Imagine if any time of the day, any member of the public could make a snap judgment of your company's values based on one compensation statistic: the ratio of CEO pay to median worker pay.
As it happens, this scenario is about to become a reality, with the Securities and Exchange Commission on the verge of requiring public companies to disclose both CEO compensation and median worker pay, the Wall Street Journal reports. Median worker pay refers to the dollar amount at which half your employees earn more and half earn less. The rule could be finalized by the first week in August and have far-reaching ramifications.
A Comparative Snapshot
What might this look like, in reality? The AFL-CIO's annual Executive Paywatch report provides a clue.
The homepage for the 2015 report lists the average (not median) pay of the American worker--$36,134--according to Bureau of Labor Statistics' 2014 data for production and nonsupervisory workers. Beneath that five-figure sum is a looping scroll of the CEO compensation at various companies.
So, at any given moment of the day, you might see a side-by-side comparison of that $36,134 figure with:
- GE's Jeffrey Immelt ($25,806,352)
- Yahoo's Marissa Mayer ($36,616,404)
- CVS's Larry Merlo ($20,330,097)
The same AFL-CEO report notes that the average CEO earned 373 times more than the typical U.S. worker in 2014. In 2013, that multiple was 331. In 2012, it was 354. In 1980, it was 42.
What It Means for Private Companies
If you own or lead a private company, you don't have to deal with any of this. Not in a legal sense, at least.
Nonetheless, this news can shape your thinking about compensation, especially if going public (or being acquired by a public company) is an aspiration. You can even view the news as a marketing opportunity, if your CEO-pay ratio is comparatively low.
For example, consider the case of Whole Foods. Co-founder John Mackey has famously advocated for making compensation transparent. Moreover, he says he's never lost an executive because of the company's compensation policy which, in addition to transparency, caps executive pay at 19 times the pay of the average store worker.
What does this mean for Mackey and Whole Foods? Well, when you compare Whole Foods' 19:1 ratio to the average 2014 ratio of 373:1--or even the 1980 ratio of 42:1--it makes Whole Foods and Mackey look fair and progressive.
Mind you, Whole Foods isn't the only company that has disclosed its ratio prior to the SEC rule change. Last week the Wall Street Journal listed several others, including Noble Energy in Houston (82:1) and South Dakota-based NorthWestern Corp (24:1). In each case, you can see why the companies would be transparent: Their ratios are small. It's something to brag about.
A Chance to Influence Perception
Are CEOs are properly compensated, compared to unskilled workers? If you think so, you're in the minority. That's one takeaway from research by Chulalongkorn University's Sorapop Kiatpongsan and Harvard Business School's Michael Norton.
Their findings provide a fascinating distillation of what people think CEOs should make compared to workers. According to Gretchen Gavett's superb summary on the Harvard Business Review blog, U.S.-based respondents to Kiatpongsan and Norton's survey believe that, ideally, CEOs should earn 6.7 times what unskilled workers earn.
Imagine that: As comparatively reasonable as the ratios are at Whole Foods (19:1) and elsewhere, that ratio is still well above what people believe it should be.
What does it all mean for today's leaders and entrepreneuers? Above all else, these findings represent a chance to differentiate yourself. If you're a private company, of course, you don't have to worry about disclosing your CEO-pay ratio. But if your ratio is relatively small, you'll have a chance to brand your company as a leader in progressive compensation practices.