Sunday, May 3, 2015

Can We Justify the Gap Between CEO and Worker Pay?

In a 2014 article in Forbes, Kathryn Dill highlighted how “with CEO compensation analysis season in full swing, the AFL-CIO released data (in April 2014) stating that American CEOs in 2013 earned an average of $11.7 million - an eye-popping 331 times the average worker’s $35,293; where information is further broken into categories including compensation by industry and state. As of April 2014, Michigan, Nebraska, and Rhode Island have the greatest CEO to minimum wage worker pay ratios, with New York and Colorado following close behind.”
This perspective is supported by further research highlighted by Schuyler Velasco who mentions that “worker pay has been a big story in 2013, with worker strikes in the retail and fast-food industries putting a harsh light on anemic wage gains alongside ballooning corporate profits. Now, a new study from NerdWallet and highlights just how vast the wage gap is in major US companies, comparing how much the United States' highest-paid chief executives make in an hour with the average hourly wage of their employees. Can you guess which company had the highest pay gap?
McDonalds: CEO: Donald Thompson
Average hourly worker wage: $7.73
CEO hourly compensation: $9,247 (1,196 times the average worker wage).
The next 9 companies with the highest pay gap between the CEO and the average hourly worker were;
Starbucks: CEO: Howard Schultz, hourly compensation = $9,637 ((1,096 times the hourly average worker wage of $8.79);
Dollar General: CEO: Rick Dreiling, hourly compensation = $7,720 (1,007 times the hourly average worker wage of $7.67);
GAP: CEO: Glenn Murphy, hourly compensation = $8,209 ((947 times the hourly average worker wage of $8.67);
T.J.Maxx: CEO: Carol Meyrowitz, hourly compensation = $7,256 (924 times the hourly average worker wage of $7.85);
Target: CEO: Gregg Steinhafel, hourly compensation = $6,882 (824 times the hourly average worker wage of $8.35);
Walmart: CEO: Mike Duke, hourly compensation = $ 6,898 (779 times the hourly average worker wage of $8.86);  
CVS Caremark: CEO: Larry Merlo, hourly compensation = $6,777 (769 times the hourly average worker wage of $8.81);
Best Buy: CEO: Hubert Joly, hourly compensation = $6,517 (666 times the hourly average worker wage of $9.78);
AT&T: CEO: Randall Stephenson, hourly compensation = $7,412 (558 times the hourly wage of an average worker of $13.28).
These figures should shock even the most liberal believers when it comes to executive pay. Even if you reduce the CEO hourly compensation by half, compensating for tax for example, the figures are still impossible to justify, surely.
The biggest problem is that even when these figures are ‘out there’ for everyone to see – and 99.9% of people find them unjustified – nothing actually happens to change the ‘status quo’ and in fact it appears that the gap just keeps on getting bigger
Velasco goes on to highlight how “wage inequality is becoming a growing concern, both on the ground and at the political level. The wealth gap between the top 1 percent of American earners and the other 99 percent is as wide as it’s been in nearly a century. Corporate profits and stock holdings have soared in value, while the federal minimum wage has remained unchanged since 2009.”
So how has this gap been allowed to develop over the last 10, 20 years, especially taking account of one of the worst global financial crashes in our time and more importantly what can be done, in practice, to narrow the gap to a more equitable and justifiable pay scale. Because it appears that though many in academia, the media and definitely at the worker level are strongly opposed to the current pay anomalies – no one has the ability or influence to change this behavior by corporate boards and their shareholders. As we must never forget that it is the boards and shareholders that ratify executive compensation packages on an annual basis.
Kathryn Dill pulls no punches when she states that “America’s CEOs, as exemplified by the individuals of companies like Wal-Mart, Darden Restaurants and T-Mobile, are cannibalizing their own consumer base,” by taking money out of the pockets of their workers and putting it into the pocket of the CEO.
This isn’t just a US phenomenon and Gretchen Gavett points to research by Chulalongkorn University’s Sorapop Kiatpongsan and Harvard Business School’s Michael Norton that concluded “we’re currently far past the late Peter Drucker’s warning that any CEO-to-worker ratio larger than 20:1 would ‘increase employee resentment and decrease morale.’ Twenty years ago it had already hit 40 to 1, and it was around 400 to 1 at the time of his death in 2005. But this new research makes clear that, one, it’s mindbogglingly difficult for ordinary people to even guess at the actual differences between the top and the bottom; and, two, most are in agreement on what that difference should be.
The lack of awareness of the gap in CEO to unskilled worker pay - which in the U.S. people estimate to be 30 to 1 but is in fact 350 to 1 – ‘likely reduces citizens desire to take action to decrease that gap,’ says Norton. (Though he notes some movement on that front, including an unsuccessful vote in Switzerland to cap the ratio at 12 to 1 in 2013 and recent protests by fast food workers in the U.S.)”
Michael Norton concludes by stating “many of the heated debates about whether CEO pay should be capped or the minimum wage increased are debates based on an extreme lack of knowledge about the true state of affairs. In other words, both liberals and conservatives fail to accurately estimate the actual current gaps in our pay. Our hope is that presenting the data to all sides might force people to examine their assumptions about whether some people are making more than they would like, and others less.”
Dill, K. (2014). Report: CEOs Earn 331 Times As Much As Average Workers, 774 Times As Much As Minimum Wage Earners. Forbes, 15th April.
Gavett, G. (2014). CEOs Get Paid Too Much, According to Pretty Much Everyone in the World. Harvard Business Review, 23rd September.
Velasco, s. (2013). CEO vs. worker pay: Walmart, McDonald’s, and eight other firms with biggest gaps. The Christian Science Monitor, 12th December.