CEO–Employee Pay Gaps Widen in US and UK

CEO–Employee Pay Gaps Widen in US and UK

The latest analysis by the left-leaning Economic Policy Institute calculates that the CEOs of the largest 350 companies in the US out-earned their employees by a factor of 312:1 last year, the Guardian reported on Thursday:

The rise came after the bosses of America’s largest companies got an average pay rise of 17.6% in 2017, taking home an average of $18.9m in compensation while their employees’ wages stalled, rising just 0.3% over the year. The pay gap has risen dramatically, with some fluctuations, since the 1990s. In 1965 the ratio of CEO to worker pay was 20-to-one; that figure had risen to 58-to-one by in 1989 and peaked in 2000 when CEOs earned 344 times the wage of their average worker. …

The astronomical gap between the remuneration of workers and bosses has been brought into sharper focus by a new financial disclosure rule that forces companies to publish the ratio of CEO to worker pay. Last year, McDonald’s boss Steve Easterbrook earned $21.7m while the McDonald’s workers earned a median wage of just $7,017 – a CEO to worker pay ratio of 3,101-to-one. The average Walmart worker earned $19,177 in 2017 while CEO Doug McMillon took home $22.8m – a ratio of 1,188-to-one.

In the UK, meanwhile, new research by the CIPD and the High Pay Centre finds that the median CEO-employee pay ratio for FTSE 100 companies stood at 167:1 in 2017, rising from 153:1 the previous year:

The Executive Pay: Review of FTSE 100 executive pay report also found FTSE 100 CEOs’ median pay had risen to £3.93m in 2017, up 11 per cent from £3.53m in 2016. By comparison, yesterday’s Office for National Statistics (ONS) figures revealed total pay for all workers had increased by just 2.4 per cent year-on-year. Chief executives’ mean average pay had shot up even further, rising 23 per cent from £4.58m in 2016 to £5.66m in 2017. However, this figure was skewed by two large payouts in 2017 – £47.1m for housebuilder Persimmon’s Jeff Fairburn and £42.8m for finance company Melrose Industries’ Simon Peckham.

These reports come as large companies in both countries are facing new regulations requiring them to publish the ratio between their CEO’s salary and that of the median employee. The new US disclosure rule came into effect this year as part of the Dodd-Frank financial reform legislation passed in 2010. Despite speculation that President Donald Trump would scuttle the rule, it survived the change in administrations largely because activist investors insisted on it. In the UK, new legislation is coming into force next January that will also require large firms to disclose their pay ratios.

The investor community has been increasingly vocal in demanding more and more regular input into executive compensation, even though these “say on pay” votes rarely result in the rejection of boards’ executive pay plans. In the UK, investors have been pushing back against bonuses for top executives that they consider excessive or unjustified. It’s not clear whether pay ratio disclosures will give investors the information they are looking for, however, as the reports don’t always paint a clear picture: CEOs’ salaries may represent only a fraction of their mostly stock-based earnings, while the median employee’s pay can vary depending on whether multinational companies hire a lot of workers in low-cost countries, for example, or if their lowest-paid workers are subcontractors rather than direct employees.

Employees don’t necessarily mind that their CEO earns a lot more than they do. When employees object to the CEO’s pay package, it’s usually because they and their colleagues are struggling, not simply because the CEO’s earnings are large. This week, for example, Financial Times Chief Executive John Ridding said he would give back some of his £2.6 million salary, after a group of employees complained that it was unfair to put funds toward a raise for the CEO instead of higher pay for trainees and above-inflation raises for other employees. Public pressure comes to bear on companies in this regard as well, especially when a company with a well-remunerated CEO is perceived as underpaying its low-level employees.

Companies have been more worried about their employees’ reactions to the denominator of these ratios: When you publish your median salary, by definition, half of your employees will realize they are earning below-median salaries and will want to know why. Pay ratio reporting rules are one of several reasons why more companies are embracing greater transparency about how much their employees earn as well as the process through which they make compensation decisions. (Gartner Total Rewards Leadership Council clients can learn more about our latest research on pay transparency by registering for one of our upcoming executive meetings.)