Mind the gap: What do CEO-to-worker pay ratios really reveal?

Employee at Chipotle.

Publicly traded companies already have to report how much their CEOs earn. The Securities and Exchange Commission now has proposed a rule requiring them to disclose how much more that is than the median employee pay. 

The pay-ratio idea gained strength after the financial crisis and was included in the Dodd-Frank financial reform legislation. Companies don’t like pay ratios, saying they’re complicated and expensive to calculate.

That argument has some merit. But even if someone finds an easy way to do the math, companies worry that the resulting rankings -- lumping together very different kinds of businesses -- won’t be fair.

“Retail, supermarkets and things like that, you’re going to have a lot of workers that are paid at a fairly low level. It’s just the nature of that business,” says Dave Larcker, a Stanford professor who studies corporate pay. “That ratio, generally speaking, is going to be quite high.”

A Bloomberg analysis this year showed that JPMorgan Chase and Chipotle Mexican Grill had similar CEO pay packages, about $19 million, but completely different pay ratios: 229:1 and 778:1, respectively. That’s because rank-and-file bankers make a lot more than burrito rollers. (The average multiple for S&P 500 companies was 204, according to Bloomberg, and the pay gap has been rising.)

Whole industries could look bad. But University of Denver law professor Jay Brown says concern about the public images of companies misses the point.

“While maybe other people can take it out of context and use it for different reasons, the reality is securities laws are designed to inform shareholders,” he says. “This information is useful in making an informed decision when they vote on executive compensation.”

Brown thinks pay ratios are most useful not for comparing companies to each other, but viewed over time to track how individual companies change pay packages.

Mark Garrison: Companies say they don’t like pay ratios because they’re complicated and expensive to calculate. There’s some merit to that, but let’s say someone finds an easy way to do the math. Stanford business professor Dave Larcker says the resulting rankings won’t be fair.

Dave Larcker: Retail, supermarkets and things like that, you’re gonna have a lot of workers that are paid at a fairly low level. It’s just the nature of that business. And that ratio, generally speaking is gonna be quite high.

A Bloomberg analysis shows JPMorgan Chase and Chipotle had similar CEO pay, but completely different pay ratios, simply because bankers make a lot more than burrito rollers. Whole industries could look bad. But University of Denver law professor Jay Brown says that worry misses the point.

Jay Brown: While maybe other people can take it out of context and use it for different reasons, the reality is securities laws are designed to inform shareholders and this information is useful in making an informed decision when they vote on executive compensation.

He thinks pay ratios will be helpful as a way to compare how companies change pay packages over time. In New York, I'm Mark Garrison, for Marketplace.

About the author

Mark Garrison is a reporter for Marketplace and substitute host for the Marketplace Morning Report, based in New York.

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