A Blog by Jonathan Low


Dec 6, 2014

The Boss Makes How Much More Than You?

Let's be clear, the impending rule requiring companies in the US to disclose the disparity in pay between CEOs and 'average' workers is going to generate as much heat as light.

In 2013, CEOs made 331 times what average workers made and 774 as much as minimum wage earners. Yeah, that means you, fast food industry, Walmart, et al.

We've known this at an aggregate level for several years. While some CEOs are going to have a lot of 'splainin' to do, having hidden behind the averages, the more instructive insight is the way companies are treating this impending 'challenge.'

Do they view it as an opportunity to rethink compensation as it affects employee engagement and productivity? A chance to optimize client relationships  and customer satisfaction? Or even as a moral issue (stifle those laughs!) that could be undermining the capitalist system?

Well, no, you will not be surprised to learn. They are universally treating it as a public relations problem.

They are gearing up to 'educate' workers and investors about how these amazing figures are arrived at. Lots of compensation consultants and wordsmiths are going to be working overtime (though probably not paid as such) to correct the impression that this is somehow just a greedy grab-all.

It is doubtful that a revolution and strikes will ensue as some business advocacy groups have ominously warned. But just as sunlight tends to help things grow, it may well be that how compensation is designed will be reformulated as discomfort escalates at the disclosures. Just dont bet on the percentages changing too quickly. JL

Joann Lublin reports in the Wall Street Journal:

