Let the CEO shaming commence
The show trials over CEO pay mandated by Congress eight years ago are finally getting underway. The first defendant, Honeywell International, took the witness stand last week when it revealed that CEO Darius Adamczyk made $16.8 million last year — 333 times more than the $50,296 the median Honeywell worker made. Put another way, Mr. Adamczyk made more in one day than Honeywell’s median worker made for all of 2017.
The disclosure, inspired by the 2008 financial crisis, is required by the Dodd-Frank market reform legislation enacted in 2010. Proponents hope that disclosing the ratio between the pay of the CEO and the average worker — a comparison critics of executive pay have been making for years — will shame corporate directors and stockholders into curbing some of the excesses of CEO pay and raising the wages of average workers.
Publicly traded companies are required to make the disclosure in proxy reports sent to stockholders in advance of annual shareholder meetings.
Many of those meetings are held in the spring, so expect more of the eye-popping disclosures in coming weeks. Whether CEOs will be overwhelmed with shame by the revelations remains to be seen. But holding your breath waiting for that to happen is not recommended.
There are a number of reasons why it took so long to implement the will of Congress. A primary factor was cacophonous howling of
the business community, which strenuously objected to the mathematical exercise. The Business Roundtable protested that computing the ratio “would be unduly costly and burdensome” and “generate immaterial, if not misleading, information to investors.”
It is difficult to sympathize. After all, CEOs exercise mathematical precision when identifying to the dollar the synergies that will be generated by their latest acquisition or the savings that will be realized from their never-ending, job-eliminating restructurings.
Nevertheless, the corporate yammering persuaded the U.S. Securities and Exchange Commission to be more flexible about how the widely watched ratio can be determined.
Revised guidelines that the agency issued in September allow companies to use reasonable estimates and statistical sampling, and to exclude certain employees in identifying the median worker (the employee who makes more than 50 percent of his or her colleagues and less than 50 percent of his or her colleagues). Law firms advising companies on the issue believe the more flexible rules will make the exercise easier and less costly.
Many companies with less than $1 billion in annual revenue are not required to disclose the pay ratio. So Snap, the Venice, Calif., company behind Snapchat, didn’t have to compare the $637.8 million that CEO and co-founder Evan Spiegel collected last year with the median pay of the company’s 3,068 other employees.
Companies are required to disclose how they calculate the ratio.
Honeywell’s proxy statement indicates the company excluded about 7,000 workers in Algeria, Bulgaria, Kazakhstan and other countries, and based the measure on their work force as of Oct. 1 to provide time to do the math. Honeywell warned that because other companies may use different methods, its 333-to-1 ratio may not be comparable to the ratios that other companies disclose.
Critics who believe CEOs are overpaid have been using pay ratios for years to make their case. The AFLCIO’s estimate that the average CEO makes 347 times than the average worker is based on analysis of CEO pay at 419 S&P 500 companies in 2016 and the U.S. Department of Labor’s determination of the average annual income of private sector production and nonsupervisory employees.
The liberal leaning Economic Policy Institute calculates its pay ratio using the 350 U.S. companies with the largest annual revenue and the same average worker data that the AFL-CIO uses. According to the Washington, D.C., research and advocacy group’s math, the pay disparity was 20-to-1 in 1965, widened to 123-to-1 30 years later, and currently stands at 271-to-1.
The disparity between the growing percentage of wealth controlled by the nation’s most affluent and the shrinking portion controlled by the least affluent is one of the greatest crises the U.S. faces.
The latest round of shaming over CEO pay is by no means a solution. But maybe it will encourage a more serious discussion about what to do about the growing gap between the haves and the have nots.