If the CEO’s High Salary Isn’t Justified to Employees, Firm Performance May Suffer

Dina Gerdeman writes about the other meaning of equity compensation — the perception of fairness in pay throughout the company, as seen by both employees and investors:

The gap between the large sums that CEOs take home versus average employee pay is taking on added importance in 2018, as public companies in the United States are mandated for the first time to disclose pay ratios between the CEO and employees. Harvard Business School Assistant Professor Ethan Rouen warns that if those disclosures are not made with proper context, they could ignite worker backlash and harm productivity.“

When you hear the amount that a CEO makes, it is going to seem outrageous. People are going to react with passion,” Rouen says. “So, it’s going to fall on every company that has to disclose these figures to provide some explanation and give a measured response justifying the pay disparity.”

Connections between wage disparity and company performance are detailed in Rouen’s recent working paper, Rethinking Measurement of Pay Disparity and its Relation to Firm Performance.

In essence, firms can flourish when they pay their workers fairly—and struggle when they don’t, the research suggests.

Source: If the CEO’s High Salary Isn’t Justified to Employees, Firm Performance May Suffer

Will New Pay Ratio Disclosure Lead to “Public Infamy?” – CEO Pay Updates: 2017 Proxy Season

Rosanna Landis Weaver writes about pay ratio disclosures for As You Sow, quoting Alexander Hamilton: “Public infamy must restrain what the laws cannot.”

CEO pay has continued to rise sharply in the years since Mackey said a pay cap was not an impediment to hiring. Perhaps greed and executive entitlement have increased markedly since 2009. Still, it is worth recalling that an arbitrary limit of 17:1 was not a problem less than a decade ago as you see ratios of over 170:1 in 2018.  I expect to see an astonishing range of data come out on pay ratios this year. The SEC has given companies broad discretion on how to calculate the data, and broadened it even more with additional interpretive guidance in September. Because the data will be variable it will make it more difficult to compare company to company, within industry, or by size. That may backfire on those that hoped to add complexity to cloud data comparisons. The overall ratio will stand out even more glaringly.<P

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. In 2015, SEC Commissioner Gallagher, in his opposition to the rule wrote of “perceived income inequality” in the same tone that others in his party write of “purported climate change.”  In both of these matters, numbers don’t lie.

Source: Will New Pay Ratio Disclosure Lead to “Public Infamy?” – CEO Pay Updates: 2017 Proxy Season

Portland Adopts Surcharge on C.E.O. Pay in Move vs. Income Inequality – The New York Times

The New York Times reports on a new initiative to address income inequality, based on upcoming pay ratio disclosures.

Moving to address income inequality on a local level, the City Council in Portland, Ore., voted on Wednesday to impose a surtax on companies whose chief executives earn more than 100 times the median pay of their rank-and-file workers.

The surcharge, which Portland officials said is the first in the nation linked to chief executives’ pay, would be added to the city’s business tax for those companies that exceed the pay threshold. Currently, roughly 550 companies that generate significant income on sales in Portland pay the business tax.Under the new rule, companies must pay an additional 10 percent in taxes if their chief executives receive compensation greater than 100 times the median pay of all their employees. Companies with pay ratios greater than 250 times the median will face a 25 percent surcharge.

Corporate Directors Wary of SEC Audit Proposals | Accounting Today News

It would be nice, in stories like this, to see what a survey of investors have to say as their responses might differ.

An overwhelming majority of corporate board directors oppose the Securities and Exchange Commission’s proposal to require mandatory disclosure of communications between audit committees and auditors, according to a new survey.

The survey, by BDO USA, found that when asked about the SEC concept release that would require disclosure of communications between the audit committee and the external auditor, an 87 percent majority of corporate directors believe such disclosures would have a negative impact on the audit committee—auditor relationship.

“Given proposals from shareholder activists for more transparency with regard to campaign contributions and a growing trend of companies self-reporting such information, board members appear to be getting more comfortable with the idea of mandatory disclosure of political contributions,” said Amy Rojik, a partner in the Corporate Governance Practice at BDO USA, in a statement. “In contrast, directors are clearly not in favor of mandated disclosure of audit committee communications with the external auditor. This is consistent with the comment letters the SEC has received on this proposal, as boards are sensitive to how such disclosures may have the unintended consequence of chilling communications between their audit committees and the external auditors.”
In addition, the BDO survey found 74 percent of public company board members do not believe the pending CEO–median employee pay ratio will be a meaningful disclosure for investors, while a similar percentage (72 percent) are in favor of the SEC’s proposed “claw back” rule requiring businesses to recoup senior executives incentive pay when material errors result in a financial restatement. A narrow majority of 53 percent of the 150 corporate board directors polled indicated they are in favor of the SEC developing mandatory disclosure rules for corporate political contributions.

via Corporate Directors Wary of SEC Audit Proposals | Accounting Today News.

The Outrageous Ascent of CEO Pay | Robert Reich

The share of corporate income devoted to compensating the five highest-paid executives of large corporations ballooned from an average of 5 percent in 1993 to more than 15 percent by 2005 (the latest data available).

Corporations might otherwise have devoted this sizable sum to research and development, additional jobs, higher wages for average workers, or dividends to shareholders – who, not incidentally, are supposed to be the owners of the firm.

Corporate apologists say CEOs and other top executives are worth these amounts because their corporations have performed so well over the last three decades that CEOs are like star baseball players or movie stars.

Baloney. Most CEOs haven’t done anything special. The entire stock market surged over this time.

Even if a company’s CEO simply played online solitaire for thirty years, the company’s stock would have ridden the wave.

Besides, that stock market surge has had less to do with widespread economic gains that with changes in market rules favoring big companies and major banks over average employees, consumers, and taxpayers.

via The Outrageous Ascent of CEO Pay | Robert Reich.

Why Putting a Number to C.E.O. Pay Might Bring Change – The New York Times

Because the rule will generate an easily graspable and often decidedly shocking number, it may energize a cadre of new combatants in the executive pay fight. And because these newcomers — company employees, state governments and possibly even consumers — will most likely be more vocal on the matter than institutional investors have been, the executive pay bubble might actually start to deflate.

via Why Putting a Number to C.E.O. Pay Might Bring Change – The New York Times.

S.E.C. Approves Rule on C.E.O. Pay Ratio – The New York Times

After a long delay and plenty of pushback from corporate America, the Securities and Exchange Commission approved on Wednesday a rule that would require most public companies to regularly reveal the gap between the compensation of the chief executive and the pay of the rest of their employees.

The rule, which stems from the 2010 Dodd-Frank overhaul of financial regulation, gives companies considerable flexibility in calculating the pay gap, suggesting that the S.E.C. was receptive to concerns about cost and complexity that corporations expressed.

Still, the data point, which calculates the ratio of a chief executive’s compensation to the median compensation of a company’s employees, could further stoke the debate over income inequality that has intensified in recent months. Fifty years ago, chief executives were paid roughly 20 times as much as their employees, compared with nearly 300 times in 2013, according to an analysis last year by the Economic Policy Institute.

via S.E.C. Approves Rule on C.E.O. Pay Ratio – The New York Times.