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:
Amid growing public and investor concern about major British companies potentially overpaying their top executives, the UK government has been kicking around the idea of instituting a pay ratio reporting rule since last year. The government hinted in April that it would propose the regulation soon, and now it is here. The proposal, which Business Secretary Greg Clark is presenting to Parliament today, will require all companies with more than 250 employees to disclose the ratio between the pay of their CEO and their average or median employee, as well as to explain this difference, the BBC reports:
The new rules, as well as introducing the publication of pay ratios, will also require listed companies to show what effect an increase in share prices will have on executive pay, in order to inform shareholders when voting on long-term incentive plans. … Mr Clark said: “Most of the UK’s largest companies get their business practices right, but we understand the anger of workers and shareholders when bosses’ pay is out of step with company performance.”
The plans were welcomed by the Investment Association – that represents UK investment managers – as well as business lobby group the CBI and think tank the High Pay Centre. Chris Cummings, chief executive of the Investment Association, said investors wanted greater director accountability and more transparency over executive remuneration.
That investors are leading the charge for transparency on executive compensation is unsurprising; activist investors were also key proponents of the pay ratio reporting rule that came into effect in the US earlier this year. Shareholders are voicing greater interest in exercising their “say on pay” prerogatives, particularly after recent scandals in the UK over executives receiving massive bonuses, in some cases without company performance justifying them.
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The UK government will propose legislation next month that will require companies to publish the ratio between the compensation of their CEO and that of their median employee, the Financial Times reported on Sunday. The rule is expected to come as part of a package of corporate governance reforms meant to address inequality by reining in executive compensation practices widely seen as excessive, which will also require boards of directors to demonstrate that they have acted in the interests of their companies’ employees, customers, and other stakeholders, rather than just the interests of investors. Large companies will also be required to certify compliance with a corporate governance code.
The writing has been on the wall for UK companies for some time now. The government first announced plans to institute a pay ratio reporting requirement last August, as well as to “name and shame” companies whose investors object to their executive pay packages. Recently, several large British companies have faced drubbings from investors and the media over the millions of pounds in bonuses they paid out to their top executives this year
At the beginning of this year, a report from the CIPD and the High Pay Centre revealed that the average FTSE 100 CEO earned £3.45m last year, or 120 times the £28,758 earned by the average British worker. At an average hourly rate of £898 per hour, the top CEOs earned more than the average employee by the third working day of the year, which campaigners quickly dubbed “Fat Cat Thursday.”
A regulation mandated by the 2010 Dodd-Frank financial reform legislation and adopted by the Securities and Exchange Commission in 2015 requires public companies to publish the ratio between the compensation of the CEO and the median annual compensation of every other employee in their proxy statements, starting with the 2017 fiscal year. The regulation was left in place by the Trump administration, although the SEC has made it slightly easier for companies to comply.
Not surprisingly, as companies have started to share this information, much attention has been paid to how much CEOs earn. The net result of this information coming out is the rather unsurprising insight that most CEOs make a lot of money. Companies have rightly been more worried about reporting the median employee salary, which some business groups have said is difficult to calculate and to communicate.
The intent of the rule was that by publishing this information, companies would have an incentive to raise the average wage of their employees to lower their CEO-median employee ratio in comparison to their peers. After all, as the denominator grows bigger, the ratio gets smaller. While there is certainly some truth to this effect, a much more interesting effect is emerging as companies release information about the median wage of their employees. Some of these disclosures are eye-popping; Facebook, for instance, reported a median employee salary of over $240,000, according to the Wall Street Journal, but of course this doesn’t count all the subcontracted workers it uses for services like security, cleaning, and food service at its facilities.
One of the observations we have made about the reporting of the median employee pay data is that, by definition, half of employees are paid below average. While some employees realize that they are paid below average, and are accepting of it, for a significant number of employees this certainly comes as alarming news. But now that more companies are reporting this information, we get to see how median employee compensation compares across companies. Deb Lifshey, Managing Director at Pearl Meyer & Partners, LLC, discussed these comparisons in a recent post at the Harvard Law School Forum on Corporate Governance and Financial Regulation:
Public companies in the US recently began publishing the ratios between the pay of their CEO and that of their median employee in compliance with a regulation adopted by the Securities and Exchange Commission in 2015 that went into effect in the 2017 fiscal year. The regulation, prescribed by the 2010 Dodd-Frank financial reform legislation, had been a potential target for revision, or reversal by the Trump administration, but major institutional investors, particularly activist funds, pressured the SEC not to delay or discard the rule.
