I remember the quotation like it was yesterday. Some summers ago at a conference on Cape Cod, the retired head of a Fortune 500 company mentioned the fancy swimming pool inside his home, the kind that generates a current of water so a fellow could swim laps while staying still. "It's one of the pleasures of being a CEO," the man said with a mischievous smile. "All the money they give you."
It would be interesting to do the math on how much that man used to get paid, compared to what the rest of the employees at his company got paid. The big financial reform law from 2010 will require public companies to do just that kind of math. Eventually, companies will file with the government an executive pay ratio: Take the boss’s compensation and divide by the median of everyone else’s compensation at the company. The idea is to identify overpaid CEOs by using the ratio to note any especially wide gaps.
Some business leadership experts, including Bill George, the former CEO of Medtronic and author of the “True North” series of books, says wide pay gaps can erode trust inside companies and hobble their performance. He is not, however, a fan of ratios; instead, he urges boards of directors to be sure the boss’s pay is aligned with how well the company is doing.
Companies are worried these CEO pay ratios will get ranked in ascending order and get splashed across websites and in other media. The companies with the biggest ratios might face public scorn. By law, the Securities and Exchange Commission is supposed to come up with a system for calculating the ratio. Most companies are loath to do this math and the SEC has yet to publish the required rules for the calculation.
Early adopters of pay ratio disclosure
That has not stopped a teeny group of companies from calculating a CEO pay ratio on their own. The financial company MBIA does it. In a 2011 government filing, MBIA reports a relatively low ratio for CEO Jay Brown, about 10 times the average pay of everyone else at MBIA, 14 times the typical (or median) pay. This is not a flush time for MBIA. It has been struggling under the weight of toxic mortgages it had on the books and has other problems beyond CEO pay.
The tiny Bank of South Carolina discloses a median salary at the company of just under $52,000 a year. The bank pays its CEO less than a quarter million dollars a year, not so much in the grand scheme of banking. When a CEO salary expert at the AFL-CIO did the math using the bank’s own data, she came up with a very low ratio of less than 5 to 1.
Whole Foods goes so far as having a salary cap for its top executive, no more than 19 times the company’s average annual wage.
Also, in a recent government filing, Northwestern Corporation, a utility in Montana, said "our executive compensation program must be internally consistent and equitable in order to motivate our employees to create stockholder value." Excluding benefits, Northwestern said it pays its CEO 19 times the typical employees salary.
Rough estimates of some other companies put executive pay ratios dramatically higher, with some 300 to 1 and beyond. The companies that might have alarmingly large ratios are not rushing to do the calculations, at least until the government makes them do so.