Demonstrating Disparity

Increasing disparity of incomes has occurred in the United States during the last 50 years, and we can show it.

Some of us suffer little from the gain of national income share by the One Percent. We feel that our income is good and stable. We may see our own fortunes and comfort increasing, which we attribute to our own efforts, talents and deserved rewards.

But some of us do suffer. Our fortunes are crushed. We go to bed hungry. We suppose we made serious mistakes, or didn’t have the knowledge, or the necessary personal connections, or the lucky breaks.

While you might not feel the One Percent absorbing the income, it does happen. You can’t observe it by looking at one person or one example, such as yourself, because idiosyncratic events with multiple explanations interweave with less obvious societal evolutions to shape individual circumstances. And each of us imagines most of the people live much as we do. We have little natural awareness of people who live in economic circumstances different from our own.

One must consider people in groups. One must take a macro view. For this purpose, consider three graphs. They come from different researchers. Let's look at the period 1970-2014, which appears on all 3 graphs on the horizontal axis. For all 3 graphs, the vertical scale shows percent-points of aggregate national income.

In the first graph, we see the aggregate income of the less wealthy 50 Percent of incomes, as a share of national income, declined by about 9 percent-points pretax and 6 percent-points posttax from 1970 to 2014. Share given up by the less wealthy 50 Percent is share gained by the wealthier 50 Percent.

The second graph shows, on the the line studded with black triangles, the share of the One Percent (incomes in the 100th percentile) increased about 13 percent-points of national income between 1970 and 2014. The Nine Percent (incomes in the 91st through 99th percentiles) gained about 4 percent-points pretax. So, these Ten Percent gained about 17 percent-points. Percent-points gained by the Ten Percent are percent-points given up by the 90 Percent (1st through 90th percentiles).

Now, the first graph showed us the less wealthy 50 Percent gave up 9 percent-points, and the second graph shows the Ten Percent gained 17 percent-points.

Since the total of all income shares is always 100 percent, a increase in share by one subgroup compensates for the net decreases in share by other groups, and the increases and decreases must add to zero. 9 percent-points given up by the less wealthy 50 Percent and 17 percent-points acquired by the Ten Percent means the remaining 40 Percent (51st through 90th percentiles) gave up 8 percent-points of national income share (-9 + 17 - 8 = 0).

The 3rd graph shows the top Ten Percent acquired 13 Percent-Points, and the Next Ten percent (81st to 90th percentiles) gave up 4 percent-points.

Though prepared by different researchers, if we allow a percent-point or two of minor and technical differences, the three graphs don't conflict with each other or contradict each other. We can understand a consistent story.

From 1970 to 2014...
1st to 50th percentiles of income: ​gave up 6 percent points of aggregate national income share.
51st to 80th percentiles of income: gave up 7 percent points of aggregate national income share.
81st to 90th percentiles of income: gave up 4 percent points of aggregate national income share.
91st to 99th Percentiles of income: gained 4 percent points of aggregate national income share.
One Percent: gained 13 percent points of aggregate national income share.
(Figures approximate.)

The Ten Percent took what the 90 Percent gave up.
The One Percent took what the 80 Percent gave up.

This analysis doesn’t imply that the One Percent are malevolent, generally speaking. There are a few criminals among them, as with any group of thousands of people. If their behavior is legal and conventional, that doesn’t contradict this analysis. If they seek to increase their personal incomes and wealth, as any humans might do in similar circumstances, then they behave as humans do. This analysis doesn’t explain why the shifting of income shares has occurred among societal subgroups, but it shows the shifting has occurred.

I'm grateful to Dr. Stetson for his communications that inspired this article, and to other friends for their helpful comments in preparation of this article.

Images and Sources

Images may be freely used in reproduction of this article. They are used here in compliance with fair use doctrines of copyright law.