As the due date for disclosure approached, executives expressed anxiety about how to communicate these figures to their employees, as well as how the media and shareholders would react. With regard to employees, the concern was not so much that they would learn their CEO was earning an outrageously large salary, but more that half of them were about to learn that they earned less than the median employee and would want to know why.
So far, over 500 companies have published their disclosures, and according to an analysis last month by ISS Analytics, “the numbers have landed all over the map,” from 1.87 for Berkshire Hathaway CEO Warren Buffett, to 2,526 for Aptiv PLC’s Kevin Clark (the median ratio for S&P 500 companies was 166:1). The SEC rule requires companies to compare salary alone, so the ratios don’t account for what CEOs earn from capital gains and dividends.
Because of this limitation, David McCann recently commented at CFO, the rule isn’t as helpful to investors as it’s supposed to be, as it allows some companies to massively undercount how much money their CEOs really make. McCann points to the examples of the private equity firms Apollo Global Management, which reported that its CEO Leon Black was paid $250,888 last year, and Carlyle Group, whose founding co-CEOs David Rubenstein, William Conway, and Daniel D’Aniello each earned $281,315. These numbers are only slightly higher than the pay of the hedge funds’ median employees, but, McCann argues, they are also meaningless:
In the 1993 federal budget, the administration of then-US President Bill Clinton created a rule that capped the tax deductibility of top executives’ compensation at $1 million, unless that compensation was “performance-based.” While Clinton had campaigned on the cap as a means of reducing the growth of CEO pay packages, the policy backfired and caused them to grow as companies shifted executive compensation into stock options and performance bonuses, taking advantage of the loophole.
The question of how to measure CEO performance for the purposes of calculating their paycheck (or whether to do so at all) has become a matter of significant debate, driven by the realization that it has not moderated the growth of pay among CEOs and other top-dollar members of the C-suite. The tax reform bills Republicans are currently trying to push through Congress propose to eliminate this loophole, which would raise $9.3 billion in tax revenue over a decade, but the Washington Post’s Jena McGregor points out that closing the loophole may not rein in the growth of executive pay packages just because creating it helped them grow:
Executive pay experts and activists said in interviews that companies are unlikely to severely limit the size of their CEOs’ compensation just because a big portion of it — the vast majority of those multimillion-dollar packages are paid in incentive-based pay — is no longer deductible. …
In the past year, we’ve taken a few looks at “corporate inequality”: i.e., the theory that income inequality in the US is being driven in large part by the growing divide between the compensation of high-value employees at highly profitable firms and the rest of the workforce. Large, wealthy organizations, particularly in the tech sector, are able to attract top talent by paying much higher salaries than lower-margin industries, exacerbating inequality by cultivating an elite class of professionals with high pay and lavish perks whose experience is completely divorced from that of the typical employee anywhere outside Silicon Valley or Wall Street.
Not everyone who works for these highly profitable companies benefits equally from their success, however. As the Guardian’s Julia Carrie Wong writes in a snapshot of Facebook’s contingent workforce, these contractors and subcontractors don’t enjoy the all-inclusive benefits o the tech giant’s regular employees, and many are struggling to get by in the increasingly expensive San Francisco Bay Area:
The $500bn company has been conscientious about ensuring that its subcontracted workers are relatively well paid. In May 2015, amid a nationwide movement to raise the minimum wage, the company established a $15 an hour minimum for its contractors, as well as benefits like paid sick leave, vacation and a $4,000 new-child benefit.
But those wages only go so far in a region with out-of-control housing costs. San Francisco and San Jose ranked first and third in the nation a recent analysis of rents, with one-bedroom apartments in San Jose going for $2,378. The extreme cost of housing is why California has the highest poverty rate in the country, according to a US Census figure that takes into account a region’s cost of living.