CEOs at large Georgia companies typically earned 120 times more than the average worker in their industries in 2012, according to an analysis of company disclosures and government data by The Atlanta Journal-Constitution.
The median CEO compensation at Georgia’s 31 largest public companies was $9.5 million in 2012. That compared to $59,988 for the median compensation for workers in those industries. The median represents the midpoint salary — half earn more and half earn less.
Three years ago, in the wake of the financial crisis and recession, Congress enacted legislation requiring companies to report how their chief executives’ pay compares to their employees’ wages.
But you won’t see that information in most corporate proxy statements yet, because the U.S. Securities and Exchange Commission still hasn’t come up with the requirements for implementing that part of the Dodd-Frank financial reform law.
Supporters of the measure say excessive pay gaps between CEOs and the rank-and-file contribute to lower worker morale and productivity. Opponents say the information is unnecessary, adding another layer of bureaucracy for a compensation system based primarily on paying CEOs for their performance.
For a preview of what such pay comparisons might look like for Georgia’s Fortune 1000 companies, the AJC compared CEO compensation — which is released in corporate proxy statements — with government figures on the average wages for the specific industries in which the firms operate.
Based on that data, there’s a huge range in the size of pay gaps between Georgia’s CEOs and the rank-and-file workers in their industries:
— Carter’s Inc. CEO Michael Casey’s $9.8 million pay is 674 times larger than the average retail worker’s annual pay of $14,480, based on federal wage statistics.
— The average annual wage in the soft drink bottling industry is higher, at $54,411. Still, Coca-Cola CEO Muhtar Kent’s $30.5 million compensation last year was 570 times bigger — the second-largest pay gap among Georgia firms.
— George Judd, CEO of BlueLinx Holdings, had the smallest pay gap among Georgia’s public companies. His $1.9 million compensation was 37 times larger than the $51,714 average pay for building products distributors.
That last multiple is about what most CEOs at large U.S. companies earned compared to typical employee pay three decades ago. Back in 1980, the average CEO earned about 42 times the typical U.S. worker’s pay.
Since then, executive pay at U.S. companies has swelled much faster than corporate profits, worker pay or even top executives’ pay at overseas firms. The big paychecks became a potent political issue during the Great Recession, when the Dodd-Frank law was being drafted.
Last year, CEOs at large U.S. firms were paid 354 times the average U.S. worker’s pay, according to an annual analysis by the AFL-CIO, an umbrella group for labor unions.
“A huge pay gap has a tremendously negative impact on morale, production and turnover (at companies),” said Vineeta Anand, chief research analyst with the AFL-CIO, which pushed for the CEO pay ratio rule to be included in the Dodd-Frank law.
In a recent interview, Anand said several academic studies have found evidence of the negative impact of big pay gaps. She noted that even Peter Drucker, the late management guru, said CEOs shouldn’t be paid more than 20 times a company’s average salary.
Others, however, believe effective CEOs who consistently deliver above-average growth in earnings and share price deserve the compensation they receive.
Companies fighting rule
The Dodd-Frank law’s pending mandate for the CEO pay ratio has been one of its more controversial parts.
Companies and business groups that don’t like it have sent hundreds of letters to the SEC calling the pay comparisons a costly and difficult calculation of little value to shareholders. At least one congressman has introduced a bill to repeal the requirement.
Employer groups are “really fighting it” because they view it as an expensive, complicated exercise that will be of little value to shareholders, said Ken Cameron, head of Grant Thornton’s compensation consulting practice in Atlanta.
The big pay disparities between CEOs and regular employees also have become “a very emotional issue, obviously,” said Cameron.
“The (CEO pay ratio) really doesn’t present any value,” he added, because it will “vary greatly” from company to company, depending on the industry they’re in, where they operate, and the types of employees they hire.
The pay gap is likely to be much higher, for instance, at retail firms that employ a lot of entry-level or part-time workers, he said. The CEO pay ratio would be tend to be smaller at high-tech firms that hire a high proportion of skilled, high-paid workers, he added.
