Issues in Compensation and Profits

Kurt Kunze National Economic Accounts Data Users’

ConferenceOctober 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

Average chief executive officer pay (S&P 500)

0

1000

2000

3000

4000

5000

6000

7000

8000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Thousands of dollars

Salary Bonuses Options and OtherSource: Congressional testimony, Professor Steve Balsam, Temple University

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Quarterly compensation

Changes in level

-25

0

25

50

75

100

125

150

175

200

225

   1990      1991      1992      1993      1994      1995      1996      1997      1998      1999      2000      2001      2002      2003      2004      2005      2006      2007   

[Billions of dollars]

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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

*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

Average revision at first annual revision*

1998-2002 2003 -2006

$55.1

$19.9

0

10

20

30

40

50

60

[Billions of dollars]

Average revision 1998-2002

Average revision 2003-2006

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Quarterly wage and salary revisions

Revisions resulting from incorporating the QCEW

$20.8

$79.2

-$26.8

-$6.5

-$37.9

$33.3

-$110.3

-$45.5

-$17.0

-175

-150

-125

-100

-75

-50

-25

0

25

50

75

100

125

150

2005:I 2005:II 2005:III 2005:IV 2006:I 2006:II 2006:III 2006:IV 2007:I

[Billions of dollars]*

(-0.1%)

(-0.7%)

(0.4%)

(-0.8%)

(1.3%)

(-1.8%)

(-0.4%)

(0.5%)

(-0.3%)

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Quarterly unit labor costs

Percent change from proceeding quarter at annual rate

[Percent change]

-2

-1

0

1

2

3

4

5

6

7

2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2

Initial estimate First revised estimate

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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)

Growth in unit labor cost -- annual release

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

2001 2002 2003 2004 2005 2006

Pe

rce

nt

ch

an

ge

1st Estimate

1st revision

2nd revision

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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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What’s 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

-100

-50

0

50

100

150

   1990      1991      1992      1993      1994      1995      1996      1997      1998      1999      2000      2001      2002      2003      2004      2005      2006      2007   

[Billions of dollars]

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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?