Alisha Coleman-Jensen, Matthew P. Rabbitt, Christian A. Gregory and Anita Singh, "Household Food Security in the United States in 2015" (Sep 2016, United States Department of Agriculture, https://www.ers.usda.gov/webdocs/publications/79761/err-215.pdf?v=42636)


Pay Ratio

Michael Milken (image: US Congress, 2006)
Having thought it over for seven years, government took a step. On September 21, 2017, the SEC Securities and Exchange Commission announced that, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed into law in 2010, publicly traded corporations must disclose publicly the “median employee” compensation along with the pay of the “principal executive officer”, and the ratio of the highly paid officer’s pay to the median employee pay, every year beginning with the company’s fiscal year that began in 2017.

Economist Piketty wrote in 2014 the supercompensation of senior corporate executives, exacerbated by rent seeking, contributed importantly to the disparity of incomes in advanced economies, especially in the United States. The Occupy Wall Street movement, chanting “We are the 99 Percent!” protested the disparity in 2011. Nobel economists Akerlof and Shiller in 2015 attributed to Michael Milken the beginning of supercompensation in the 1980s as the indirect effect of his pioneering corporate acquisitions financed by junk bonds. Nobel economist Stiglitz in 2013 wrote of corporate CEOs Chief Executive Officers taking a disproportionately large share of the wealth of the companies over which they presided. And now, the US government has acted to measure supercompensation.

Early reports are in. I’ve looked at 24 of them. (You can find them yourself by searching up the company website, finding the link to “Investor Relations” or “Investors”, then the link to “SEC Filings”, and then the link to the 2018 “DEF 14A” or “Proxy”. (Or you can just apply your search engine to all those keywords plus the name of the company.) Here I present some highlights of what I found.

The regulation requires companies to report the CEO’s total compensation, the median employee compensation, and the ratio. For example, for AXP American Express, in 2017, the CEO got $19m, the median employee got $57k, and the reported ratio was 327.

We suppose a company would prefer to report a low ratio, because the executives wouldn’t want to appear overly avaricious. A company can report a lower ratio than you might expect if the CEO isn’t the most highly paid employee. The most highly paid employee must be disclosed in what most companies call the “Summary Compensation Table” in the proxy statement. For WHR Whirlpool, the CEO Marc Bitzer’s pay was $7m, but the most highly paid employee was Jeff Fettig who got $16m. The SEC regulation calls for calculating the ratio of the CEO’s pay to the median employee pay, so WHR calculated a ratio of 356 ($7m/$20k), not 800 ($16m/$20k). Another example was OSTK Overstock.com, where CEO Patrick Byrne got $445k, and the most highly paid employee was Saum Noursalehi who got $968k.

Companies need not consider contractors, leased workers and similar “gig economy” workers to be employees. Thus it’s possible for a company to obtain a lower ratio by hiring a contracting firm which then hires all the employees paid less than, say, $150k. I found no clear evidence of an occurrence. Companies can also decline to count some workers outside the US, up to 5% of the employees. Some companies have done so.

The company with the highest ratio was LEA Lear, which makes car seats. The highly paid employee got $15m in 2017, and the median employee got $10k, and the reported ratio was 1,452.

The company with the lowest ratio was perennial startup OSTK Overstock.com. The highly paid employee got $1m, and the median employee got $52k, and the reported ratio was 8.

I found no significant correlation between pay ratio and market capitalization (size), but there was significant positive correlation between highest pay and market capitalization.

Graph: Daniel Brockman, 2018
I found very mild negative correlation between highest employee pay and the increase in stock price during the last 10 years. I found mild positive correlation between ratio and 10 year price increase, but with the small sample size, the extraordinary case of LEA Lear, with a ratio of 1,500 and a price increase of 16 times, strongly influences the correlation measure. Remove LEA and the data are uncorrelated.

