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In 2018, corporate America will give up a data point it would probably rather keep under wraps: how much CEOs make in comparison to their employees.
For the first time, a new Securities and Exchange Commission rule mandated under the 2010 Dodd-Frank financial reform requires publicly traded companies to disclose how their CEOs are compensated in comparison with their employees. In public filings, companies have to disclose their “pay ratios,” or the CEO’s compensation divided by the median employee’s. The numbers are pretty jarring.
Margo Georgiadis, the CEO of toymaker Mattel — the company behind Barbie, Hot Wheels, and Fisher-Price — makes 4,987 times more than the company’s median employee, or, when accounting for a one-time sign-on bonus, 1,527 times more. Georgiadis brought in $31.3 million in 2017, her first year on the job, while the median Mattel employee, globally, made $6,271. (Seventy-eight percent of Mattel’s total workforce is located outside the US, where pay standards are lower.)
Greg Creed, the CEO of Yum Brands, which owns KFC, Pizza Hut, and Taco Bell, made 1,358 more than the median employee. His 2017 compensation: $12.4 million. The median employee’s pay, including full-time and part-time workers: $9,111.
Representatives for Mattel and Yum did not return requests for comment.
The list goes on. Per a Bloomberg tracker of pay ratios as they’ve been made public with the SEC, the CEO of VF Corporation — which owns apparel brands such as Lee, the North Face, Timberland, and Vans — pays its CEO 1,353 times more than the median employee. The CEO of Kohl’s makes 1,264 more than its workers. The pay ratio of the cigarette company Philip Morris is 990 to 1; at the oil refiner Marathon Petroleum, it’s 935 to 1.
Not all the pay ratios released so far are so stark. Warren Buffett, the CEO of the conglomerate Berkshire Hathaway, makes less than twice his company’s typical employee. The same goes for Wayfair CEO Niraj Shah. (To be fair, both men are billionaires, and the vast majority of the money they make doesn’t show up in compensation filings.)
A 2018 survey from Equilar, which tracks corporate governance and executive compensation, found that CEOs earned 140 times more than their median workers in general. An AFL-CIO study cited by Bloomberg estimates S&P 500 company executives made about 347 times more than their average employees in 2016, up from 41 to 1 in 1983.
In other words, it pays to be in the C-suite — and more every year.
It took quite some time to get the pay ratio rule put together, and companies aren’t particularly happy about it
The pay ratio rule was mandated in the Dodd-Frank Act, signed by President Barack Obama in the wake of the financial crisis in 2010. In September 2017, the SEC finally approved guidance for companies outlining how to implement and comply with the mandate.
The rule has drawn criticism from Republicans and business groups such as the US Chamber of Commerce, who argue it is unfairly burdensome to calculate and might not be reflective of reality. The SEC has acknowledged the rule will cost corporate America about $1.3 billion collectively to comply in the first year and about $526 million each year after, including both internal costs and the cost of outside professionals.
The pay ratio rule’s critics point out that items such as one-time bonuses and awards might create an inflated appearance of CEO compensation, and that including part-time and foreign employees pushes median pay lower, ultimately skewing the final number. They also say the guidelines for defining who the median employee is still aren’t clear.
The National Retail Federation, a trade association, has argued that the rule is “heavily biased against businesses that rely on seasonal and part-time workers.” NRF president and CEO Matthew Shay wrote in a March CNBC op-ed that the it “take[s] an important part of our workforce and uses it to paint an inaccurate picture of retail jobs in the name of investor transparency.”
Proponents of the rule, however, say that calculating and publicizing the CEO-to-employee pay ratio just isn’t that big a deal. It’s not like companies don’t know how much they’re paying employees — if they don’t, their shareholders should worry — and the SEC’s guidance is pretty comprehensive.
Moreover, companies are not required to do anything about the number, no matter how astronomical it is — they just have to disclose it. It brings transparency to corporations’ compensation strategies, and that’s good for workers and investors alike. “The only barrier here is Wall Street’s fear of embarrassment,” wrote Richard Trumka, president of the AFL-CIO, in a 2015 CNN op-ed on the rule.
The Trump administration has called for the pay ratio rule to be scrapped. A Treasury Department report last October made the argument that it is “not material to the reasonable investor for making investment decisions.” But getting rid of the rule would require action by Congress, and that’s unlikely.
For now, it appears the pay ratio rule is here to stay. And while it doesn’t make companies rein in executive pay — CEO compensation has continued to go up, even though corporations knew the disclosure rule was coming — it does serve as another data point in the broader picture of inequality in America.
