The AFL-CIO has recently updated the data set on CEO pay to Median Pay ratios in publicly trades US companies. You can play with it here. It’s kind of fun data, especially if you work for one of those companies. It turns out that in 2020 the CEO of Hilton (who I couldn’t name without resorting to a google search) made 2,000x what the median employee at the company took home, which was around $28,000. All the while, the CEO of Berkshire Hathaway, who of course we all know who he is, right? he only made 6 times the median pay at the company. You read the data and it’s fun because it makes you think about jokes such as “Warren should really ask for a raise.” Ha ha, as Regina Spektor would say. Very funny. My CEO at Intuit only made about 120x of median pay at the company, which was far below 299x, which was the average. Just FYI!
But it has occurred to me (and I think I stole it from an old Matt Levine Money Stuff column, but I am not sure and had no success looking it up) that these data are not only fun. They are also potentially dangerous, because if we take them too seriously, we might actually ask CEOs to manage them, and that would lead to a whole bunch of unintended consequences. A whole bunch! I mean, Goodhart’s Law and the Law of unintended consequences would both have a field day!
And the thing is, it’s not just an idle thought that occurred to little old me. The reason the AFL-CIO has the data is because public companies, in the USA and in many other countries, are required by law or by their regulators to disclose median pay and CEO pay. It’s not so far fetched to suggest the regulators want us the public to look at them and compare them between companies. From there, it’s not such a big jump to getting an idea like ‘maybe we should limit the ratio between CEO and median pay’.
Which would be a terrible idea. Not just terrible - nonsensical.
Let’s see why by using an illustrative example. I invented a fake company with 11 employees. You can see them and their pay data in this spreadsheet. Now let’s say we are at an environment where it’s politically difficult for the CEO to increase the ratio of her pay to the median pay (currently 10). If you think about it, it has all sorts of weird consequences. If we are now interviewing a job candidate for a junior position, hiring that person would increase the CEO/median ration by 5%! The CEO is sitting in that interview room thinking, I can’t hire this person. Let’s find something wrong with them. On the other hand, hiring an incompetent person with lots of experience that merits pay above the median - great!
And that’s just one example. It makes everything weird - raises, acquisitions, layoffs.
Another problem with looking at these ratios is they make for very apples to oranges comparisons . Take Apple and Facebook, for example. Both are big tech companies. But Apple’s ratio is 256 to Facebook’s 96. 150% more! Is that because Zuck is so modest? or Tim Cook so greedy? Well, no. It’s because Apple has chosen to employ (as full time employees, not 1099s contractors) many people who are not absurdly well paid software engineers and the like. The hire folks for retail positions too. Is that a good thing? I would say as a society yes it is. Does measuring the pay ratio makes it embarrassing for Tim to do the right thing? For now, I think not so much. In the future who knows.
All of this is to say - be careful what you measure, and be extra double super careful what you make into a KPI. Well-meaning focus on a metric can end in quirky incentives and more often than not, does!