February 21, 2018 at 5:51 PM
A potentially embarrassing math calculation employers have long hoped to escape — one that pay experts thought was dead following President Trump's election — can no longer be avoided.
In recent weeks, a few public companies have begun disclosing a ratio, required for the first time this year, that compares the pay of their chief executive with the pay of their median employee. At industrial giant Honeywell, currently the largest company to disclose, the ratio was 333 to 1. At Teva Pharmaceuticals, the Israel-based generic pharmaceutical company, it's 302 to 1. And at the regional bank Umpqua Holdings, it's about 55 to 1.
As of Wednesday morning, companies had disclosed the figure for only about 20 CEOs, according to the research firm Proxy Insights. But with Corporate America's annual meeting season getting underway — the majority of public companies release their annual reports and proxy voting documents in the coming months — investors, the public and employees are about to get a much closer look at how their pay compares not only with that of their CEO but that of their peers.
It's that last comparison that has employers most concerned, say consultants who work with them on executive pay issues.
“I don't think companies are as worried about newspaper articles, because they are what they are, and I don’t think they’re worried about shareholders,” said David Wise, a senior client partner at Korn Ferry, as investors are already closely focused on executive pay issues. “I think they’re worried about how their own people will react. How do you communicate to an employee who now knows they’re paid in the bottom half of the company?”
The regulation mandates that companies identify the compensation of the median-paid employee at the firm, compare that with the CEO as a ratio, and disclose it each year. As part of the Dodd-Frank legislation of 2010 created in the aftermath of the financial crisis, the rule was finalized in 2015 but met resistance along the way from business groups that said it would be onerous and expensive to calculate. The rule was thought to be a goner after the 2016 election, when a Republican-controlled Congress and a White House whose transition team had promised to “dismantle” Dodd-Frank came to power.
But it has remained unscathed. “Now that these ratios will be published, companies are laser-focused on making sure they get their communications to their employee base right,” said Steve Seelig, a senior regulatory adviser for Willis Towers Watson, a human resources consulting firm.
Pay consultants say employees may be bothered not only by how many multiples higher the chief executive is paid but by where they fit in with their peers. At most companies, compensation remains pretty opaque, and a company-endorsed median figure would provide some additional transparency.
“At the end of the day, we’re all human. We all want to be above average. When you’re not, that impacts job satisfaction, engagement and performance,” Wise said. “That’s the part companies are worried about the most — and they should be.”
Compounding that concern is timing. The ratios are being disclosed just after corporations have received a massive windfall in the form of a corporate tax cut, which could add to questions about inequality. “There may very well be heightened expectations from employees who are paid in the bottom half that incremental tax cut dollars are going to be used to enhance companywide pay programs,” Wise said. “That would be a very understandable reaction given the timing of everything.”
Last week, Honeywell reported that its CEO, Darius Adamczyk, made 333 times the median worker at Honeywell, who makes $50,296. In an emailed statement, a company spokesman said Adamczyk's compensation package is “tied to performance-based incentives that deliver value only when Honeywell performs well against pre-defined targets,” aligning his interests with shareholders and “reflects his strong performance over the past 12 months.”
The SEC's regulation permits companies to exclude from the calculation certain non-U. S. employees, representing up to 5 percent of its total employee base, acknowledging the cost of collecting the data. In its filing, Honeywell said it had excluded workers from 27 countries, such as Brazil, Indonesia and Slovakia, from its figure, slightly less than 5 percent of its workforce. (A Honeywell spokesman said the exclusions were in line with SEC rules)
Sarah Anderson, the global economy project director for the left-leaning think tank Institute for Policy Studies, questioned whether companies were doing that to “manipulate the median worker number,” making the ratio appear smaller since such countries presumably have lower wages than markets in Western Europe or Japan.
Seelig, meanwhile, said companies may exclude such employees either because it's difficult or costly to get pay data on them or to reduce the ratio. Still, “there's reason the SEC chose 5 percent,” he said. “It's not going to move the needle very much.”
A recent survey of 356 public companies by Equilar, an executive compensation and governance research firm, found that the median CEO pay ratio was 140 to 1. But it also suggested that the figure for Honeywell, which is No. 73 on the Fortune 500, would not be that out of line with other similar size companies. Companies above $15 billion in annual sales had a ratio of 263 to 1 and those with the greatest number of employees (43,000 or more) also had the largest ratio, at 318 to 1. Honeywell had 2017 sales of $40 billion and has more than 143,000 employees.
Israel-based Teva Pharmaceuticals, which announced roughly 14,000 job cuts and the suspension of its dividend in December, said in its filing that its CEO pay ratio (302 to 1) would be closer to Equilar's median number if it weren't for a one-time award the CEO received in 2017, valued at $10.2 million.
“Excluding the sign-on equity awards, the ratio would have been 143 to 1,” a company spokeswoman said.
Whether lopsided CEO pay ratios will raise the ire of employees or the public is not yet clear. Despite rising populist sentiments and increasing focus on income inequality, high CEO pay does not seem to generate the same outrage it did during the financial crisis, and only time will tell if juxtaposing the two numbers will have the effect of shaming outlier companies into lower pay for CEOs — or higher pay for workers.
But if unemployment rises, or the market faces a correction, it could, Wise said: “The pay ratio becomes an even bigger deal in the court of public opinion if the bottom falls out of the stock market — full stop.”