A group of U.S. chief executive officers earned 140 times more last year than the median workers at their companies, according to a survey that gives a first glimpse of newly required pay ratio disclosures.
Workers at the 356 public companies included in the study received $60,000 in median compensation, Equilar Inc. said in the report released on Feb. 1, which didn’t include CEO pay figures.
Thousands of U.S. companies will reveal the ratio for the first time in coming months, required as part of the 2010 Dodd-Frank Act. Supporters of the rule hope it will highlight growing income inequality and force corporate boards to rein in excessive executive compensation. Critics see the provision as a populist measure intended only to shame CEOs, saying it’s costly to calculate and difficult to compare from one industry to the next.
“Since half of a company’s employees are being paid less than the median, a big concern is that internal conversations at the water cooler will lead to a decrease in morale across the business,” said Nathan O’Connor, a managing director at Equity Methods, which helps companies calculate the ratio. Still, preparing the figure has helped many firms get a better sense of their pay equity and differences in regional compensation, he said.
Consumer-discretionary businesses included in the study reported a median pay ratio of 350-to-1, the biggest among all industries, while the energy sector’s earnings gap of 72-to-1 was the smallest.
The ratio presents a CEO’s total reported pay -- including salary, bonuses, equity awards and other benefits -- as a multiple of the compensation earned by the company’s median employee. Publicly traded U.S. businesses, excluding emerging-growth companies and investment firms, must disclose the ratio for fiscal years starting on or after Jan. 1, 2017 -- almost seven years after Dodd-Frank became law.
The delay underscores the rule’s embattled past. For years, it remained bottled up at the Securities and Exchange Commission, which didn’t publish guidelines on how it should be calculated until 2015. Scores of workers, lobbyists, policy experts and companies weighed in on the mandate, flooding the agency with more than 300,000 comment letters.
About three-quarters of asset managers surveyed by Institutional Shareholder Services Inc., a proxy advisory firm, said they will look at how the ratio compares with peers and year-over-year movements.
Critics have savaged the pay ratio, saying it lacks purpose and lends itself to those who seek to vilify corporate executives. The ratio will “perhaps do more to inflame than to inform,” Glenn Booraem, Vanguard Group Inc.’s head of investment stewardship, said at a 2017 conference.
Opponents also questioned how the figure will compare across industries because the rule is laced with caveats to help global companies with sprawling operations identify their median employees. Many boards, however, are most worried about how the half of workers who earn less than the median will react, according to a survey from Willis Towers Watson Plc.
“Unions will be very focused on this disclosure,” said Jim Kohler, a Willis Towers director. A low median pay figure compared with rivals “could also impact companies’ recruiting efforts.”
By Anders Melin