SEC Puts CEO-to-Worker Pay Ratios Front and Center

Money

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The disparity between CEO compensation and the average wage of rank-and-file employees has become a hot-button issue. In the wake of the 2008 financial crisis, regulators, investors, and the general public scrutinized executive compensation packages and balked at what they considered outsized rewards. Payment was loosely, if at all, linked to company performance — an insult to hard-working employees that has been aggravated by stagnant or declining median wages.

In 2010, a provision of the Dodd-Frank Act required public companies to disclose the ratio of CEO compensation to the median for the rest of their employees, but there has yet to be any data collected on this front. Business organizations such as the Center on Executive Compensation oppose the measure, arguing that compiling the data is costly and ineffective.

On Wednesday, the Securities and Exchange Commission is expected to unveil the rule that will finally require companies to disclose CEO pay ratio information. It’s important to point out that from the SEC’s perspective, the issue at hand is not necessarily whether or not CEOs are being paid too much (that’s an issue for investors and the public to decide), but whether or not knowing the CEO pay ratio at any given company is important information for people in order to make investment decisions.

The post-recession financial industry was a case study for this. Shareholders wanted boards to design compensation packages that scaled with the performance of the company. A few million dollars to a top executive is a justifiable salary only if the company is performing well. If the stock is crashing, sales are down, and talent is jumping ship, then every single one of those dollars suddenly seems misplaced.

A recent example highlighting how executive compensation may fit into an investor’s impression of a company is J.C. Penney (NYSE:JCP). Former CEO Ron Johnson earned $53.3 million in pay and benefits in the 2012 fiscal year. That is 1,795 times the average worker pay and benefits package of $29,688.

If that seems a little staggering, well, that’s because it is. Hindsight is 20-20, but many observers feel like Johnson’s compensation package was absurd, not just because of how outsized it was relative to average worker compensation, but because it failed to do the one thing that could conceivably justify such a gigantic paycheck — inspire Johnson to turn the company around.

In May, Bloomberg compiled a list of the 250 companies with the highest CEO-to-median-worker salary ratio. J.C. Penney topped the list, followed by Abercrombie & Fitch Co. (NYSE:ANF). CEO Michael Jeffries earned total pay and benefits of $48.1 million in the 2012 fiscal year, 1,640 times the average pay and benefits package of $29,310.

A recent report from the Institute for Policy Studies showed that in 1993, CEOs earned on average 195 times what the average worker did. By 2012, average CEO compensation had grown to 354 times average worker compensation.

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