Public companies for the first time this year must disclose how much more they pay their chief executive than their median employee, a rule born in the wake of the financial crisis and amid a social backlash against rising income inequality.
Many of Illinois’ largest companies debuted their CEO-to-worker pay ratios in recent regulatory filings, and the gaps, clearly, are massive.
What’s less clear is what to make of the new information.
And at McDonald’s, CEO Steve Easterbrook’s $21.76 million pay package was 3,101 times the $7,017 paid to the fast-food giant’s median employee, which the company defines as a part-time hourly restaurant crew member in Poland.
The leeway companies were given by the Securities and Exchange Commission to compute their ratios makes it difficult to draw any meaningful conclusions, critics say, and huge CEO pay packages — which include salary, bonus, stock options, rise in pension value and other incentives — are hardly news. But the disclosure of median employee pay, a less commonly reported figure, could prove significant for employees renegotiating their own pay or for job candidates evaluating potential employers.
And for many people who track executive pay, what will be most interesting is to see how the ratios change over time.
“Are they giving themselves a raise while the rest of the workforce is hurting?” said Rob DuBoff, director of corporate research at Just Capital, a nonprofit research organization that ranks corporations based on what its surveys show Americans care about most.
The ratio reporting requirement, mandated by Congress in the 2010 Dodd-Frank Act, is intended to give shareholders more information for managing executive compensation. There is no target ratio, and the ratios vary vastly depending on company size, industry and workforce structure.
Equilar, a compensation research company, has been tracking company disclosures across the Russell 3000 index. As of mid-April, the median pay ratio reported was 72:1, according to Equilar. The ratios range from 5,908:1 at Weight Watchers, whose new CEO was awarded several one-time awards last year as part of her recruitment, to 0.1:1 at Texas-based Energy Transfer Partners, whose CEO chose to take a $1 annual salary and forgo bonus and equity incentives, so his compensation consisted of health benefits.
CEO-to-employee pay ratio for major Illinois companies
Public companies must now disclose the pay gap between CEOs and employees. These ratios vary widely given size, industry and other factors. Below are a selection of local Fortune 500 companies.
Companies can exclude up to 5 percent of their non-U.S. workforce but don’t have to, some include health benefits in the compensation calculation but others don’t, and making cost-of-living adjustments for geographic differences is optional.
In addition, the salaries of part-time, temporary or seasonal employees lower median employee pay, and companies that rely heavily on those workers tend to have a wider CEO-to-employee pay gap as a result.
“What is it going to tell people? On balance, very little,” said Donald Kalfen, partner at Lake Forest-based Meridian Compensation Partners, which advises boards and senior management on executive compensation issues.
But proponents say any pay transparency is useful, both for shareholders and for employees who have seen their own wages stagnate as CEO pay climbs.
“We should be well-aware of these pay ratios because they may come back to bite those companies if they’re way out of whack,” said Jay Rehak, president of the board of the Chicago Teachers Pension Fund, an institutional investor that manages $10.8 billion in pension investments for 63,000 people.
CEO pay has been rising since the 1980s, with a sharp climb during the 1990s among large companies driven by hikes in incentives and restricted stock. By the turn of the millennium CEOs were making 120 times the pay of the average worker, whereas in the 1970s they were making about 30 times more, according to research by finance professor Carola Frydman and associate finance professor Dimitris Papanikolaou, both of Northwestern University’s Kellogg School of Management. The researchers have theorized that the pay gap widens during periods of rapid technological innovation because it becomes more important to have a skilled CEO who can grow the company amid those shifts.
Whether highlighting the yawning gap between the rank and file and the CEO shames companies into bringing CEO pay down, or median employee pay up, remains to be seen, though several experts said they doubted much movement except at the extremes.
But perhaps more important than workers comparing themselves against the CEO, whose compensation has been public for decades, is that they can now compare their pay with that of the company’s median employee, a figure that until now has not been available.
There is concern that such comparisons could hurt employee morale, but “that’s kind of the point,” said Ben Harris, former chief economist to Vice President Joe Biden and now a visiting associate professor at Kellogg School of Management.
“If you are underpaid, you should know it, you should feel bad about it and you should have the opportunity to negotiate up,” Harris said.
To Harris, workers have been disadvantaged in pay negotiations with employers because most don’t have access to any salary information. Knowing the median employee pay at their company gives workers a data point for negotiating, “a tiny step on a really long journey … to making our labor market competitive,” he said.
Historically, pay transparency hasn’t always had the intended effect.
When Congress mandated disclosure of CEO pay during the Great Depression in 1934, with the intent of narrowing disparities with the common man, the effect was to increase the pay of the lower paid CEOs who were miffed that they fell below some of their peers, according to a study by Princeton University researcher Alexandre Mas.
When the salaries of city managers in California were made public in 2010, it resulted in an 8 percent reduction in their pay, but also a 75 percent increase in their quit rates, another study by Mas found.
