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:
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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:
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An analysis released this week by the CIPD and the High Pay Centre highlights the extent of income inequality in the UK by comparing the compensation of FTSE 100 CEOs to that of Britain’s average full-time employee, the Guardian’s Rupert Neate reports:
The chief executives of FTSE 100 companies are paid a median average of £3.45m a year, which works out at 120 times the £28,758 collected by full-time UK workers on average. On an hourly basis the bosses will have earned more in less than three working days than the average employee will pick up this year, leading campaigners to dub the day “Fat Cat Thursday”. …
The analysis … shows chief executives of FTSE 100 companies are paid an average of £898 per hour – 256 times what apprentices earn on the minimum wage.
The ratio between the pay of the CEO and the average employee (the definition of which is a matter of some controversy) is becoming a widely accepted standard for measuring income inequality within organizations and societies. As the pay gap between top executives and the rank and file has grown in recent decades, spurred on in some cases by tax loopholes, activists have decried this trend as evidence that CEOs are overpaid, while employees are not receiving their fair share of growing corporate profits.
In an effort to address inequality and curb CEO pay packages deemed excessive, the UK government has proposed new laws that will require listed companies to publish and justify their CEO-to-median-employee pay ratios, along with “naming and shaming” companies whose shareholders object to executive compensation plans as determined by the board. A similar disclosure rule was adopted in the US by the Securities and Exchange Commission in 2015, which will require public companies to publish their pay ratios in their proxy statements, starting with the 2017 fiscal year. Portland, Oregon has gone a step further and imposed a surtax on companies doing business in the city whose CEOs earn more than 100 times their median employee.
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. …
The CEO-employee pay ratio disclosure rule adopted by the Securities and Exchange Commission in 2015 will require 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. In response to employers’ concerns over how to comply with this rule, the SEC issued guidelines late last month that give companies some flexibility in deciding how to calculate the ratio in order to reduce the cost of compliance.
Despite the commission’s efforts to ease the burden, leaders at these companies remain concerned over the impact these disclosures will have on their workforces. A new survey from Willis Towers Watson illustrates some of these anxieties, finding that one half of companies say their biggest challenge in complying with the rule will be in anticipating their employees’ reactions to the disclosure:
The poll also found that almost half of respondents (48%) have yet to think about how or even if they will communicate the pay ratio to employees. About four in 10 (39%), however, are preparing leadership to respond to employees’ questions. Less than two in 10 respondents (16%) are prepping managers to have discussions with employees, while 14% created a detailed communication plan to educate employees. A similar number are not planning to say anything to employees.