Balance between CEO and worker pay needed

● As US stock investors contemplate the biggest long-term risks facing the market, such as a global economic slowdown, trade tensions or rich equity prices, they shouldn’t overlook a critical one: the pay disparity between corporate bosses and workers.

In 2015, the Securities and Exchange Commission adopted a rule that required public companies to disclose the median compensation of employees and that of the CEO, beginning with fiscal year 2017. The numbers have confirmed what many suspected: CEOs are paid tremendously more than workers.

The numbers also revealed that hundreds of the biggest US public companies pay their workers less than a living wage. That’s not sustainable. As the grim pay disclosures pile up year after year, the backlash against the corporate elite will intensify. If corporate boards can’t find a better balance in their pay structure, outside forces will, and at a far greater cost to companies and their shareholders.

My Bloomberg colleagues, Alicia Ritcey and Jenn Zhao, compiled the CEO-to-worker compensation ratios for companies in the Russell 1000 index, which represents roughly the 1,000 largest US public companies by market value, and laid them out in a superb interactive chart.

The median employee pay for 104 of the companies, or roughly 10% of the Russell 1000, is below the federal poverty level of $25,750 (R343,877) for a family of four.

Meanwhile, the average CEO in the Russell 1000 received total compensation of $11.8m during the most recent year for which numbers are available, including salary, bonus, stock grants, options and other benefits. The average CEO-to-worker pay ratio was 248-to-1. For the 104 companies whose median employee pay falls below the poverty line, the ratio is a huge 917-to-1.

It didn’t used to be this way. The CEO-toworker pay ratio was 20-to-1 in 1965, according to EPI. The ratio gradually swelled during the following three decades to 343.5to-1 by 2000. With few exceptions, it has hovered near 300 since then. That history is a reminder that the corporate pay structure was once more balanced and can be again.

Fortunately, companies can afford to give workers a raise. Firms in the Russell 1000 posted an average profit margin of 10% in 2018, the highest since 1995.

Critics of the CEO-toworker pay ratio like Matthew Shay, president and CEO of the National Retail Federation, say the ratio is misleading because it includes part-time workers. Though I agree that it would be better to exclude them, it wouldn’t change the analysis. Shay, for example, estimates that including parttime workers overstates the retail industry’s ratios by 31%. But even if that were true across all industries, it would still mean that CEOs were paid roughly 200 times more than the median worker, or 10 times the pay ratio in 1965. It also ignores the fact that the full-time equivalent of part-time pay would still be inadequate.

Some prominent investors have already acknowledged that the status quo may not hold. And the question isn’t whether CEOs, founders and innovators deserve to be rewarded. Rather, it’s whether they share enough of the spoils with the workers who are essential to their success. Clearly, many do not.

Hundreds of the biggest US public companies pay workers less than a living wage