Such measures of pay disparity “are likely to result in confusion and erroneous comparisons” between companies in different industries, the Retail Industry Leaders Association, a group of 200 big retail firms, said in a letter to the SEC.
Saying it will be difficult and costly for big multinational firms to comply with the yet-to-be-issued rule, the Center on Executive Compensation, a unit of the HR Policy Association in Washington, D.C., asked the SEC to simplify the calculation by allowing estimates and basing it only on U.S. employees.
“We understand the (SEC) must implement the law as passed by Congress,” the business group said in comments to the regulator. But the organization urged the SEC to adopt a “narrow interpretation” to make it easier for companies to calculate.
Labor groups and other proponents of the law counter that companies would prefer to leave out overseas employees and avoid making the calculation altogether. It might show their CEOs making hundreds or even thousands of times more pay than its typical employee, who might work in a low-wage factory overseas.
It’s “specious” and “alarming” for companies to argue that it’s difficult to use their existing payroll data to come up with the required numbers, said CtW Investment Group, which manages money for union pension funds, in a letter to the SEC.
Proponents also argue that the pay comparisons provide valuable information to investors. They cite studies by several researchers showing that companies with big pay gaps perform worse than firms with more egalitarian pay scales.
“Issuers that provide excessive compensation to executives at the expense of other employees and shareholders are creating risks,” said Bethesda money manager Calvert Investment Management in a letter to the SEC.
Even one of the SEC’s five commissioners has weighed in. In February, former Atlanta attorney Luis Aguilar, who was named an SEC commissioner, urged companies to consider voluntarily disclosing the CEO-worker pay ratio this year, saying wide pay disparities “create risks to an enterprise, including the risk of employee, customer, and shareholder discontent.”
Few companies followed his advice.
Several studies have found that firms with big pay gaps tend to have higher employee turnover, lower morale, worse product quality and weaker financial and stock performance than other companies.
South Korea is one of the few countries that has required companies to disclose worker’s average pay for more than a decade.
In a paper published last year, researchers at Seoul National University used such disclosures to study the effects of the growing pay disparities at Korean firms between 2000 to 2009. The typical South Korean CEO’s pay grew to about 19 times the average worker’s pay, far smaller than the pay gap in the United States.
Still, the researchers linked a growing pay gap to lower corporate profits and stock returns. At firms where the pay gap was twice as large as the average gap, profits earned on the firm’s assets were about 1 percent lower, and stock returns were about 6 percent lower.
The researchers said it would be “interesting” to do a follow-up study once U.S. companies start disclosing their CEO-employee pay ratios. “We suspect that our results might be even stronger,” they said.
The SEC hasn’t been in a hurry to issue a rule, which did not come with a deadline. But the SEC’s recently sworn-in chairwoman, Mary Jo White, told Congress earlier this month that the agency must finish the rest of Dodd-Frank’s new rules “in as timely and smart a way as possible.”
Voluntary disclosure
Meanwhile, only a handful of companies are voluntarily disclosing typical employee pay levels ahead of the requirement. They include high-end grocer Whole Foods Markets, MBIA, which insures municipal bonds, and Bank of South Carolina in Charleston.
Austin-based Whole Foods caps top executives’ combined salary and bonus to no more than 19 times its employees’ average annual pay of $38,747, although that cap excludes stock-based awards.
Bank of South Carolina, a 75-employee banking firm, started disclosing its median employee salary three years ago, when the pending mandate was included in the Dodd-Frank law.
“We thought it was information a shareholder might like to see,” said Chief Financial Officer Sheryl Sharry.
Last year, Bank of South Carolina’s CEO, Fleetwood Hassell, was paid $204,489, or 4.2 times more than the $48,201 median salary of its non-executive employees, according to the bank’s proxy statement.
Sharry said it’s possible the pending federal rule will be much harder and more expensive for big, multinational firms to comply with than it was for her bank. But it also could just be a number they don’t want to disclose, she added.
“I could see where if your CEO salary was millions and millions of dollars and your median salary was puny, you could be embarrassed,” she said. “That’s not the kind of organization we run.”