Why does this matter? In the US, we have a narrative that if a person works diligently and loyally and energetically, works pleasantly with others, does work of highest quality, and deals honestly and fairly with others, then she or he can expect to prosper and to rise to even the highest office. But the disclosed pay ratios tell us a different story. What kind of annual raise in pay could such a good worker expect, with consistent performance year after year? 10%? 15%? With that kind of annual raise, after how many years will the good worker have pay equal to the most highly paid executive? This formula gives us the answer, assuming the good worker starts at the median employee pay:

Years = log( pay ratio ) / log( 1 + annual raise fraction )

At ALGN Align, for example, we calculate using an annual raise of 10%:

72 years = log(923) / log(1 + .10)

At OSTK Overstock.com, the good worker could attain the high pay after 22 years, a lifetime of work. At no other company in my set of 24 is such a short time possible. At INTC Intel, the figure is 56 years. At T AT&T, it’s 62 years. This exceeds what a person can do in a lifetime, meaning a person must do something more than or different from good work to reach the highest levels of monetary reward. Put differently, the CEOs get paid for something other than good work.

Disclosing the median employee pay alongside the highest employee pay is an important development. Some European governments require disclosure of corporate officers’ pay, though none publish typical employee pay to my knowledge. Asian companies don’t disclose these numbers. The US SEC requires the most detail and provides an example to other regulators. It will be interesting to see what diligent future researchers find in the pay ratios.

My data set of 24 companies is available at https://docs.google.com/spreadsheets/d/1M9OYJuBHkVdnFKAXq8oDDd0Neqq0-DvPE-VwoIRlr6c/edit?usp=sharing


U.S. Congress, "Michael Milken" (2006, Public Domain, Wikipedia)

Daniel Brockman, Graph (2018, freely use with attribution)


From the SEC Securities and Exchange Commission …

“Press Release: SEC Adopts Interpretive Guidance on Pay Ratio Rule” (Sep 21, 2017, https://www.sec.gov/news/press-release/2017-172)

“Commission Guidance on Pay Ratio Disclosure” (https://www.sec.gov/rules/interp/2017/33-10415.pdf, retrieved Apr 12, 2018)

“Inflation Adjustments and Other Technical Amendments” (https://www.sec.gov/rules/final/2017/33-10332.pdf, retrieved Apr 12, 2017)

“Division of Corporation Finance Guidance on Calculation of Pay Ratio Disclosure” (Sep 21, 2017 https://www.sec.gov/corpfin/announcement/guidance-calculation-pay-ratio-disclosure)

“Code of Federal Regulations, Title 17 - Commodity and Security Exchanges, Section 229.402 (Item 402) Executive compensation” (Apr 1, 2017,

“Commission Guidance on Pay Ratio Disclosure” (Sep 27, 2017,

“Regulation S-K, Questions and Answers of General Applicability” (Sep 21, 2017,

“Public Statement, Additional Dissenting Comments on Pay Ratio Disclosure” (Aug 7, 2015,

“Item 402 of Regulation S-K -- Executive Compensation, Questions and Answers of General Applicability” (Aug 8, 2007,

Other sources ...

George A. Akerlof and Robert J. Shiller, “Phishing for Phools” (2015, Princeton University Press, http://a.co/6uww373)

Carola Frydman and Raven E. Saks, “Executive Compensation: A New View from a
Long-Term Perspective, 1936–2005” (2010, Oxford University Press, http://web.mit.edu/frydman/www/trends_rfs2010.pdf)

Thomas Piketty, “Capital in the Twenty-first Century” (2014, Harvard University Press, http://a.co/fdt8GiZ)

Joseph E. Stiglitz, “The Price of Inequality” (2013, W.W. Norton, https://amazon.com/dp/0393345068)

Wikipedia, "Michael Milken" (retrieved Apr 13, 2018, https://en.wikipedia.org/wiki/Michael_Milken)


Investing for Growth and Value

Image: Google Books Ngram Viewer, books.google.com/ngrams

Last week, two good friends with whom I discuss investing more or less every week wanted to know: “What is the difference between growth stocks and value stocks?”

