Efforts to regulate CEO pay gain traction
The soaring pay of corporate chief executives is spurring efforts to pass laws to limit their compensation and close the widening gap in earnings between workers and top executives.
Such laws have been proposed in at least three states, including Massachusetts, as well as in Switzerland. Proponents have yet to succeed in enacting these measures, but they vow to keep pressing the issue.
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The Massachusetts Nurses Association, a labor union, earlier this year sought to place an initiative on the ballot that would fine hospitals paying CEOs more than 100 times the earnings of the lowest paid employee. The question did not go to the November ballot, but union officials say they’ll take the fight to the Legislature next year, and, if unsuccessful, to the 2016 ballot.
In Rhode Island this summer, the state Senate passed a bill that would give preference in state contracts to companies with small gaps between chief executive and worker pay, but the legislation was defeated in the House. The sponsor plans to refile the bill next year.
In California, a state senator recently proposed a bill that would tie a firm’s corporate tax rate to its CEO-worker pay gap — the wider the gap, the higher the rate.
“There is a growing movement that targets exorbitant executive pay,” said Lawrence Mishel, president of the Economic Policy Institute, a Washington think tank that advocates for lower income families. “People are looking for things that policy makers can do that will insure that economic growth gets to everybody and goes beyond those at the top.”
Income inequality has emerged as a major political and policy issue, and chief executive pay has become a potent symbol of the growing divide between rich and poor. Many economists argue that the widening gap hurts the economy: When wealth is concentrated instead of broadly distributed, it curtails the spending of middle- and lower-income consumers who ultimately drive the US economy.
In the United States, compensation for chief executives soared 937 percent between 1978 and 2013, while the average worker’s compensation climbed just 10 percent, according to the Economic Policy Institute. CEOs at the top 350 firms made an average of $15.2 million in compensation last year – nearly 296 times higher than the average worker’s earnings of about $52,000.
In 1978, the ratio of CEO to average worker pay was 30:1. In the 1980s, the late management consultant Peter Drucker recommended a ratio of 20:1 to prevent low worker morale.
The gap varies between industries and companies. Average CEO compensation at Starbucks, McDonald’s and other major fast-food companies was $23.8 million last year, more than 1,000 times what the average worker made, according to Demos, a New York public policy group. More than half of fast-food workers’ families nationwide rely on public assistance, according a study by the University of California and the University of Illinois.
In Massachusetts, TJX Cos. chief executive Carol Meyrowitz made $11.1 million in compensation in fiscal 2012, 378 times more than the average employee’s pay and benefits of $29,310, according to a Bloomberg analysis. EMC Corp.’s leader Joseph Tucci earned $16.6 million, 283 times the average employee’s $58,565. (An EMC spokesman said there was a smaller ratio last year, but did not provide the data.)
At the state’s hospitals, at least four chief executives received more than $2 million in 2012, according to federal tax filings. The nurses union estimates the lowest-paid hospital employee makes around $16,000 a year — a ratio of 125:1.
Limiting chief executive pay is viewed by some lawmakers and policy makers as one step toward closing the income gap. The approaches vary.
A few weeks ago, US Representative Chris Van Hollen, Democrat of Maryland, introd
Another tactic: transparency. The 2010 Dodd-Frank law to overhaul the US financial system requires publicly traded companies to report the compensation ratio between the chief executive and median employee — a measure not yet enforced. The Wagemark Foundation, a Toronto nonprofit, last year launched a registry for companies with a highest-to-lowest-paid worker ratio of 8:1 or less — a way for companies to promote themselves as fair employers, said executive director Garrett Morgan.
Narrowing the income gap can be good for business, said Harvard Business School professor Michael Norton. His research shows that once people are well compensated, more money doesn’t motivate them to work harder. But when people know they are making considerably less than others, productivity drops.
But some analysts say the role CEO compensation plays in income inequality is overstated. The American Enterprise Institute, a right-leaning Washington think tank, notes that studies revealing huge pay gaps are limited to large, publicly traded companies. If all firms are considered, it says, the divide shrinks to 4:1.
Others point out that a blanket ratio doesn’t make sense, given the complexity of some executive’s jobs, and cutting CEO pay to redistribute it to workers would not make much of a difference. Michael Saltsman, research director at the Employment Policies Institute, a conservative Washington think tank, called efforts to limit CEO pay a “stunt” that unions use as bargaining chips.
Even if the top five executives at Yum! Brands — the parent of Pizza Hut, Taco Bell, and other fast food chains – cut their salaries in half and redistributed the difference to their nearly 464,000 part-time employees, each worker would get only a 5-cent-an-hour raise, Saltsman estimated.
Still, some executives have been moved to act. In July, interim Kentucky State University president Raymond Burse, a retired General Electric executive, took a voluntary $90,000 pay cut to boost wages of the school’s lowest-paid workers from $7.25 to $10.25 an hour.
“This is not a publicity stunt,” he told the Lexington Herald-Leader newspaper. “I did this for the people.”