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

2. www.bea.gov 2 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

3. www.bea.gov 3 Components of CEO pay

4. www.bea.gov 4 Quarterly compensation Changes in level

5. www.bea.gov 5 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

6. www.bea.gov 6 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* 1998-20022003 -2006 Average revision 1998-2002 Average revision 2003-2006

7. www.bea.gov 7 Quarterly wage and salary revisions Revisions resulting from incorporating the QCEW

8. www.bea.gov 8 Quarterly unit labor costs Percent change from proceeding quarter at annual rate [Percent change]

9. www.bea.gov 9 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

10. www.bea.gov 10 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

11. www.bea.gov 11 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

12. www.bea.gov 12 What else?  Relationship of withheld income taxes and QCEW wages  Relationship of stock price changes and wage changes

13. www.bea.gov 13 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

14. www.bea.gov 14 Growth in unit labor costs (per unit of real gross product of nonfinancial corporate business)

15. www.bea.gov 15 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

16. www.bea.gov 16 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

17. www.bea.gov 17 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

18. www.bea.gov 18 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

19. www.bea.gov 19 Quarterly corporate profits Changes in level

20. www.bea.gov 20 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

21. www.bea.gov 21 Pensions and corporate profits  Corporate expense item  Differing reporting requirements can lead to timing inconsistencies  Reconciliation?