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:
Apollo and Carlyle are structured as limited partnerships, where the partners who act as top executives are in essence “paid” in the form of dividends on their equity in the partnership. The pay ratio rule does not require such income to be included in the calculation of CEO pay. Thus, as reported by Bloomberg Law, the $191.3 million in dividends that Apollo’s Black reaped last year did not count.
There also isn’t necessarily much to be learned from a company reporting a very high ratio, McCann also notes, as those numbers can be skewed if those companies operate in various countries or if their high-earning staff are employed as contractors. For example, Fresh Del Monte Produce reported a ratio of 1,465:1, the largest yet as of the time McCann was writing in mid-March:
The company disclosed that its employee population consists of “full-time, part time, temporary, and seasonal employees,” 80% of whom are from Costa Rica, Guatemala, Kenya, and the Philippines. What are investors to make of Fresh Del Monte’s pay ratio? With its employees concentrated in low-wage countries and consisting of many less-than-fulltime workers, does the fact that its pay ratio is the highest reported so far have any real meaning?
Another example of this skewed comparison is found in the disclosure from the toymaker Mattel, whose CEO Margo Georgiadis earned 4,987 times what the company’s median employee made in the past year—$31.3 million against $6,271—or 1,527 times more after correcting for a one-time signing bonus. As the Wall Street Journal’s Theo Francis points out, however, more than three quarters of Mattel’s 35,280 employees are located outside the US in countries with much lower labor costs: That median employee is a factory worker in Malaysia. Its competitor Hasbro, by contrast, which contracts its manufacturing out to other firms, paid a typical worker around $74,000 last year, while its CEO Brian Goldner earned a total compensation package of $10.8 million. To McCann’s point, the comparison between these two direct competitors is not really apples-to-apples.
Like other regulatory efforts by the US government to discourage purportedly excessive CEO compensation, this one may not have the intended effect. CEO earnings increased substantially last year at large US companies, according to a recent Wall Street Journal analysis, but these gains were not due to raises in their base salaries. Instead, they mostly reflected the growing value of corporate leaders’ equity compensation in a healthy economy and a surging stock market.
That’s why BloombergView columnist Matt Levine finds the whole exercise somewhat pointless. Obviously, Warren Buffett’s wealth did not grow by a mere $100,000 last year, Levine writes; the vast majority of Buffett’s “pay” comes in the form of capital gains as Berkshire’s stock rises:
In 2017, Berkshire Hathaway’s stock was up about 22 percent, meaning that the value of Buffett’s shares increased by about $15.1 billion, to $84.1 billion. So in a sense he made $15.1 billion in 2017, or $15.1001 billion if you include his salary, or $15.10005 billion if you deduct the stamps. That’s a pay ratio of about 282,435 to 1.
There is a maximalist approach in which the CEO should be showered with all the goodies you can think of, which proves his importance and his firm’s love for him. And there is the sort of Zen approach in which the CEO is paid a dollar, or $100,000, can’t even expense his postage, and grows his dynastic wealth just by owning most of the company. The latter approach looks more appealing; … But from the perspective of an ordinary mortal the approaches kind of come to the same place. The perks, the salaries, they all look like rounding error compared to the basic economic engine of owning billions of dollars’ worth of stock in a growing company. Once you’re there, your choice about how else to get paid is mostly aesthetic.