One of the biggest news items this week was the SEC’s final approval of a rule requiring public companies to disclose the so-called “pay ratio,” which compares the salary of its CEO to that of a median employee. The measure, which has already taken five years to implement since Dodd-Frank’s enactment, will not be a reporting requirement until 2017.
At least one study has shown that CEO salaries in the United States soared to 300 times that of their employees as of 2013. The figure has multiplied 15-fold in just 50 years, with the average pay ratio of only 20 in the 1960s. How has this ratio skyrocketed even while the U.S. is still recovering from the worst economic downturn since the Great Depression?
One explanation is that companies have had to keep compensation packages high in order to be competitive and attract highly-qualified CEO candidates. But this theory tends to work as much against the argument as for it. Wouldn’t a company wanting to attract the most talented workforce need to pay it accordingly, too?
Several companies—including Wal-Mart, Target and Gap—have raised the minimum wage for its hourly workers in recent months. This move comes after President Obama’s call to Congress last year to raise the federal minimum wage to $10.10 an hour. The current federal minimum wage is $7.25 per hour, or $15,080 per year for a full-time employee, which is below the federal poverty guideline for a family of 2. Twenty-nine states have raised minimum wage to higher than the federal requirements, and fifteen states index their minimum wage increases to the cost of living. But these pay hikes—though meaningful to workers—hardly put a dent in the CEO pay ratio.
The real issue of executive pay is one for shareholders. Many investors will need to consider whether the money is better spent on CEO salaries or whether reinvestment in the company, higher worker wages, or even shareholder dividends are a better use of the money.
S.P. Slaughter
Follow me on Twitter: @SP_Slaughter
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