Does the Ratio of CEO to Employee Pay Really Matter?

By Howard Mavity

The Securities and Exchange Commission recently voted to require employers to disclose the pay gap between the CEO and his or her employees. Unions, investors, and other groups have increasingly been using this disparity to attack companies.

As Fortune  magazine calmly pointed out in The Big Flaw in the SEC’s Pay Ratio Rule:

The rule is well intentioned. CEO pay in 2014 was an eye-popping 373 times that of an average worker, according to data compiled by the AFL-CIO, and a sharp rise from 331 times in 2013. This imbalance contributes to America’s growing wealth gap and accompanying social and political inequities. Requiring companies, especially large public corporations, to disclose how richly their CEOs are paid would provide valuable information for shareholders and possibly help the larger national debate about economic fairness.”

The AFL-CIO maintains an elaborate website to check CEO pay titled, “Executive Pay Watch: High Paid CEOs and the Low-Wage Economy.”

Is the CEO-employee pay ratio a reliable measurement?

This is not good press or a source of positive employee relations.

The CEO-employee ratio is not alone a reliable measurement. Not only does the analysis fail to consider whatever value the CEO adds, it does not consider other factors such as whether the CEO’s decisions benefitted the company on a long-term basis, or recognize those entrepreneurs who built a business from scratch.

Perhaps the better question is “what is the CEO and the company’s ‘responsibility’ to employees?

We should candidly discuss the nature of a company and its CEO’s responsibility to its employees. A company’s role is to make money, so employee welfare cannot be the driving value, no matter how appealing this prospect, because the employer will fail and employees will be out of work.

But management labor lawyers will tell you that ignoring employee welfare will, in the long-term, harm your business. Not only are successful employees more likely to contribute to corporate profits, a narcissistic or disconnected corporate attitude can lead to poor judgment in other areas.

Perhaps of more immediate concern is that the apparently increasing disparities make corporate America look uncaring and ripe for counterproductive regulation. I’m in favor of making lots of money, but as my entrepreneur dad explained, “Pigs get fat but hogs get slaughtered.

Article Continues Below

Some questions to consider

American workers and investors do have some undefined sense of when enough is enough. Self-regulation is preferable to more government intervention, and such self-critical inquiries are not contrary to a free-market system.

Many employment discrimination and whistleblower claims are frivolous and driven by the personality of the plaintiff, but the failure of an employer to appear to “care” about its employees contributes to lawsuits, government investigations, and union drives.

So, what is an employer’s responsibility to its employees? What is “right” from both a cold business calculation and from an ethical standpoint?

Consider these questions:

  • What is the role of our employees in achieving the corporation’s goals?
  • Should an employer make employee success a genuine driving value?
  • What, if anything, does the business gain by a conscious focus on employee success?
  • What role does compensation play in employee success and satisfaction? Communication, gratitude, involvement and opportunity to advance are also important.
  • How does foreign competition, LEAN manufacturing, and shareholder activism affect the calculus?
  • What do I want for returns? How much is enough?  In other words, do short-term returns contribute to long-term success and the legacy of the corporation and its leadership?

I’m not an ethicist or philosopher; I’m a management labor lawyer who cleans up and tries to prevent workplace problems. Employers need to wrestle with these questions to forestall new government regulation and to lessen legal problems.

This was originally published on Fisher & Phillips’ Workplace Safety and Health Law Blog.

Howard Mavity is a senior partner in the Atlanta office of the law firm Fisher & Phillips. He co-chairs the firm's Workplace Safety and Catastrophe Management Practice Group, and has provided counsel for over 200 occasions of union activity, guided unionized companies. In addition, he has managed almost 400 OSHA fatality cases in construction and general industry, ranging from dust explosions to building collapses, in virtually every state. Contact him at hmavity@laborlawyers.com .

Topics

2 Comments on “Does the Ratio of CEO to Employee Pay Really Matter?

  1. I hear what Mr. Mavity is saying but I see it a little differently — and am not a “I’m in HR because I love people” type. I’m pretty much pro-business.
    1) You’d have to be Rip Van Winkle not to agree that the CEO focus has been/is on the short-term. Positive quarterly reports drive up stock price. That makes both shareholders and CEO happy. The CEO’s pay package is based on profitability — even if it means neglecting the long-term. We did too good a job in the 1970’s by linking CEO pay and shareholder interests together — measured by stock price. There have many, many companies in the past year buying back their company stock which — you guessed it — drives up the stock price. Financial-markets-based compensation has become the norm.
    2)CEO’s have much less control over the business environment than 20-30 years ago. Globalization and high speed trading to name a couple have lessened their control. With HST computers run the market and they don’t care about company financials, market penetration, profit, leadership, new products, acquisitions, etc.
    3)CEO’s handpicked board of directors is made up of CEO’s of other firms, each of whose own future pay hikes may depend on how big a raise he gives the CEO whose board he sits on.
    4)Compensation consultant is selected by the Board to advise what the CEO pay should be. The recommendation to the Compensation Committee of the Board who approves it is sometimes/many times given more consulting assignment in the company if a favorable recommendation is given..
    5)Board members are members of the same “old boys’ club” and are CEO’s of other firms, each of whose own future pay hikes may depend on how big a raise is given the CEO whose board he sits on.
    This is because CEO pay is based on executive pay surveys. The higher that the pay that’s reported in surveys, the higher CEO pay will climb as a result.
    6)The majority of shareholders are large institutional investors who sell stock when it reaches a
    pre-determined price. They care about a company only in terms of its stock. Their interest is short-term,

    When the stock price is soaring and CEO pay is climbing why shouldn’t that translate in some way to employees whose pay has remained flat since about 1990??

Leave a Comment

Your email address will not be published. Required fields are marked *