At a time when skilled talent is hard to find, business executives may want to resist the urge to socially engineer. One tech company CEO learned this lesson the hard way. According to “Seattle company copes with backlash on $70,000 minimum wage” (Seattle Times, August 1, 2015), across-the-board raises to establish a minimum base salary, and the reduction of the CEO’s million dollar pay package to make it happen, have been followed by several adverse outcomes. Two key employees quit, “spurred in part by their view that it was unfair to double the pay of some new hires while the longest-serving staff members got small or no raises.” One person opined that money was given “to people who have the least skills and are the least equipped to do the job.” Several customers took their business elsewhere, “dismayed by what they viewed as a political statement.” Even though the company’s stance led to “dozens” of new clients, they will not start paying their bills until next year. In the meantime, new workers had to be hired, now at a “significantly higher cost.” Competitors are agitated, fearing that their costs will be forced upward.
How much someone gets paid continues to be a hot topic although not always for the right reasons. A few years earlier, companies such as Ben & Jerry’s and Herman Miller moved away from salary cap initiatives in order to populate the C-suite with experienced people who might otherwise not consider a move. See “Limits on Executive Pay: Easy to Set, Hard to Keep” (Wall Street Journal, April 9, 2007).
Jump ahead to 2015 and the calculus begins anew with regulations that are meant to discourage big gaps. Hot off the press, on August 5, 2015, the U.S. Securities and Exchange Commission (“SEC”) announced the mandate (pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act) that a public company now disclose how much its chief executive officer makes relative to the median compensation of its employees. Click to download the 294 page final rule about this pay ratio disclosure rule.
Not everyone thinks that government intervention will help. Financial journalist and best-selling author Roger Lowenstein articulates what some say is blatantly obvious, i.e. CEO’s earn much more than the people they manage. In “Why the new SEC rule is the wrong way to fix CEO pay” (Fortune, August 7, 2015), he points out the following:
- Lots of people besides CEOs make big money, including popular authors, athletes and private fund managers; and
- A pay ratio rule does little to empower investors in getting answers to important questions such as whether pay is “in proportion to the value added” and a proper alignment of shareholders’ interests with managerial incentives exists.
He rightly intimates that a pay ratio will do little to enlighten anyone about whether board member conflicts exist and, if they do, how executive compensation may be tainted as a result. His recommendation is to grant the SEC the power to let shareholders have a true “say on pay” and improve the proxy system to facilitate the installation of independent board members.
Like others, I have my doubts about the value of the compensation benchmark data. A company that relies on higher skilled workers will no doubt report a lower CEO to median pay ratio than a company with an “hourly or seasonal workforce.” So what?
As the U.S. Chamber of Commerce points out in its August 5, 2015 “Statement on SEC Pay Ratio Rule,” the metric is “misleading, politically-inspired, and costly” and “fails to provide investors with useful, comparable data.”
I am reminded of a discussion I had with another tenured professor when I taught graduate level finance. He argued that all university faculty should get the same wage until he discovered that he would be receiving less money in order for the school to pay more to others. So much for the Karl Marx dictum – “From each according to his abilities, to each according to his needs.”
No doubt, political blowhards will use newly disclosed pay ratios to make hay about their view that capitalism is “evil” because some people earn more than others. (How about those Congressional pension funds that can begin at age 50 or earlier?) Hopefully short-term hype will give way to the voice of enlightened shareholders and board members who continue to push for objective performance-linked rewards that promote long-term wealth creation.