Some academics worry that the new pay ratio disclosure could have other unintended consequences.
For example, if companies are self-conscious about a big pay ratio they could try to shrink it by outsourcing some of the lower-paid work to third parties to get those low salaries off their payrolls, Kellogg’s Frydman said. They could also replace two part-timers with a full-time worker at double the salary.
“Firms that have a lot of part-time or seasonal employees might not want to have them anymore,” Frydman said. “Those types of impacts worry me.”
Brian Tobin, senior client partner in executive pay and governance practice in the Chicago office of Korn Ferry, a global organizational consulting firm, said he doesn’t think companies are so fixated on the pay ratio that they would change fundamental business practices. Most of his clients have not heard shareholders voice concern about the new disclosures, Tobin said.
But companies should develop internal talking points for employees who may raise questions about where they stand compared with the median, so that supervisors can steer the discussion to issues of skill development and career advancement, Tobin said.
“This is really an opportunity to turn this around and use it to start those discussions,” he said. “Here is how you move from your level to that role that pays more.”
Companies have been so focused on the methodology in the inaugural year of the reporting requirement that many have neglected to communicate with stakeholders to put the numbers in context — a mistake that could compromise their ability to attract and retain top talent, said Joy Duce, partner in charge of human resources consulting services at Naperville-based Sikich, a professional services firm.
Not only might existing employees feel demoralized if they see they fall below the median, but potential new hires likely will compare median employee pay between similar companies or question salary offers that don’t meet that level, Duce said.
“We’re not seeing companies take control of their story,” she said. “Those numbers will have legs, and the negative impact they could have could be monumental.”
Many of Illinois’ largest companies have tried to provide context for vast pay ratios.
At Sears Holdings, CEO Eddie Lampert’s $4.34 million pay was 264 times the $16,442 earned by the retailer’s median employee, who is defined as a part-time hourly worker. But taking into account only salaried employees, whose median pay is $65,358, the ratio is 66:1, the company said in its filing.
Mondelez, with a 403:1 ratio, notes that of nearly 100,000 employees in more than 80 countries around the world, most are hourly, many are part-time or seasonal and 82 percent are located outside the U.S., with five of the six largest employee populations in emerging market countries. The company excluded 4,610 non-U.S. employees from its median employee calculation, as permitted by SEC rules. It did not apply a cost-of-living adjustment for non-U.S. workers.
“I would emphasize that we’re confident that we pay our employees competitively in all markets in which we operate,” Mondelez spokesman Michael Mitchell said in an email. “We benchmark at each level of our organization to ensure our pay is fair and to enable us to attract and retain the best talent.”
At Kraft Heinz, another snack-maker with similar revenue, the CEO-to-worker pay ratio is much smaller, at 91:1. While its median employee pay, at $46,006, is similar to that at Mondelez, CEO Bernardo Hees made just $4.19 million last year, a quarter of former Mondelez CEO Rosenfeld’s pay package.
The contrast reveals different compensation philosophies. While Mondelez uses peer groups to calculate executive pay, comparing itself with companies of similar size and global breadth such as Nike and Pfizer, Kraft Heinz adheres to a performance-driven model that reflects the value its owners, 3G Capital and Berkshire Hathaway, place on cost efficiencies.
“We operate under a Pay for Performance model — a direct link between delivering results and earning rewards that’s tied to target achievement,” spokesman Michael Mullen said in an emailed statement. “As a company, we did not meet our global internal targets last year, therefore, our CEO did not receive a bonus based on our compensation model, which impacted the pay ratio.”
As for McDonald’s, whose 3,101:1 ratio is the biggest among Illinois’ largest companies reporting so far, the company did not use any permitted exclusions despite its global workforce. It notes that 90 percent of Easterbrook’s pay is based on company performance, and the value of the company grew $36 billion last year.
“Steve Easterbrook’s leadership has raised the bar for McDonald’s by leading the business out of declining sales back to strong growth, unveiling plans to make the business more sustainable for both shareholders and stakeholders all while investing more in the education and skills of the people working in our restaurants,” spokeswoman Terri Hickey said in an emailed statement.
To DuBoff at Just Capital, the giant ratio isn’t the primary concern. What matters more is if growth in CEO compensation is outpacing growth in pay for median employees who struggle to make ends meet.
Just 10 percent of McDonald’s U.S. workers make a living wage, meaning their hourly wage is enough to cover local costs for food, housing and medical care, he said.
The company “is a good turnaround story, and the CEO should certainly be able to participate in that,” DuBoff said.
But, he said, “whatever gains they are having on earnings, they have a lot of catching up to do in terms of helping their workers participate in the overall success of the company.”
Photo Credit: Public companies now must disclose how much their CEOs make compared to their employees. Clockwise from left: Steve Easterbrook (McDonald’s), Irene Rosenfeld (Mondelez), Bernardo Hees (Kraft Heinz), Oscar Munoz (United), Pietro Satiano (US Foods), and Dennis Muilenburg (Boeing).