Top 7 CEO Pay Ratio Predictions
Written by Chris Crawford and Brent Longnecker of Longnecker & Associates
The newly enacted SEC pay ratio requirement for CEOs and publicly traded companies is getting a lot of news coverage right now. McDonald’s was just cited as having the highest ratio in the U.S., and this is just the beginning of what is guaranteed to be a crazy time for HR professionals.
Here are 7 predictions we are making here at NFPCCmp;A:
1. Pain for Fortune 500. The Fortune 500 companies are going to get most of the attention simply because they are the biggest, they pay their CEOs the most and they will have the largest CEO pay multiple. And, not all are even close to having the same employee dynamics. McDonalds’s does not have the same type of labor force as GE, yet the ratio could be drastically lower at GE and the CEO paid significantly more there than at McDonald’s, just due to the labor force need difference.
2. Costly Calculation. Companies will spend on average 1,000 labor hours and approximately $200,000 in compliance costs to calculate. These estimated costs to businesses are approximately nine times more than what the SEC originally estimated. How many jobs will that keep a company from hiring? Maybe we should take the cost of compliance and then divide by the average workers’ compensation to determine “jobs lost.”
3. Good Material for the Media. The general U.S. population will be interested to read the median worker pay for many companies. They’ll be shocked at how low the average pay is for larger retailers, fast food chains or overseas workforces. Trusting the media with the math will be interesting.
4. Rough Times for HR. Employees at a company will now know where they stand compared to the median pay, and this will create some tension for the HR department. To top it off, the company is required to fully load the compensation for each employee including base salary, bonus, grant values of stock, actuarial values of pensions and benefits, 401k costs, healthcare benefits, etc. As a result, more than 50% of the employee population will conclude they are under the median since employees generally don’t see the real costs of benefits provided that have been calculated for the SEC disclosure.
5. Fuel for the Debates. Rest assured the “haves and have nots” will be a central theme in 2016 elections. Pay ratios will be used and abused.
6. No Impact to CEO Pay. The CEO pay ratio will not have an overall impact on CEO pay. Sure, you may have a few CEO outliers that get reined in, or a few industries that look higher than others, that will work to somehow cure the gap. On the flip side, you may have a few CEOs point to their pay ratio versus their peers and say “look how low our company ratio is!” Overall, there will be very little impact to CEO pay.
7. No Pay Ratio Cap in the US. The current CEO pay ratio rules were born out of the AFL/CIO lobbying to have a provision in the Dodd-Frank Act, to curb egregious CEO compensation and to lower the pay gap. This was generated from a business guru, Peter Drucker, who suggested 20:1 in 1984. Peter got his cues from the philosopher Plato, who originated the thought with a 5:1 ratio as a reasonable cap. If you want to know if the pay ratio cap works, do a quick study of Ben & Jerry’s Ice Cream. It didn’t. While the CEO pay ratio will provide another piece of information to shareholders, it will not change CEO pay and will not lay the ground work for a cap on CEO pay of public companies in the U.S.