Payday Disclosure

Posted on Jun 21, 2013 | 8 Comments

When Peter Drucker was writing about executive compensation in the 1970s, his purpose was to puncture some of the myths about it. Executives, Drucker pointed out at the time, weren’t getting paid as much as people seemed to think. At most companies, the ratio of CEO pay to average employee pay was less than 25-to-1, while most Americans erroneously believed it to be 50-to-1 or 100-to-1.

But that would all change in the following decades. Today, the CEOs of the largest U.S. companies make 354 times more than the average rank-and-file worker. At some companies— including Abercrombie & Fitch, CBS and Nike—the ratio is in excess of 1,000 to 1. (See this chart from Bloomberg for details.)

As far as Drucker was concerned, this sort of pay structure was absurd. “It is surely not professional altogether for people who are employees and not ‘owners’ to pay themselves salaries and bonuses greatly in excess of what their own colleagues, that is, other members of management, receive,” Drucker wrote in The Frontiers of Management. “And it is not professional to pay oneself salaries and bonuses that are so far above the social norm as to create social tension, envy and resentment. Indeed there is no economic justification for very large executive incomes.”

In fact, in The Changing World of the Executive, Drucker recommended that companies have a “published corporate policy that fixes the maximum compensation of all corporate executives, after all taxes but including all fringes, as a multiple of the after-tax income of the lowest paid regular full-time employee (including fringes).” He added, “The exact ratio is less important than that there should be such a ratio.” (His suggestions ranged from 15-to-1 to 25-to-1, depending on the size of the company.)

Given Drucker’s view, we are confident that he would have supported a provision in the Dodd–Frank Wall Street Reform and Consumer Protection Act mandating that companies disclose the ratio of CEO pay to median company pay. (We even wrote our own letter to the Securities and Exchange Commission about this.)

Now, however, the House has voted to repeal that provision. The Wall Street Journal reports, “Rep. Bill Huizenga (R., Mich.), who sponsored the bill, said the provision would be ‘a logistical nightmare for all public companies,’ because they would have to calculate pay for all employees in the manner they currently do for their top five executives and disclose it in every SEC filing.”

Drucker wouldn’t have been entirely unsympathetic, for he worried about “the growing burden of governmental regulations, restrictions, reports and paperwork.” But he also saw a place for the right kind of regulation.

The key was to measure the costs and benefits properly. “Regulations are a burden on the economy,” he wrote. “In many cases the burden is greatly overbalanced by the benefits. . . . But we need to know the tradeoffs.”

What do you think: Do the pluses of forcing companies to disclose the ratio of median employee pay to CEO compensation outweigh the regulatory burden?

 


8 Comments

  1. John Hunter
    June 21, 2013

    Thanks for posting this. I have been posting about the damage done by excessive executive pay for years http://management.curiouscatblog.net/tag/executive-pay/ I point to Drucker as someone who saw this practice as extremely damaging.

    I agree the burden’s of regulation need to be considered. The abuses by those on board and in the senior executive positions of the control over the treasury to take from the corporate treasuries completely overwhelms the regulatory burden. We sadly have many boards and senior executives that are enriching themselves at the expense of companies and doing great damage to those companies, the stock holders, the employees and other stakeholders.

    Reply
  2. David
    June 21, 2013

    You cannot separate the amount that wage earners are paid from the amount that the Government taxes them. The top 1% of wage earners, those earning over $1.4 million annually, account for nearly 20% of wages, but also account for over 30% of federal taxes. “Average income” earners, those making about $46,562 annually, account for about 8.6% of federal taxes.

    Someone earning $1.4 million, and a tax rate of 35.5%, has a $497,000 tax bill. Someone earning 46,000, and a tax rate of 13.8%, has a $6,426 tax bill.

    If you remove free market forces to set an arbitrary ceiling and floor on wages for the sake of arbitrary fairness, than you’d also better figure out the impact of the misery that you’ll create since nobody will be motivated to earn enough to pay the tax rates you’ll need.

    Reply
  3. Edmund Charles Davis-Quinn
    June 22, 2013

    There is plenty of money in having estate taxes come back to 10% and capital gains going back from 15% to 25%.

    Executive compensation is hilariously awful. I think it also makes CEOs think they are more important then they actually are. It can also lead to short term thinking when options are a big part of compensation.

    Reply
  4. Maverick 18
    June 22, 2013

    The regulatory burden in reporting CEO/median worker pay is the installation of an algorithm in the company’s payroll system. Hardly an overwhelming burden in the computer age.

    Rick Wartzman’s letter to the SEC was correct. It would indeed be helpful, and might wake up the investing public, if the ratio was uniformly published by listed companies.
    The same Congress that gave listed companies a break on this has mandated that any business that is privately held, i.e. does not publish its financials, and does more that $25M/year of business with the Government, provide compensation records for its top 5 most highly compensated employees. That’s a big burden for small and medium size contractors, and there is no defined use for the information. On the other hand, the CEO/median worker pay ratio, if published, would be a wake up call for investors and would make boards of directors more sensitive to the issue.

    Reply
    • Georgia Mom
      June 24, 2013

      As an investor myself, I sure would like to see that number.

      Reply
    • Matt
      June 26, 2013

      I agree with your comment on technology. This type of information would not be difficult for companies to provide.

      Reply
  5. Mike Grayson
    June 22, 2013

    If a company can print a W-2 form, they can easily perform this calculation at the end of every year without much trouble.

    In my opinion, privately owned companies should have the freedom to pay their owners whatever they wish without any regulations. Only publicly held companies should be subject to this disclosure. But there should be some kind of differential between base pay and compensation for performance.

    Some CEO’s take very low base salaries, but have substantial compensation linked to performance. Meg Whitman of HP had a salary of $1 per year, but her compensation in 2011 was $16.5 million.

    Reply
  6. Georgia Mom
    June 24, 2013

    Everyone has become so focused on the short term and executive pay is a big part of that. Executives and stockholders are compensated based on short term goals, rather than larger long term initiatives that really drive competitive advantage and company strength. If the CEO and board’s incentive is getting paid more with a higher price on stock (regardless of how temporary it is), that is what they will do and that often leads to bad decision making down the chain. Decisions that ultimately hurt the company as a whole.

    In Peter Drucker’s day, buying a stock meant you were purchasing ownership of a company that you felt would be a solid investment long term.. you rode the ups and downs because you BELIEVED in the company, the product, and their future. Now, it’s all about short term gains.. CEOs have no longevity either, so their monetary incentives are tied to making decisions based on what drives profits NOW.. even if it sacrifices quality later.

    It’s a shame, because not only has this been devastating to workers, the CONSUMERS we all rely on to create demand, but it’s been devastating to our long term strength and competitiveness. Our companies are no longer as innovative as they could be. Instead, it’s all about quarter to quarter profits, rather than making something REALLY good and being proud of it.

    Reply

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