May 22, 2018

Pay Ratio: A Congressman Weighs In (With a Study)

Here’s something that I blogged yesterday on A member of Congress is now using pay ratio data to examine income inequality. This study from Rep. Keith Ellison’s staff (D-Minn) looked at pay ratios from 225 large companies that were responsible for employing more than 14 million workers. When it comes to “extreme gaps,” it “names names” – and it also seems to assume that companies that excluded portions of their workforce were doing so to keep their ratio down.

This article describes the findings – here are the main ones:

1. Pay ratios ranged from 2:1 to 5000:1. The average was 339:1 – compared to 20:1 in 1965

2. 188 companies had a ratio of more than 100:1 – so the CEO’s pay could be used to pay the yearly wage for more than 100 workers

3. Median employees in all but 6 companies would need to work at least one 45-year career to earn what their CEO makes in a single year

4. The consumer discretionary industry had the highest average pay ratio – 977:1

I think it’s easy to become numb to high CEO pay when you work with it all the time and you’re focused on the mechanics of programs and disclosures. This study is a reminder that no matter how useless pay ratio seems to companies, people outside of this field are paying attention – and they’re synthesizing the data not just to compare companies, but to show that outsized executive pay is a pervasive issue that interests many.

Pay Ratio: Customer Fallout?

As highlighted in Rep. Keith Ellison’s study, the consumer discretionary industry is shaping up to have the highest average pay ratios – 977:1 among the S&P 500. That compares to a supposedly ideal ratio among consumers of 7:1, according to this study. And while the high numbers aren’t surprising given the workforce for most of those companies, this WSJ article says it could impact their bottom line. Here’s the high points:

A recent study found that consumers are significantly less likely to buy from companies with high CEO pay ratios. First, it found that sales declined for Swiss companies when their high pay ratios were publicized.

In a follow-up experiment, people had the chance to win a gift card to one of two retailers. In the absence of pay-ratio information, 68% of people chose one retailer’s card and 32% chose the other. But when participants were informed that the first of those retailers had a 705:1 pay ratio and the second had a 3:1 ratio, just 44% of people chose gift cards from the first retailer while 56% chose the second.

It’ll be interesting to see whether this holds true in “real life,” where customers probably aren’t looking at pay ratios at the same time they’re making a purchase – and may not have the option to buy from a company with a 3:1 ratio. The lowest ratios I’ve seen for that industry are around 100:1.

By the way, here’s this CNBC piece entitled “Companies with Closer CEO Pay Ratios May Generate Higher Profit Per Worker.”

UK’s “Enron”: Parliament Committees Recommend Governance Reform

Last week, two Parliament committees issued their final report on the collapse of Carillion – which had been the UK’s second-largest construction group. The situation has been called the British “Enron” and could lead to sweeping reform. As described in this ”Financial Times” article, the report comes down hard on the Big Four auditors – and also blames the implosion on the board and lax regulations. It includes these findings:

– Carillion’s directors elected to increase its dividend every year, come what may. Even as the company very publicly began to unravel, the board was concerned with increasing and protecting generous executive bonuses.

– Government should refer the statutory audit market to the Competition and Markets Authority. Possible outcomes considered should include breaking up the audit arms of the Big Four, or splitting audit functions from non-audit services. The lack of competition in the audit market “creates conflicts of interest at every turn.”

– In its failure to question Carillion’s financial judgements and information, KMPG was “complicit” in the company’s “questionable” accounting practices, “complacently signing off its directors’ increasingly fantastical figures” over its 19 year tenure as Carilion’s auditor.

– The regulators are wholly ineffective – they only started investigating after the company collapsed and are more interested in apportioning blame than in proactively challenging companies and averting avoidable failures.

– The regulators’ mandate should be changed to ensure that all directors who exert influence over financial statements can be investigated and punished.

Also, the British have a way with words. Here are comments from one MP:

“Same old story. Same old greed. A board of directors too busy stuffing their mouths with gold to show any concern for the welfare of their workforce or their pensioners. This is a disgraceful example of how much of our capitalism is allowed to operate, waved through by a cozy club of auditors, conflicted at every turn. Government urgently needs to come to Parliament with radical reforms to our creaking system of corporate accountability. British industry is too important to be left in the hands of the likes of the shysters at the top of Carillion.”

Liz Dunshee