A new regulation that came into force this year, eight years after it was mandated by the U.S. Congress, requires companies to disclose the pay disparity between CEOs and average workers.
The new Securities and Exchange Commission (SEC) regulation requires that companies calculate median compensation of its employees, compare that with the CEO’s compensation as a ratio, and announce it. This was part of a piece of legislation passed in the aftermath of the 2008 economic crisis. The rule was finalised in 2015, but corporate lobbyists stalled its implementation until now. In 2016, with the Republicans winning the presidency and both chambers of the legislature, the rule was thought to be doomed. But it did come into effect, bringing into spotlight the CEO salaries in comparison with the earnings of average workers.
The high salaries of senior executives are a function of the market, companies have argued for long. But compensations may have little to do with the performance of the executives, a study in 2013 that analysed 241 corporate chief executives, who had ranked among America’s 25 highest-paid CEOs in one or more of the previous 20 years, showed. About 20% of the sample consisted of CEOs whose firms vanished or survived on taxpayer bailouts after the 2008 financial crisis, the study by the Institute for Policy Studies found. Eight per cent of the people in the sample ended up getting sacked, but did not empty handed — their ‘golden parachutes’, or severance packages, were valued at $48 million on average. Richard Fuld of Lehman Brothers was among the 25 highest-paid executives for eight consecutive years, before the investment bank collapsed in 2008.
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Highest paid CEOs
According to a Bloomberg analysis in December 2017, U.S. and Indian CEOs are the highest paid in comparison to the workers that they lead. The report said CEO salaries at U.S. companies averaged $14.3 million a year, more than twice that of their Canadian counterparts and 10 times greater than the Indian figures. According to a separate Bloomberg ranking, CEOs of Indian companies listed on the Sensex earn 229 times more than the average worker, compared to U.S.'s ratio of 265.
As the season of annual meetings progresses, dozens of companies have published their CEO-median worker compensation ratio. The widest gap reported so far is by YUM China Holdings, a fast-food company, which has most of its employees in China. While the median employee earned $3,396 in 2017, its CEO Micky Pant’s compensation was $9.57 million, a ratio of 1 to 2,818. The median worker would have to work for 2,818 years to earn what Mr. Pant earns each year. AT&T CEO Randall Stephenson made 366 times more money than the company’s median worker last year. His package was $28.7 million, while the median employee salary was around $78,000.
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Certain types of workers employed abroad are excluded from the calculation. American retail giants that thrive on part-time employees have lobbied hard for converting their compensations into full-time equivalents for the purpose of this regulation, but the SEC did not allow that.
The spate of such disclosures comes against the backdrop of a huge tax cut given to American corporations by the Trump administration. While average employees have seen marginal increases in their salaries, most of the extra money that companies gain is being used for share buybacks. This raises share prices, which, in turn, boosts executive compensation further.
Varghese K George works for The Hindu and is based in Washington