Retail decries disclosure rules

Industry must show pay gap between CEOs, workers

Newly implemented corporate disclosure rules show that retail companies have some of the widest pay gaps between CEOs and average workers, but the industry says the rules are unfair.

The numbers are emerging as publicly traded firms for the first time must disclose the ratio of the CEO’s compensation to that of the firm’s median worker. Half of employees are paid less than the median, and half are paid more.

The disclosures, contained in statements companies must provide to shareholders before their annual meetings, show ratios of more than 1,000to-1 for retailers such as Kohl’s (1,264to-1), Walmart (1,188-to-1), TJX (1,501to-1), Ross Stores (1,314-to-1) and Gap (2,900-to-1).

All are several times greater than the difference at the median S&P 500 company, according to data compiled by Bloomberg. Among the 341 such firms the news organization had tracked as of May 17, the median ratio was about 180to-1.

The overall data, however, mask variations among companies that can significantly affect the ratios. Different industries may have much different pay structures, for example. Or one company may have large numbers of employees in low-wage countries — above a certain threshold, they must be counted — while another company’s workforce might be entirely domestic.

Except for leisure and hospitality, retail trade has the lowest average hourly earnings of any major industry group in the U.S. That alone would tend to widen the sector’s pay ratio, but what really bothers retail firms is something else:

Under the Securities and Exchange Commission rule on the pay ratio, they must count part-time employees in their calculations, and cannot adjust their pay to its full-time annual equivalent.

That matters because retailers tend to use lots of part-time labor, and their median employee may well be a parttime worker.

Kohl’s, for example, averaged 137,000 employees during 2017, and 104,000 of them were part-time.

The company’s median employee, it turned out, was a part-timer who

earned $8,975.57 over the entire year. With CEO Kevin Mansell receiving total compensation of $11.3 million — thanks in part to a significantly stepped-up bonus because of the firm’s improved performance — Kohl’s pay ratio topped the 1,000-to-1 mark.

The median employees at Gap, Ross Stores and TJX (which operates the T.J. Maxx, Marshalls and HomeGoods chains) also were part-timers.

Further, in determining who is the median employee, companies must include seasonal workers — used in significant numbers by retailers such as clothing and department stores. Their pay, like that of part-timers, cannot be adjusted.

The requirement for companies to calculate and disclose the ratio, specified in the 2010 Dodd-Frank Act, is meant to give shareholders relevant information to evaluate executive pay.

David French, chief lobbyist for the National Retail Federation, however, said comparing the earnings of parttime and temporary workers, without adjustment, to the compensation of full-time CEOs renders the ratio “nonsensical.”

“This is not helpful in making an informed decision about anything,” he said.

Robert Pozen, a senior lecturer at the MIT Sloan School of Management and a senior fellow at the Brookings Institution, also thinks the SEC rule produces a misleading picture of the pay structure in industries such as retail.

“It’s wrong,” he said of the commission’s prohibition on adjusting the pay of part-timers to a full-time equivalent, “just methodologically wrong.”

The result, said Pozen, who with a Sloan colleague wrote a recent commentary on the issue for The Wall Street Journal, is an “apples and grapefruits” comparison.

“The question is what are we trying to get to here, and are these ratios really meaningful,” he said.

Thomas Linsmeier, an accounting professor at the University of Wisconsin-Madison School of Business, said it could be argued that the pay ratios of companies with lots of part-timers shouldn’t be stacked against the ratios of companies where almost everyone works full-time.

But he also sees reason to require companies to compare the CEO’s pay to that of the firm’s median employee, whether or not that person is part-time.

The retail industry, in part, has chosen to use large numbers of part-time workers, perhaps to hold down labor costs, Linsmeier said. Given that, he said, the way the SEC rules work may appropriately indicate the gap between the CEO’s pay and a retail firm’s employment base.

The SEC seems to agree. In August 2015, when publishing its rules, the commission rejected arguments such as those advanced by the National Retail Federation.

No adjustment of part-time pay to its full-time equivalent by “registrants” — companies required to file documents with the SEC — would be allowed, the commission said.

“We are taking this approach in the final rule because we believe it most accurately captures the workforce and compensation practices that the registrant has chosen to employ,” the commission said.