CEO pay ratio: The small number that could change a lot

 In Home News Section, Uncategorized

One. Combine with “to” it’s a little number with a big impact. That’s because US and UK companies must produce a CEO pay ratio that reveals how many multiples of the median worker’s wage they pay to the boss.

The laws revealed the chief executive of US fast food chain Chipotle, Brian Niccol, earns 1,129 times what a median worker at his company does.

Proponents want it mandated for Australian companies, as new research suggests the boss of stock market darling CSL, Paul Perreault, may have earned 380 times the average Australian wage in 2019.

“We’ve seen an explosion in CEO wages, while worker wages have likely remained stagnant,” said Katie Hepworth, director of workers’ rights at the Australasian Centre for Corporate Responsibility.

“Investors already vote on CEO remuneration. This just allows them more information and it gives them the opportunity to see whether or not CEO pay rates are fair, and how it relates to the rest of their workforce.”

The pandemic has made the issue of inequality undeniable, according to Luke Hildyard, director of UK think tank the High Pay Centre.

Low-paid and casual workers have been at greater risk of catching COVID-19, less able to work from home and suffered more when industries were shut to stem the spread of the virus.

“Simultaneously, you’ve got millionaire CEOs continuing to rake it in from the comfort of their own home or from the safety of a top-floor office. That inevitably provokes quite a strong response,” he said.

“The debate is going to happen anyway, so it’s best that it’s contextualized with accurate evidence and data. And pay ratio disclosures provide that, they show exactly what the top bosses are getting compared to the ordinary workers.”

Huge pay gap

Australian Shareholders’ Association analysis highlights the soaring gaps between executives and workers that could be revealed if CEO pay ratios were released for local companies.

Its analysis, using publicly available figures from before the coronavirus pandemic in 2019, has some of Australia’s most prominent bosses out-earning workers by more than one hundred times.

  • 57 to 1: Telstra CEO Andy Penn
  • 126 to 1: Qantas CEO Alan Joyce
  • 143 to 1: Woolworths CEO Brad Banducci
  • 169 to 1: Goodman Group CEO Gregory Goodman

All of the companies were contacted for comment and vigorously disputed the figures.

Most mentioned factors such as a strong share price, that their chief executive’s pay package is low compared to global competitors and that many senior leaders refused bonuses during the pandemic.

More details about the calculations are at the end of this article.

Because local companies are not forced to release the pay levels of staff, the association’s research compares CEO pay to the Australian average wage and the ratio listed here is greater than it would be for companies where staff earn above-average wages.

For example, the average pay packet at Qantas, if you take out executives, is around $130,000, which would shrink the ratio.

At Telstra, chair John Mullen noted at last year’s annual general meeting that setting executive pay is “overly complex and confusing” and it could be easier to have a fixed salary with most of it paid in shares.

“I am old enough to remember when I just got paid a salary and if I did a bad job I was fired,” he said. “I sometimes wonder whether we should not go back to those days.”

Every dollar counts

Workers like Mark Tripodi believe publishing the ratio of CEO to average wage in a particular company could embarrass them into lifting pay for staff.

Hearing that bosses of Australian firms earn many hundreds of times what workers do doesn’t sit right with the Adelaide resident, who works a variety of casual, part-time and volunteer roles.

“It leaves me feeling pretty disappointed and kind of disillusioned with the system that we have going at the moment,” he said.

“When we get into the (ratio), that number is so far out of the scope of human value, that it’s impossible for that to actually be something that can be earned by any one person.”

After some of his roles ended due to the COVID pandemic, Mr Tripodi has lost what he called the “cushion” of income that kept him afloat between his different commitments.

“I’m in a very insecure world,” he said. “I think a lot of people are in my position.”

How it works

CEO pay ratios measure how many multiples the boss’s pay packet is when compared to the average worker in the company.