With American parochialism, I turned to the products of three grand investment firms that have managed growth and value mutual funds and ETFs for decades:

BlackRock, www.blackrock.com, manager of iShares ETFs.
State Street Global Advisors, us.spdrs.com, manager of SPDR ETFs (pronounced like “spider”).
Vanguard, www.vanguard.com, manager of Vanguard ETFs.

Here are the ticker symbols of 18 ETFs I considered:

Large Cap
Mid Cap
Small Cap

Searching the websites of the three firms, one immediately encounters disappointing non-definitions of Growth and Value, such as, in the case of IVW, “INVESTMENT OBJECTIVE. The iShares S&P 500 Growth ETF seeks to track the investment results of an index composed of large-capitalization U.S. equities that exhibit growth characteristics.”

Growth and Value are “style” characteristics of investment strategies. By perusing the prospectuses of the funds, I find that each of the 18 ETFs defers the question of the definition to the index the ETF tracks. All 6 large cap ETFs use the S&P 500 Growth and Value Indexes (us.spindices.com). These indexes don’t define Growth and Value, but they use a process to determine whether a stock is a Growth stock or a Value stock. The Index Construction section of the Methodology document describes giving each company a Growth score and a Value score.

The Growth score summarizes three measurements:
Three-year change in earnings per share, excluding extraordinary items, divided by price per share.
Three-year sales per share growth rate.
Momentum, 12-month percent price change.
The 500 companies in the S&P 500 are ranked from 1 to 500, the company with the highest score having a rank of 500.

The Value score summarizes three measurements:
Book value to price ratio.
Earnings to price ratio.
Sales to price ratio.
The 500 companies are ranked with the company having the highest Value score having a rank of 500.

The 500 companies are then sorted in ascending order of the ratio of the Growth rank to the Value rank (G/V). The companies in the top third of the list will have the highest G/V values. These are the “pure” Growth companies. Similarly, the companies with the lowest G/V value are the “pure” Value companies near the bottom of the list. And the companies in the middle of the list are hybrids.

The S&P indexes put portions of a hybrid’s market capitalization in both the Growth and Value indexes, which is why you can find some companies among the holdings in both ETFs. This bothers some of us, so the three firms offer “pure” Growth and Value ETFs as well, but I digress from the question of definition, and I want to get back to that.

The iShares mid cap Growth ETF IWP uses the Russell Midcap Growth Index (www.ftse.com/products/downloads/Russell-US-indexes.pdf). Russell combines one ranked Value variable, book to price ratio, and two ranked Growth variables, the I/B/E/S Institutional Broker’s Estimate System (financial.tr.com/ibes) 2-year earnings growth estimate, and 5-year sales per share historical growth, to produce a composite value score (CVS). A stock with high CVS is a Value stock, and a stock with low CVS is a Growth stock. Both the Growth and Value indexes contain proportions of the same stock, weighted according to its CVS.

For VOE and VOT, Vanguard uses the CRSP U.S. Mid Cap Value Index and Growth Index (www.crsp.com/products/investment-products/crsp-us-mid-cap-value-index) which builds a Growth metric from long and short term future earnings growth, 3-year historical earnings growth current investment-to-assets ratio, and return on assets, and a Value metric from ratios of book to price, future earnings to price, historic earnings to price, dividend to price and sales to price.

Each definition of Value seems to include some form of high book value to price ratio. Each definition of Growth seems to include earnings growth (historical or forecast) and historical sales growth. The differing definitions implicit in methodologies continue as one looks at additional ETFs and their indexes.

So there are no standard definitions of Growth and Value stocks. I think that, historically, the terms were invented to appeal to investors’ emotional hopes for their investments. Dr. Dennis Martin points out the term “value stock” was seldom used before World War I, after which people used it most frequently in the 1930s. “Growth stock” emerged in frequent use only after World War II. Marketers, quantitative analysts and lawyers have tortured the definitions ever since.

Take caution, dear reader, of the numerous and diverse hazards of investing.

Disclosure: I own some shares of SLYG.

My thanks to friends who inspired and critiqued early drafts of this article.


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