How Much is Too Much? The Dawn of Pay Ratio Disclosure
This is the year the pay ratio between the CEO and the median employee will finally appear in proxies. It has been a long road for Section 953b of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act to be implemented.
At every step of the way, the rule faced opposition from corporate lobbyists, as well as Republicans in Congress and the SEC. But it was popular among investors. When a draft rule was issued in September 2013 the SEC received more than 304,000 letters, the vast majority of which strongly favored it.
The SEC has given companies broad discretion on how to calculate the data in its interpretive guidance in September. Because the data will be variable, it will be difficult to compare companies, those within industries, or differently sized companies. That may backfire for those that hoped adding complexity would cloud data comparisons, since the overall ratio will stand out even more glaringly.
Great thinkers and business leaders have often debated how much pay is too much. Former compensation consultant Graef Crystal points to the long history of these discussions: “Plato told Aristotle no one should make more than five times the pay of the lowest member of society. J.P. Morgan said 20 times. Jesus advocated a negative differential--that's why they killed him."
The growth of CEO pay in recent decades has concerned many, even former executives. William J. McDonough, then CEO of the Federal Reserve Bank in New York, noted in a powerful speech, “I am old enough to have known both the CEOs of 20 years ago and those of today. I can assure you that we CEOs of today are not 10 times better than those of 20 years ago.”
Many companies, including Whole Foods, maintained a reasonable ratio level. John Mackey in a 2009 essay, “Why sky-high CEO pay is bad business,” noted that having a cap had not presented a problem to his company. “Whole Foods has never lost to a competitor a top executive that we wanted to keep since the company began more than 30 years ago.” He also explained that employees cared about pay equity issues and that Whole Foods found that a smaller gap made for a happier workforce with better performance results.
What sort of pay ratios will we see this year? No one knows for sure.
Pay data firm Equilar released results of a survey of 356 public companies on February 1 that found a CEO to median employee ratio of approximately 140:1. This survey included companies of a range of sizes, however, so companies in the S&P 500 will likely have higher ratios.
Alexander Hamilton once wrote: “Public infamy must restrain what the laws cannot.” Perhaps public infamy – which should be focused on the directors who design the packages, the shareholders that approve them, as well as the executives themselves – may yet restrain what this disclosure will now clearly illustrate.
Rosanna Landis Weaver
Program Manager, Executive Compensation Initiative, As You Sow