Since being mandated in the US and UK, it has exposed the well-paid leaders of listed companies, boosted the income of minimum wage workers and increased transparency around mega-millions packages given to chief executives.

“There’s been concern over a number of years that pay is, in a sense, out of control,” said Peter Parry, director of the UK Shareholders’ Association.

“There’s an element to ‘shaming’, but the issue, of course, is that you get these egregious examples, which are then used to ratchet up pay by other companies.”

Rosanna Landis Weaver, program manager at US shareholder advocacy organisation As You Sow, said mandatory reporting of CEO pay ratios had helped “shine a spotlight” on egregious gaps within workforces.

“I think it just got to such an extreme,” she said.

“You know, it used to be that there were the nerds who were reading the proxy statements (company financial information given to shareholders) and then there was the rest of the world. And now the nerds can find each other and raise momentum.”

Figure already exists

Remuneration committees for listed companies set most executive pay and would already have the figure, according to Fiona Balzer, policy and advocacy manager for the Australian Shareholders’ Association.

That’s because they use it to “benchmark” salary packages against similar companies in their industry.

She believes the public – particularly investors and employees – should know as well.

“Where publishing assists is that [the company] have to be prepared to back that in a public forum to both shareholders, employees and other interested parties,” she argued.

“So being able to say, for some of the companies that are doing well, ‘this actually represented value’ for this reason, and in other circumstances, saying, ‘yes, we got it wrong’.”

Pay explosion

Carl Rhodes has been watching CEO pay explode for decades.

“We haven’t fully embraced the kind of excesses of inequality that we see in the US,” the professor of organisational studies and deputy dean of UTS Business School told the ABC. “But we’ve certainly followed the trend.”

He agrees the increased responsibility of leadership should be rewarded with increased pay.

“But what’s happened, particularly since the 1980s, is that the rate of increase in CEO pay has been staggeringly high compared to modest increases in rates for average workers, and in many cases, stagnating wages.”

Wage growth for 2020 remained at a record low of 1.4 per cent, and small shifts back up since then come after a decade-long slide.

“So the gains, the financial gains of the corporations get channelled to the people at the top of the corporation at the expense of the people who actually do the work,” he observed.

Stratospheric pay packages for senior executives are not only a part of growing inequality in Australia, he added, they make businesses more difficult to run.

“If there’s a significant gap, then you create in a business a kind of ‘haves and have-nots‘, it’s going to create tension and concern, and basically a feeling that businesses run in a way that’s unfair,” he said.

Mandating CEO pay ratios would force companies to justify the disparity.

Many companies in the US, including Chipotle, have substantially increased the minimum wages of workers since the ratios were first published.

However, it is not possible to draw a straight line from the publication of the ratios to mass wage increases, because the US has experienced vocal state-based campaigns to raise its low minimum wage and companies have suffered staff shortages due to the economic recovery.

Bringing Australian companies into line with the US and UK would bring them “a sense of trust that can only come from transparency,” according to Professor Rhodes.

“By having this disclosure, it opens the issue of extreme payments to public debate,” he said, even if it wouldn’t change the disparity.

“So it’s a bit of a runaway train. Having a disclosure of the figures just means you can watch the train.”

How this was calculated

The data for Australian ratios in this article comes from Australian Shareholders’ Association research.

Because companies do not have to reveal the median wage of their employees, the CEO’s pay is compared to Australian full-time adult average weekly total earnings (based on data from the Australian Bureau of Statistics).

Companies like CSL, whose specialised staff would likely earn more, would reduce the ratio.

Additionally, the CEO’s pay is based on fixed remuneration, short-term awards and any equity that vests at the market share price on the date of vesting for the year.

There was no adjustment for timing of awards, claw-back or any subsequent fall in share price, which could impact the ratio.

The Australian Industry Group said the issue was a matter for individual companies.

Other leading business lobby groups and peak bodies were contacted to comment for this article but did not respond to repeated requests.

By business reporter Daniel Ziffer (Original ABC Article)