Tackling the CEO-worker pay gap

 A pending SEC rule targets the disparity between executive and employee compensation.

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Last fall a Portland-based Wells Fargo employee named Tyrel Oates composed an email asking for a raise.

Oates, who processes debt-collection cease-and-desist requests for $15 an hour, reasoned that the San Francisco-headquartered bank had netted $5.7 billion in its second quarter and paid CEO John Stumpf over $19 million in 2013, so it could afford to pay workers like him approximately $4.71-an-hour more. “Why not take some of this and distribute it to the rest of the employees?” he wrote.

Then Oates sent the email directly to Stumpf, and CC’d about 200,000 fellow employees. The message soon went viral. For his 15 minutes of fame, Oates became the poster child for income inequality, an issue that has gained growing attention in recent years from economists, policymakers and the public.

The numbers tell the story. Continuing a three-decade trend, the gap between the richest and poorest Americans has widened in the past few years, even as the economy started to recover. According to Federal Reserve data, the top 3% of families saw their share of total income rise to 30.5% in 2013 from 27.7% in 2010, while the bottom 90% saw their share decline. 

As for chief executives, their fortunes keep getting bigger. In 2013, the average CEO made 296 times more than the average worker, according to the Economic Policy Institute, a Washington D.C.-based think tank. In 1965 this ratio was 20 to 1.

Paying corporate executives big salaries, of course, is a time-honored practice in American business. But the growing pay disparity along with the financial crisis have set the wheels of change in motion —and not just among the Occupy Wall Street set. The U.S. Securities and Exchange Commission, for example, is poised to adopt a rule that seeks, in a seemingly small way, to address deepening inequities in CEO and worker pay.

A provision of the sweeping Dodd-Frank Wall Street reform bill passed in 2010, the so-called “pay-ratio rule” will require public companies to disclose the ratio between the compensation of their CEO and the median compensation of all other employees. Though public companies are already required to disclose CEO compensation, they are not required to reveal what average workers make.

As the SEC prepared to finalize the new compensation rules, Oregon Business surveyed dozens of the state’s public companies about the information that will be required. We also talked with corporations, socially responsible investment firms and economists about the rule in context of corporate and macroeconomic performance.

A tool to help investors assess company operations, the pay-ratio rule spotlights rising concerns about inequality and economic stagnation in this country. As such, the regulation reignites a long-standing debate about the value of corporate social responsibility: Is corporate do-gooding an ethical enterprise? Or does attention to issues of equity pay off  —  for business and the economy?

Provisions meet with fierce opposition from industry

It’s a complicated question — and for now, most companies, in Oregon and around the country, still balk at revealing rank-and-file pay-stub information.

In comments submitted to the SEC — more than 127,000 were filed over the past year — many businesses criticized the pay-ratio provision as a blunt tool, one insensitive to the substantial logistical challenges they would face in collecting and processing the required data.They have been lobbying the commission to make the rule flexible: for instance, allowing companies to utilize statistical sampling in computing the median-pay number.

In our survey, we asked 35 of Oregon’s 44 publicly traded corporations whether they had calculated the median yearly pay of all workers (not including the CEO) and the ratio between that number and the CEO’s annual compensation. We also asked companies whether they would be willing to share this information.

More than half of the participating companies said they didn’t have the pay-ratio information. Several pointed out that because the rule is still being finalized, they couldn’t know how to calculate the ratio. Indeed, key questions about the disclosure requirement remain the subject of debate, including whether non-U.S. and part-time employees should be included in the ratio calculation, and how exactly the median-wage figure should be determined.

In one of the comments filed with the SEC, Raymond Link, CFO of Hillsboro-based FEI, urged the commission to exclude foreign workers from the ratio calculation. About 70% of the company’s approximately 2,600 employees are based outside the United States, with large contingents of skilled workers in the Czech Republic and the Netherlands. Given differences from country to country in standard benefit packages, costs of living and even currency values, Link estimated that computing a multinational median wage would necessitate more than 1,000 hours and $250,000 initially, and over 500 hours and $100,000 annually after that.

Link also pushed the SEC to let companies simply pull workers’ wages from W-2s instead of employing the labor-intensive method used in calculating executives’ compensation for SEC filings. In an interview with Oregon Business, the CFO explains that the latter method requires companies to account for projected compensation like as-yet-unearned bonuses and as-yet-unexercised stock options. “To do that same calculation for every employee, even just in the U.S., would be extremely burdensome,” he says.

Other companies are less concerned about the ratio calculation than mounting disclosure requirements in general. Steve Corson, a spokesman for Portland General Electric, says that while computing the pay ratio wouldn’t be “a huge compliance issue in and of itself” for the electrical utility, PGE has “a lot of regulatory requirements, and this will be one more.”

