Economy, Domestic Economy

Exposure of High CEO Pay: What Do They Signify?

Exposure of High CEO Pay: What Do They Signify?Exposure of High CEO Pay: What Do They Signify?

The recent exposures of “astronomical” salaries of CEOs and top government officials in Iran, up to 2.4 billion rials per month ($68,000 at the market exchange rate or $200,000 PPP) have put pressure on the government of President Hassan Rouhani.

But how high are these salaries in light of the wage distribution in Iran and CEO pay elsewhere, wrote Iranian economist Djavad Salehi-Isfahani in a recent article posted on his personal website.

Salehi is a professor of economics at Virginia Tech University and an authority on Middle Eastern economics. Excerpts from the articles are presented below.

Before answering this question, it should be noted that the sensational revelations of top salaries may be just that. For example, the 2.4-billion-rial salary, belonging to the beleaguered (now fired) head of Bank Refah Kargaran, Ali Sedghi, is not his actual monthly salary. A document shows his regular salary to be about 89.8 million rials, one-third of the reported total, which includes end of the year bonus, etc.  But let’s take the higher figure for the sake of argument.

In the US, where wage inequality is the highest among developed countries, in 2014 the reported average CEO compensation for the largest firms was $16.3 million. This is more than 800 times the US minimum wage and 200-500 times the median wage, depending on the source.  

In Europe, the ratio of CEO pay over the median wage is much smaller: UK 22, France 15 and Germany 12.

Where does Iran stand in this metric?  The latest year for which we have wage and salary data is 2014-15. Wages have not changed much in real terms in the last year or two, so these data can be reliably adjusted for this year by multiplying them by the inflation rate since then, about 18%.  

According to the Household Expenditures and Income Survey of 2014-15, the monthly median wage (in today’s rials) is about 8.26 million rials (about $235 or $700 PPP). The ratio of the highest CEO salary reported is thus about 290, which places Iran in the high range for this metric of wage inequality.  

Of course, this is the highest reported number and the average is probably lower, but even considering that we are quite far from the European range of the ratio of CEO to median worker pay.

Wage inequality is lower than overall income inequality. The Gini index for all incomes in the survey is about 0.40, whereas for wages is 0.35.  In light of the revelations of CEO pay, both numbers are underestimates because the highest monthly wage in the survey is 215,250,000 rials, which is less than 10% of the highest reported CEO pay of 2.4 billion rials.  

How do high Iranian CEO salaries compare with the minimum wage?  Interestingly, the minimum wage is not much lower than the median wage. The approved minimum wage for 2016-17 is set at 8,121,640 rials per month, which is only 2% lower than my calculation of the median wage for this year.  

According to survey data, about 40% of wage earners earn below the minimum wage, most of them in rural areas. Of course, there is probably some under-reporting of the wage, too, but minimum wage laws are mainly enforced in larger enterprises, and most workers in Iran work in small, less formal enterprises.