Saturday, July 13, 2013
In 2012 the average cash compensation of a corporate CEO was 279 times larger than average employee pay. This statistic, or one similar to it, is broadcast by some organization every few months.
So why are hoards of business lobbyists in Washington, D.C., working against the Securities and Exchange Commission to kill a rule that would require publicly traded corporations report the ratio of CEO compensation to the average total pay of their employees?
The attorneys and lobbyists representing America’s largest corporations say they are concerned with the “inordinate amount of time, effort, and resources (needed) to respond to this regulatory burden,” according to Cara Welch, public policy vice president for WorldatWork.
That’s pure hokum.
Back in the 1980s I had these numbers at the ready for several corporations without the aid of today’s technology. I expect today’s compensation administrators can produce the numbers needed within an hour. Every year the details of the CEO’s pay package are reported in the proxy report. So why fuss about a ratio?
Welch claims that without substantial context the CEO pay and average worker pay will be misunderstood, making the ratio “essentially futile and not a credible evaluation of a company’s executive compensation package.”
I agree with this statement, and I have the experience and knowledge to provide some context.
When I first started working with executive compensation I asked my boss why the top executives paid nothing for their health insurance, why many highly paid execs were given interest-free home loans, and why they could defer income while the company paid them a guaranteed minimum 12 percent annual interest on that deferred income.
The answer was the same then as it is today — a competitive pay package is necessary to recruit the best candidates.
And why pay executives millions of dollars in severance when they have been fired for poor performance?
My boss told me we need them to leave quickly and quietly. When one of the division presidents ran afoul of the board of directors he was given a check for more than $1 million.
The employees, who had worked to the best of their abilities on that division president’s projects, unaware they were doing anything wrong, were given a box for their personal belongings, a final paycheck and an escort out of the building.
The rules for corporate executives aren’t the same as the rules for corporate employees or for small business owners. When a small business fails — for whatever reason — that business owner will probably take a big financial hit.
But corporate CEOs have employment contracts that insulate them from risk or the consequences of their own bad decisions.
CEOs are employees, recruited and hired to work for a company. But the rules that govern most employees and the rules of the free market don’t apply to corporate CEOs.
The real issue isn’t that the ratio is difficult to calculate; it’s that it is very hard to explain why there is such a disparity in treatment between a handful of employees in the executive ranks and thousands of employees.
The CEO and executive team have fully paid health and life insurance while many employees struggle to pay their share of health coverage premiums.
Execs will receive at least three weeks of vacation time and whatever sick time is needed. The average paid vacation time for employees is 1.5 weeks, and 40 percent of the retail and service sector employees receive no paid time off.
With a generous pension plan, all kinds of company stock and the services of an expert financial planner available to them executives can retire with few worries. Yet many also receive a consulting contract of several hundred thousand dollars per year for the first few years of their retirement, just in case they are called for advice.
Meanwhile, the average employee making $50,000 a year doesn’t have a pension, may have some money set aside in a 401(k) and has to hope and pray he or she isn’t forced to retire early.
Going through a personal crises or divorce? The CEO is provided with a staff member to handle the paperwork and ensure everything is taken care of. Employees facing a personal crisis are on their own and will probably burn up their vacation time; they don’t have a choice and could well be dinged for poor attendance and performance.
Years ago CEOs of high tech companies often asked to have their pay package compared to Bill Gates’ pay, assuming Gates’ pay would make their own look paltry. Most people didn’t realize Gates kept his pay at $150,000 for many years.
He and his employees made their wealth on Microsoft stock. As much as his buggy product irritated me, I respect him for that.
When the CEOs realized Gates’ pay and benefits made them look way overpaid, they would ask me to delete that piece of data. (It was a fair comparison. I didn’t delete it.)
CEOs want to pick and choose and fine-tune the context in which their pay is displayed. That CEO pay to employee pay ratio is a bit rough but in context it’s brutal.
Virginia Detweiler, based in Walla Walla, provides human resource services and management training to businesses in Southeastern Washington with her consulting firm HR Partner on Call. Her columns are written as a service to employers and employees and rely on reader questions and comments for topical material. Contact her by email at firstname.lastname@example.org or phone at 509-529-1910. Because of job and employer sensitivities, care is taken to protect identities.