Corson declined to provide either the average pay for all PGE employees or the average pay for employees in the utility’s largest job category, only confirming that average annual wages for the electric-power industry according to Oregon Employment Department data — between $93,432 and $103,828  — “represent appropriate reference points for our business.” According to SEC filings, CEO James Piro’s 2013 compensation totaled more than $2.3 million.

For his part, Link said he wasn’’t comfortable giving the annual salary of U.S. employees in FEI’s largest job category, though he did reveal that the median compensation for all U.S. employees is “close to $85,000.” The CFO’s total compensation in 2013 was $1.3 million; for CEO Don Kania, the figure was $3.9 million.

Jack Isselmann, public-affairs director of the Greenbrier Companies, responded to questions about worker pay by defending CEO Bill Furman’s compensation. He says the railcar and barge manufacturer’s compensation committee determines Furman’s pay using “benchmarks derived from peer-group comparisons and data from market surveys.” The chief executive received a $1.4 million raise in November, bringing his total compensation in 2014 to about $5.3 million.

The only company that voluntarily disclosed its worker pay was NW Natural, where the average annual salary for full-time employees is $75,920, spokeswoman Melissa Moore says. CEO Gregg Kantor brought in $1.9 million in 2013, about 24 times the average salary.

Job creation vs. fairness and equality

In keeping with national trends, income disparities in Oregon are widening. In 2012 the top one percent’s average income was about $880,000, more than twice the inflation-adjusted average of about $317,000 in 1980, according to an analysis of state data by the Oregon Center for Public Policy. Meanwhile, the median taxpayer earned about $31,940 in 2012, about $260 less than 30 years ago.

In context of the CEO-worker pay gap, a few qualifications are in order: First, industry average wages for many Oregon public companies are higher than the state’s median taxpayer income. And compared with national figures, the pay ratio for many Oregon companies is relatively modest. At Umpqua Bank, for example, the CEO-employee pay ratio is 23.2; at FLIR, it’s 28.9. 

There are outsized exceptions. Nike CEO Mark Parker earns 137 times more than the average worker. Schnitzer Steel’s Tamara Lundgren pulls in 174 times more than the rank and file. In lieu of reported figures, we used industry averages from the Oregon Employment Department to calculate these pay ratios; the ratios do not take into account wages of employees based outside the state or country.

In an interview with Oregon Business last summer, Lundgren responded to questions about pay disparities by focusing on job creation. “The opportunity to work is the biggest driver of economic growth,” she said. “Corporate leaders, government leaders, have to make sure there is opportunity for that. You can’t begin to address the question if you don’t give people the opportunity to work.”

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The debate over CEO-worker pay disparities tends to revolve around issues of fairness and equality. But the SEC, whose mission is to protect investors, is not in the morality business. This is the crux of the issue. Is pay disparity purely an issue of fairness? Or is corporate transparency and attention to income inequality good for business and economic growth?

A growing number of economists and socially responsible investment firms argue increasing pay disparities are driving deeper, more intractable divisions in wealth accumulation. They also point to an expanding body of research suggesting that widening inequality puts a damper on long-term economic growth. A recent analysis of tax data by economists Emmanuel Saez and Gabriel Zucman found that “surging top incomes” have led to greater wealth concentration, with the top .1% of households by wealth possessing roughly the same share of all wealth as the bottom 90%. (In other words, the 160,700 richest families control about as much wealth as 144.6 million less-affluent ones.)

“The usual story is, we need some inequality to give people incentive to work hard and do innovative things,” explains Mark Thoma, an economics professor at the University of Oregon. Now “there seems to be a negative link between inequality and growth.”

A 2014 analysis by the International Monetary Fund found that “lower net inequality is robustly correlated with faster and more durable growth,” shoring up a “tentative consensus” in the literature that inequality “can undermine progress in health and education, cause investment-reducing political and economic instability, and undercut the social consensus required to adjust in the face of major shocks.” (Think Occupy Wall Street.)

A 2014 literature review from the rating agency Standard & Poor’s came to similar conclusions, noting that inequality can lead to less spending by the wealthy and unsustainable borrowing by the less wealthy. “When these imbalances can no longer be sustained,” the authors wrote, “we see a boom/bust cycle such as the one that culminated in the Great Recession.”

The pay gap also has a direct negative effect on company performance, proponents of the pay ratio claim. The new disclosure requirement, they say, will enable shareholders to evaluate CEO compensation within the context of companies’ general compensation practices, shedding light on potential morale and productivity problems caused by low pay and big income gaps.

