Issues in Compensation and Profits

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Issues in Compensation and Profits
Kurt Kunze National Economic Accounts Data
Users Conference October 15, 2007
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Compensation

• Compensation can be volatile and subject to large
  revisions
• Wages and salaries
• Increasing impact of irregular pay
• Stock options
• Bonuses
• Pensions
• Lack of timely, consistent source data

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Components of CEO pay
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Quarterly compensation
Changes in level
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Wages and salaries

• Primary source data BLS quarterly census of
  employment and wages (QCEW)
• QCEW includes
• Bonuses
• Gains from exercising nonqualified stock options
• Data availability lag
• Incorporation of quarterly QCEW
• Prior to 2002 at annual revision
• After August 2002 quarterly incorporation

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Annual wage and salary revisions before and after
QCEW methodology change
Average revision at first annual revision
Average revision 1998-2002
Average revision 2003-2006
1998-2002
2003 -2006
The average revision is the average of the
absolute values of the revisions (without regard
to sign) ------------------------------- Source
BEA, Survey of Current Business various issues
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Quarterly wage and salary revisions
Revisions resulting from incorporating the QCEW
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Quarterly unit labor costs
Percent change from proceeding quarter at annual
rate
Percent change
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Early wage and salary estimates

• Extrapolated using BLS monthly current employment
  statistics (CES)
• Average hourly earnings x Average weekly hours x
  Employment
• Featured CES measures
• Regular pay
• Production and nonsupervisory workers

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Irregular pay

• Gain on the exercise of stock options and bonus
  payments contribute to volatility and revisions
  in wages and salaries
• Gain on exercise of stock options reflected in
  QCEW when exercised
• Bonus payments reflected in QCEW when paid
• Neither is separately identified in QCEW
• Neither stock option gains nor bonus payments are
  included in current employment statistics used
  for extrapolation

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What next for wages and salaries?

• New data All-employee total earnings and gross
  monthly earnings
• Studying the experimental data and evaluating its
  impact on personal income
• When available, more timely data will replace
  current measures of employment, hours, and
  earnings

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What else?

• Relationship of withheld income taxes and QCEW
  wages
• Relationship of stock price changes and wage
  changes

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Pensions

• Private pension contributions have contributed to
  large revisions to compensation
• Growing concern about pensions in general as part
  of concerns about the aging population and
  retirement saving
• Undertaking studies to more clearly identify data
  inconsistencies with the goal of developing
  improved methodologies

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Growth in unit labor costs(per unit of real
gross product of nonfinancial corporate business)
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Form 5500

• Informational tax form for pension plans
• Comprehensive data source
• All large plans (100 or more participants)
• Sample of small plans
• Extended filing period
• Long time lag

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Other pension data sources

• Corporate financial reports
• PBGC tabulations of form 5500 for defined-benefit
  plans
• Corporate tax returns IRS Statistics of Income
  tabulations of pension expenses
• BLS survey data
• Employment cost index
• Employer costs for employee compensation

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Whats ahead for pensions?

• The updated System of National Accounts
  (international guidelines for national accounts)
  will recommend an accrual approach based on
  actuarial data
• Volatility will probably be dampened
• Additional estimation challenges

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Corporate profits

• Corporate profits Business receipts less
  business expenses
• Wages and salaries and pension contributions are
  expenses to business
• Estimates of profits are volatile and subject to
  substantial revisions
• Improved estimates of stock option gains and
  pension contributions could lead to improved
  estimates of profits

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Quarterly corporate profits
Changes in level
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Profits and stock options

• The gain on the exercise of stock options
  contributes to volatility and revisions in
  profits
• Reflected in the corporate income tax data as an
  expense when exercised
• Corporate financial reports (used for
  extrapolation) now expense options when granted
  based on fair value (option pricing model)
• Revisions resulting from stock option activity
  depend on the timing of option grants and option
  exercises
• In the future, could move to fair-value measures
  -- could dampen volatility, but challenging
  estimation issues

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Pensions and corporate profits

• Corporate expense item
• Differing reporting requirements can lead to
  timing inconsistencies
• Reconciliation?