Enough CEO Greed
In Kim Stanley Robinson’s near-future climate fiction novel, The Ministry for the Future, the author imagines a sweeping alternative version of the next two decades. It’s one where the anthropocene era isn’t quite so dire, global inequality is flattened out, and the world’s leaders manage to come together to meaningfully respond to the climate emergency.
A key way that was achieved in Robinson’s vision? By setting the maximum wage ratio from ten to one, meaning the chief executive in any company can only earn a maximum ten times its median worker’s wage. This “pay justice [and] wage ratio movement” as the book puts it, helps put “an end to the kleptocracy of the plutocrats” leading to a more livable, just world.
The wage ratio may sound too wonky to serve as a foundational tenet of a new economic order, but like many things in Robinson’s Barack Obama-recommended novel, it’s proved prescient. In the pandemic’s wake, executive pay ratios are under harsh scrutiny. In a year when the average worker struggled more than ever, chief executives were compensated “as if the pandemic did not occur,” as a New York Times and Equilar survey of executive compensation at the top 200 publicly-listed companies found.
In 2020, the average CEO pay ratio among the top 200 companies was 274 to 1. What’s more, 68% of companies surveyed boasted a larger gap in 2020 than before the pandemic. CEO pay jumped an average of 14.1% over 2019, compared to a 1.9% for median workers. Equilar, an executive compensation firm, said that the inexorable rise in executive compensation was “due in large part to the fact that CEO pay is chiefly awarded through equity, or the rights to earn shares of company stock.” This leads to eye-wateringly high pay days if a company’s stock goes up, as many did during the pandemic—despite the plight of workers.
At a time when many workers are defiantly refusing to return to low wage jobs with paltry benefits — particularly after what the pandemic revealed about how society treats essential workers — a pay gap of this magnitude feels increasingly untenable.
“With the pandemic, it’s just been so obscene to see that CEOs actually increased during a year of so much suffering for other people,” Sarah Anderson, Global Economy Project Director at the Institute for Policy Studies, who has been researching executive pay for 20 years, said.
“And our research shows it has nothing to do with performing so spectacularly. It was because boards took action to protect them from the crisis while their workers were really suffering.”
For the last four years, the SEC has required all listed companies in the US to report on their wage ratio, a requirement that was highly contested by companies who would be affected. The UK has a similar requirement, making the two countries leaders on the issue globally.
Anderson adds that the attention paid to this issue currently is reminiscent of the 2008 recession, when the perception of Wall Street soured in the public consciousness, eventually leading to Dodd Frank financial regulation. Perhaps because of that, shareholders seem jittery. The pay packages of executives at GE, Starbucks, Walgreens Boots Alliance, and others in the UK have been booed by shareholders this year, marking what the Financial Times called a “record year for failed pay votes.” Though these votes on compensation are only advisory, the symbolism is not lost on longtime watchers of this issue. It’s clear that shareholders want the C-suite to start reading the room.
“This isn’t just a moral issue, it’s also bad for business,” Anderson said.
“There’s a lot of research that shows that when you have these extreme gaps it undermines employee morale, and that can undermine productivity and increase turnover rates. So shareholders who aren’t even particularly moved by the fairness question should be taking a hard look at this from a strictly ‘what makes businesses effective’ point of view.”
Research shows that consumers also take notice. Research in the Journal of Consumer Psychology found that consumers avoid companies when they learn their pay ratios are high compared to competitors. Tobias Schlager, co-author of the research, says the average consumer may assume a pay ratio of merely 40 or 50 to 1 would be unacceptably high — despite some rapacious companies boasting ratios in the thousands. He says this underlines why the requirement to disclose and explain the pay ratio, rather than a raw figure of executive pay, is important for public understanding and shaping sentiment.
“In terms of absolute numbers, if a person hears a CEO earns 10 million, or a couple of million, then they think that’s probably worth it or probably okay. So it’s really about the ratio — it’s about putting it into the perspective of what the worker is being paid. The research shows this changes consumer sentiment.”
Covid has proved something of a sea-change moment, disrupting and creating new industries, and changing the way many workers look at what their labor is worth. But not so much for the bottomless appetites of C-suite executives. If change is to come, Anderson says, it’s through policy shifts, not the pressure of optics.
“Disclosure was a step forward in terms of progress and all the shareholder work that is drawing attention to this is really important too, but I think to actually have an impact in terms of CEO pay levels we’re gonna need some tighter public policy to address it,” Anderson said.
Anderson points to a bill reintroduced in the most recent session of Congress, which would increase the corporate tax rate on companies that have big gaps, as well as another bill that would give preferential treatment to federal contractors if the company has a wage gap of less than 100 to 1. Other reforms on this issue include adding labor representatives to the boards of companies, something that’s commonly seen in countries like Germany, and strengthening unions.
However it’s possible, too, that public shame may play a role. If workers can refuse to work at companies that seem to find every possible way to pay them less, then maybe consumers can refuse to spend their hard-earned cash at them, too.