Business group: Public companies shouldn’t have to compare CEO and worker pay
By Peter Whoriskey,
Here’s one financial figure some big U.S. companies would rather keep secret: how much more their chief executive makes than the typical worker.
Now a group backed by 81 major companies — including McDonald’s, Lowe’s, General Dynamics, American Airlines, IBM and General Mills — is lobbying against new rules that would force disclosure of that comparison.
The lobbying effort began more than a year ago. It involved some of the biggest names in corporate America and meetings with members of both parties on the House Financial Services Committee and Senate banking committee.
The companies and their Republican allies in Congress call comparisons between the chief and everyone else in the company “useless.”
But some Democrats and investors say the information should be issued to highlight the growing income disparity in the United States. They add that opponents of disclosure merely want to hide the outrageous scale of executive pay packages.
On Wednesday, a House committee approved a bill that would repeal the disclosure requirement.
Disclosing such comparisons “can mislead or confuse investors,” said Rep. Nan A.S. Hayworth (R-N.Y.), who filed the bill to repeal the disclosure. “It creates heat but sheds no light.”
She also said the calculation of the ratio would be a burden for companies, especially those with global operations.
The committee vote was largely along partisan lines: Twenty-nine Republicans and four Democrats supported repeal; 21 Democrats opposed it.
“The real reason House Republicans want to keep the typical worker’s pay secret is that it may embarrass some companies to reveal that they pay their CEO in the range of 400 times what they pay their typical worker,” said Sen. Robert Menendez (D-N.J.), who added the requirement to the financial regulatory overhaul bill that passed last year.
Executive compensation at the nation’s largest firms has more than quadrupled in real terms since the 1970s, according to research by Carola Frydman of MIT’s Sloan School of Management and Raven E. Molloy of the Federal Reserve, even as pay for 90 percent of American earners has stalled.
In 1970, average executive pay at the nation’s top companies was 28 times the average worker income, according to the Frydman-Molloy data and numbers provided by Emmanuel Saez at the University of California at Berkeley. By 2005, executive pay had jumped to 158 times that of the average worker.
Concern over the income disparity led Menendez to add the reporting requirement to the financial overhaul legislation. The requirement calls for public companies to report the median annual total compensation for workers and the annual total compensation for the chief executive, and to report the ratio of the two.
The Center on Executive Compensation has led the criticism of the provision. The group is part of the HR Policy Association, which represents the human resources executives at 325 large companies.
The thrust of the group’s criticism is that the information would have little value for investors comparing firms, because companies have workforces that differ in skills and expected pay. Wages also vary across regions and industries.
Current rules already require disclosure of executive compensation; the new requirement calls for the additional disclosure of median worker pay. Critics say that would add little to what is already known.
“You can already tell where a CEO falls relative to his peers,” said Tim Bartl, senior vice president and general counsel for the Center on Executive Compensation. “You can already tell where he falls relative to the average worker in the industry. What is this number going to tell us?”
Last year, the HR Policy Association paid Bartl’s law firm, McGuiness & Yager, more than $1.5 million for lobbying, according to OpenSecrets.org.
Investor groups who seek to align their ethical beliefs and their portfolios say the disclosure could be meaningful for stockholders and employees.
Proposals to disclose similar comparisons were made to at least nine companies last year, often by religious groups that own shares. The Sisters of Charity of the Blessed Virgin Mary made such a proposal at General Electric, the Benedictine Sisters of Mount Angel at Goldman Sachs, and the Sisters of St. Francis of Philadelphia at Coventry Health Care.
The proposals at the nine companies were overwhelmingly rejected by other shareholders.
For example, last year, the Franciscan Sisters of Perpetual Adoration proposed that Allstate disclose a comparison of executive pay and that of the lowest-paid employees.
“If they have nothing to hide, why wouldn’t they put it in their annual report so all shareholders would know?” said Sister J. Tydrich, treasurer of the group.
Sister Gwen Farry, of the Sisters of Charity of the Blessed Virgin Mary, said, “It just doesn’t seem right that there should be such a large disparity.”
Some companies have willingly sought to restrain the disparities. Whole Foods, the grocery chain, has aimed to limit cash compensation to 19 times the average pay.
“We think it’s important . . . not to have gross inequity between the executives and everyone else,” said Mark Ehrnstein, the chief human resources executive at the company.
In 2010, the average annual wage was about $37,000, which dictated a salary cap of $705,000, company officials said.
This limit, however, does not apply to stock and options, and a couple of top officials earned much more. A.C. Gallo, the president and chief operating officer, earned $4.6 million, according to proxy statements, and co-chief executive Walter Robb made just slightly less.
Even so, supporters of such disclosures said the example of Whole Foods shows that at least some companies and some investors see value in comparing top salaries with those of everyone else.
“We think its meaningful information,” Ehrnstein said. “We’re convinced that the transparency engenders trust for our employees.”