Warren Buffett earned less than seven times as much as the median Berkshire Hathaway employee last year while Elon Musk was paid 40,668 times more than the median Tesla worker, according to corporate filings, stirring debate about a disclosure that politicians demanded after the financial crisis.
Such details are emerging in US proxy filings for the first full year since the Securities and Exchange Commission mandated American companies to disclose the relationship between their chief executive’s compensation and that of their median employee, providing fuel for those seeking to rein in executive pay.
The median CEO pay ratio for 2018 was 254:1, according to an analysis released last week by Equilar, a compensation consultancy, up from 235:1 in 2017 when only two-thirds of the companies it tracks disclosed such figures.
The ratio, a legacy of the Dodd-Frank Act’s post-crisis efforts to regulate executive pay, has attracted attention from labour unions, activists and politicians at the beginning of a 2020 election season in which several Democrats are campaigning on taming corporate excesses and reducing inequality.
“Politicians know that this is an issue that really strikes a chord with people across the political spectrum,” said Sarah Anderson, director of the global economy project at the left-leaning Institute for Policy Studies, who noted that a 2016 Stanford poll found majorities of Democrats and Republicans favoured capping executive pay.
“It’s a really important indicator of whether a corporation is sharing their wealth internally,” she added, saying that the disclosures have encouraged lawmakers in seven states to try to tax companies with high pay ratios.
One such tax has been introduced, in Portland. Companies in Oregon’s largest city must pay a 10 per cent surcharge if their CEOs make 100-250 times more than their median employee, while those with a ratio above 250 face a 25 per cent surcharge. Portland said in February that the tax would raise $2.4m in its first year. In its 2018 fiscal year, Nike, the city’s most famous company, paid its chief executive Mark Parker 379 times the amount it paid its median employee, with a US-based retail employee earning $24,955 a year.
The ratio’s political potency was on display last week when Katie Porter, a California congresswoman, challenged Jamie Dimon, head of JPMorgan Chase, on the discrepancy between his $31m compensation and the $16.50 hourly wage the bank offered a teller in her district.
A closer examination of the small print underpinning the headline figures shows wide disparities between companies, along with an array of asterisks and anomalies that cast doubt on the utility of a disclosure which is increasingly being demanded in countries from India to the UK.
“If you really dig behind the number you can see it’s a weak and inaccurate number,” said Deborah Lifshey, managing director at Pearl Meyer, an executive compensation consultancy.
Equilar analysed pay at the 100 largest companies by revenue that had published 2018 data by April 1, the midpoint of the annual reporting calendar. A full account will not be available until May, but Amit Batish, author of the Equilar report, said he expected it to paint a similar picture.
Of the 100 CEOs, 11 made more than 1,000 times as much as their median employee, and most were at pains to explain the gulf.
When Manpower, the staffing company, said its chief executive earned 2,508 times the $4,563 made by its median employee, who it said was a caregiver in Israel, it asked investors to remember that 95 per cent of its people were on temporary assignments.
Large performance-based incentives swelled the ratio at several companies. Safra Catz and Mark Hurd, Oracle’s co-CEOs, topped Equilar’s compensation list with $108m packages each but the software company said these were “atypically high” because they included five years of stock option grants. Adjusting for their annualised value, Oracle said, would lower the ratio from 1,205:1 to 282:1.
Discovery Communications similarly invited shareholders to look past a near-$100m 10-year option package for David Zaslav, while Disney said Bob Iger’s ratio would have been 852 times what a full-time theme park employee earned, rather than 1,424, were it not for a $26m grant of restricted stock units for its Fox acquisition.
Equilar did not include Tesla in its analysis but the electric car maker recorded the most extreme pay ratio of all, at 40,668:1. All but $56,000 of Mr Musk’s $2,284,044,884 compensation came from a performance award which will only pay out in full if Tesla passes milestones including a $650bn market capitalisation, however, and Mr Musk opted not to take his five-digit salary.
On the other end of the scale, Berkshire Hathaway argued that complying with the SEC’s requirements “would provide little, if any, useful information to its shareholders” given that Mr Buffett’s annual compensation has been $100,000 for more than 25 years.
An analysis by Pearl Meyer’s Ms Lifshey last year found that pay ratios vary greatly between industries, and cautioned that they have little correlation to performance. Despite record corporate profits in 2018, Equilar noted that median compensation among the CEOs it analysed dipped a fraction to $15.6m.
Cost to Corporate America of compliance with pay ratio disclosure rule
“Everyone is concerned about the optics of it but it’s not driving decisions about executive pay because it’s not what should drive decisions about executive pay,” Ms Lifshey said this week, arguing that compensation committees would continue to focus on financial performance.
The headline figure about CEO pay ratios would provide a “sound bite” for several 2020 election candidates, she added, “but what they’re talking about is not accurate because it’s a contrived number”.
Other countries have set different disclosure rules, with the UK requiring companies from this year to compare their chief executive’s remuneration with that of representative employees in the 25th, median and 75th percentile of their UK staff.
“We think this will be an interesting and insightful disclosure,” said Luke Hildyard, executive director of the UK’s High Pay Centre, a governance think-tank, adding that it could strengthen the case for more profit-sharing among employees. He added, however, that he had not seen evidence of the new disclosure demands changing behaviour.
The SEC has estimated that complying with its disclosure demand has cost companies $1bn. Their efforts to understand who counts as a median employee have also prompted some to offer brief portraits of these human benchmarks, from a line maintenance crew leader making $113,035 at Southern Company to a Union Pacific signalman making $79,902.
Shareholders can now measure Coca-Cola’s James Quincey against an hourly employee in South Africa (1,106:1) or McDonald’s Steve Easterbrook against a part-time restaurant employee in Hungary (2,124:1).
The job of a median employee appears no more stable than that of a chief executive, however. Those chosen to represent the middle of the pack at United Continental, McDonald’s and JPMorgan Chase in 2017 had all left by the time the 2018 numbers were calculated.