At a time when pay disparities are a hot political and business issue, the coming rule may put businesses in the sticky spot of having to explain why the highest executive is rewarded so richly while regular workers make comparatively little.
Companies are preparing for a controversial new federal rule that will force them to disclose just how much more the top boss makes than the rank-and-file worker.
By year-end, the Securities and Exchange Commission may adopt a regulation requiring most public U.S. companies to disclose the ratio of pay between their chief executive and their typical employee. At a time when pay disparities are a hot political and business issue, the coming rule may put businesses in the sticky spot of having to explain why the highest executive is rewarded so richly while regular workers make comparatively little.
Some employers are taking steps to plan for the possibility of internal morale problems, negative press and an investor outcry over the sizable gulf in pay between the top and the bottom. Among other things, they intend to expand employee training and shareholder outreach efforts.
Under the rule, which the SEC could require for proxy-statement disclosures in 2016, businesses will compute the pay of their median worker and compare that figure with their leader’s pay.
Proponents hope that forcing businesses to disclose the gulf in pay between the CEO and rank-and-file workers will prompt management to trim CEO rewards, raise wages of lower-level workers—or both.
Critics say such pay ratios matter little to investors and could make executives easy targets for populist anger or hostile shareholders. The proposed federal rule was mandated under the 2010 Dodd-Frank financial reform law, and it attracted more than 128,000 comments. In a letter sent Monday, three Republican lawmakers urged the SEC not to act swiftly, warning the rule would be unduly costly.
John Stumpf , chief of Wells Fargo & Co., was thrust into defending his employer’s pay practices during a quarterly town-hall meeting in late October after hourly employee Tyrel Oates emailed him seeking a $10,000 raise for everyone.
Mr. Stumpf’s 2013 compensation totaled $19.3 million—“more than most of the employees will see in our lifetimes,” Mr. Oates wrote. The $15-an-hour processor forwarded his Oct. 6 missive to about 200,000 Wells Fargo colleagues.
Mr. Oates still works for the firm. In his view, the bank’s low-level staffers “are grossly underpaid for the amount of profit we drive.” He says he also believes Mr. Stumpf “should be looking out for [his] employees when people are struggling to make ends meet.”
A company spokeswoman declined to comment about the town-hall meeting or Mr. Oates but said, “We provide a great place to work.’’ A MarketWatch story reported Mr. Stumpf described the bank’s pay model as competitive and said that 40,000 employees received a promotional raise last year.
Total direct compensation for 300 CEOs at public companies increased 5.5% to a median of $11.4 million in 2013, concluded an analysis by The Wall Street Journal and Hay Group. A separate AFL-CIO study of CEO pay across a broad sample of S&P 500 firms showed the average CEO earned 331 times more than the typical U.S. worker last year. In 1980, that multiple was 42.
Compensation experts say that shareholders care a lot more about the ratio of pay between the chief and fellow executives because a sizable difference may hasten management turnover. The median CEO of an S&P-500 company makes almost 10 times as much as the 15th highest paid executive, concluded a recent analysis by Equilar, a pay-research firm.
Analysts expect disclosed pay ratios to vary, depending on the dispersion of a workforce. Businesses with numerous lower-paid employees abroad will likely report higher ratios than domestic-focused ones.
California and Rhode Island lawmakers considered bills this year offering breaks on state income taxes or contracts for employers with narrow gaps between CEO and worker earnings.
Significant differences in pay can affect morale, product quality and turnover, studies have found. Pay-ratio revelations could cause fresh management problems once individuals realize they make less money than their employer’s median worker.
“Half of your workforce is going to [ask], ‘Why am I paid below the median?’” said Jill Kanin-Lovers, a retired human-resources executive, at a National Association of Corporate Directors conference. “That’s going to be really explosive.”
Ms. Kanin-Lovers runs the board compensation committee for recruiters Heidrick & Struggles International Inc. The firm hasn’t decided yet how to explain the pay-ratio disclosure to its 1,500 staffers in 30 nations. But directors and executives “recognize the importance of getting out in front of the issue,” she says.
At Avnet Inc., pay-ratio preparations will include employee outreach that may occur six months before the first proxy disclosure, says MaryAnn G. Miller, the company’s chief human-resources officer. The technology distributor has almost 19,000 employees in 55 nations.
Staffers will learn how management computes pay rates and determines job levels, plus “what you can do to advance,” Ms. Miller says. Meanwhile, she adds, she and fellow executives intend to better analyze whether Avnet pays competitively.
Chief Executive Rick Hamada collected about $5.9 million in compensation during fiscal 2014. Because even modest CEO pay packages look huge to rank-and-file associates, Avnet will also try to explain that the highest job “is very demanding. You’re on 24/7,” Ms. Miller says.
The coming federal rule raises another tricky question: How much extra information should companies provide shareholders about their pay ratios?
Some may imitate Coca-Cola Co.’s approach on a related issue. Last month, the world’s biggest beverage company heeded shareholder criticism and revamped an executive-compensation plan, providing fewer stock options and wider use of cash-based awards. Maria Elena “Mel” Lagomasino, the board’s pay-panel chairman, took the unusual step of promising additional investor dialogues about compensation in a detailed letter she posted on Coke’s blog.
Ms. Lagomasino anticipates that such direct communication with shareholders will become increasingly important. “Pay ratios will be part of that,” she says.
Companies with staff around the world “worry their pay ratios will mean little because the median employee may be a part-timer in India making a few dollars a day compared with their U.S. CEO, who makes millions a year,” says James D.C. Barrall, a partner at Latham & Watkins LLP who specializes in executive compensation.
The SEC’s proposed inclusion of part-time and temporary employees may also skew the ratio. Certain companies may compare their leader’s compensation to that of their median U.S. full-time employee; the proposed rule doesn’t specify how companies should determine who their median worker is.
Some firms already disclose pay-ratio information. Among the handful that do: natural-gas utility NorthWestern Corp. , Whole Foods Market Inc., Noble Energy Inc. and Bank of South Carolina Corp.
NorthWestern CEO Robert C. Rowe ’s pay totaled nearly $1.7 million last year. He had targeted compensation valued at about 22 times the median pay of full-time employees, the company’s latest proxy statement says. “This new disclosure requirement will not raise new concerns,” says Timothy P. Olson, NorthWestern’s corporate secretary. “We will continue to be transparent.”


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