“We’ve seen that high pay disparities inside a company can really hurt employee morale and productivity,” says Jonas Kron, the Portland-based director of shareholder advocacy for the socially responsible investment firm Trillium Asset Management. “If your assets as a company feel resentful walking out the door every day, then they’re not putting their all into their work.”

And if that lower productivity results in lower stock prices, the socially responsible investment philosophy goes, the pay ratio is material information for investors.

Oregon Treasurer Ted Wheeler, who as a member of the Oregon Investment Council shares responsibility for the state’s $87.8 million in investments, agrees the pay ratio is relevant to investors. In a public comment to the SEC, Wheeler wrote that the “important metric” would help shareholders such as the Oregon Public Employees Retirement Fund “in better understanding a company’s pay practices and approach to compensation.”

{pullquote}We’ve seen that high pay disparities inside a company can really hurt employee morale and productivity. — Jonas Kron {/pullquote}

Overstepping the SEC mandate?

Companies opposed to the rule beg to differ. Historically, corporations haven’t conceived of investors’ interests as extending beyond executive pay and performance, says Marcus Williams, the chair of the securities practice at law firm Davis Wright Tremaine.

“The philosophy has generally been: Hire a competent management team, evaluate them and allow them to make your business decisions,” explains Williams, who has represented the likes of JELD-WEN and McCormick & Schmick’s. “If the motive here is to cause shareholders to make decisions about compensation of lower-level employees, that’s a significant departure.”

The Oregon public-company representatives we interviewed echoed that assessment. “Investors are most interested in how management is being evaluated and compensated, and that’s already disclosed,” says FEI’s Link, noting that in his two decades working at public companies, no investor has ever requested a CEO-worker pay comparison.

Corson, from PGE, also suggests investors don’t need the pay ratio. “I think our investors have quite a lot of info on which to evaluate how the business is operating, as well as our overall philosophy in terms of being a responsible member of the community and a model employer,” he says.

Some of Williams’ clients are concerned that the pay-ratio rule has less to do with protecting investors than pushing a social agenda, the attorney says.

“It isn’t that there aren’t inequitable compensation practices. The question is, is this the right way to deal with that?” Williams says. “We haven’t heard a lot of calls for this from investors. Where we hear those calls from are socially conscious investment funds and socially conscious groups that are trying to promote a more general good. While there are many outstanding organizations like that, and they have an important purpose, the SEC was certainly not intended as a tool to achieve those purposes.” 

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A new stage in the evolution of corporate responsibility

Perhaps pay-ratio supporters do seek to advance “a more general good” than the SEC was designed to promote. Income inequality is an enormously complex problem, and the CEO-worker pay gap is but one example of a much larger wealth-distribution phenomenon tied to globalization and technological automation, as well as changes in the relationship between labor and capital. One might also argue that the executive-worker pay gap is a convenient scapegoat for bigger challenges, and the SEC rule little more than a public shaming of CEOs — a modern send-up of “let them eat cake.”

But if the SEC rule is a small, even symbolic solution to bigger problems, it is not just another corporate-reporting requirement. Nor did it spring up in a vacuum. On the contrary, the pay ratio caps a decade in which corporations have become more transparent about all manner of business practices — while also broadening their interests beyond profit to include sustainability issues such as the environment and employee working conditions.

In 2005 Nike released a groundbreaking corporate social responsibility report offering a first-in-the industry accounting of its overseas manufacturing operations, including pay and working conditions for contract workers. Since then, sustainable business concepts and practices such as fair trade, social entrepreneurship and B-corps have become part of the national lexicon. Meanwhile, consumers, armed with social media, are holding companies to ever higher standards of behavior. 

Consider Oates, the Wells Fargo employee. He never got that raise. (CEO John Stumpf never replied to his email.) But the amount of negative PR the incident generated for Wells Fargo shows that pay disparities are beginning to damage brands much like sweatshop-labor or harmful environmental practices did in the past.

The worker-executive pay gap in the United States lags behind issues such as climate change and human rights on the corporate social responsibility agenda, says Joel Makower, chairman and executive editor of GreenBiz Group, an Oakland-based outfit that tracks corporate-sustainability trends. “But that’s likely to change,” Makower says. “Inequality is gaining increasing attention in society. CEO pay fits with the growing narrative that the deck is stacked against the middle class.”

That narrative may help explain why Stumpf never responded to Oates, and why many Oregon public companies declined to answer questions about employee compensation and an SEC regulation that will likely go into effect next year, although GOP lawmakers are pushing for further delays. But as the line between public and investor good continues to blur, and as the corporate social responsibility movement continues to gradually, haltingly, reshape business practices in America, such questions are becoming increasingly difficult to ignore. 

Freelancer Jonathan Frochtzwajg contributed reporting to this article.

A version of this article appears in the January 2015 issue of Oregon Business.

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