Executive Compensation and the Investor, Worker & Stakeholder: The New Corporate Disclosures on CEO Pay Ratios Are Now Part of the Public Dialogue
G&A's Sustainability Highlights (05.24.2018)
There are some interesting new angles to the perennial public dialogues that go on about issues related to executive compensation. The new news is regarding the compensation packages for the Top Man (in the Fortune 500 universe, there are only 24 companies that have female CEOs) and the relationship of that sum to (1) the employees of the firm and (2) the shareholders, including key fiduciaries managing OPM (other peoples’ money). The CEO Pay Ratio disclosures of 2018 are now becoming more of a public dialogue.
One thread of conversation that is gaining some momentum in the public square is about the ratio of the CEO’s pay to the median worker pay at various companies in specific sectors. This disclosure was mandated in 2010 with passage of the Dodd-Frank reform legislation and it took until this year before the final rules were in effect for public company disclosure, and the disclosures began. The analysis of what this all might mean to investors and stakeholders is now underway.
The CNBC commentator James Thorne, for example, explored the ratio issues in a post on May 13th. He begins his commentary by noting that for decades, as publicly-traded companies disclosed their CEO’s pay, criticism could rise when investors thought the pay was not justified by the company’s performance.
Now that the CEO-to-Median employee disclosures are being made, Thorne’s initial conclusion was that companies with certain characteristics -- closer CEO pay to workers in the ratio -- may generate a higher profit-per-worker than firms with a wider gap. He began his research with the question: does the ratio say something about performance? The CNBC analysis suggested that it did -- with equal pay distribution generating higher profit per worker.
In examining corporate disclosure on the pay ratio to date, the “bunching up” seems to be in the 200-300-400 (200-to-one, etc.) range, with some firms having ratios as high as 800 to 1,000 CEO pay to the median. The analysis was performed by Calcbench.
The CNBC commentary explains that ratios can vary, depending on factors like company size, geographic distribution and percentage of part-time or seasonal workers; companies also have latitude in deciding how the ratio is calculated (and then disclosed). The Willis Towers Watson firm noted that direct (company-to-company) comparisons can be difficult. The SEC cautioned that firm-to-firm comparisons were not the intent of the disclosure rule.
Touching on something relevant to the investment side is Ric Marshall, MSCI’s executive director of ESG research: “The investors who will find the most value [in ratio disclosures] are those who have concerns about inequality.” Here at G&A we are seeing a steady flow now of news and commentary on the ratio issue from investors and other stakeholders focused on inequality and related societal issues.
With fundamental changes in the structure and definition of “worker” the short- and longer-term effects of these changes are being examined by a host of social scientists and pundits. (The familiar “rank and file” has been replaced by part-timers, seasonal workers, contractors, consultants, outsourced workers, and more variations at many firms. Researchers are closely examining the results). One extension of this ongoing public discussion is the concept floated for a minimum payment to those displaced or unable to find work in the new normal of “employment.”
We suggest that you check out the flow of related commentary on the topic of “the workplace” from the McKinsey & Company’s Global Institute at: https://www.mckinsey.com/mgi/overview
The Top Story this week from CNBC explores the CEO pay ratio dialogue and provides highlights within industries for you (manufacturing, retail trade, etc.).
The overall public dialogue on “inequality” (steadily rising in tempo and fervor) includes the subset of executive compensation and the CEO pay ratio is becoming a part of the discussion. The news, commentary and research results to come in the months ahead will be of interest to investors, employees and other stakeholders.
This is just the introduction of G&A's Sustainability Highlights newsletter this week. Click here to view the full issue.