CEO to staff pay ratios: Will more knowledge make any difference?

Internationally there is discussion around CEO to general staff pay ratios. John McGill provides some insight into this contentious topic which is gaining ground locally.

It has been suggested that publishing the ratio between CEO pay and the average pay in an organisation will restrict excessive levels and movements in CEO pay, as comparisons across the economy can easily be made. Some suggest it will also shame and embarrass the CEOs concerned.

This idea has generated a lot of discussion since the 2010 US Dodd-Frank financial reforms made such disclosures a legal requirement (2017 or 2018 may actually see implementation of the legislation). Many other countries have also looked at introducing similar requirements.

Is it going to work?
Detractors say probably not, for a variety of reasons, many of them quite compelling. For example, big organisations will generally have big ratios and small organisations small ratios.

Why is this? Big organisations are more likely to have both a larger number and a broader range of employees with a greater range of skills. Their senior managers may be highly skilled, competent industry leaders. That group will command more pay as comes with the ability to lead these larger and, in many cases, more complex organisations.

Organisations that employ high numbers of professional employees (like accounting firms, for example) will have quite different ratios to say banks or organisations in manufacturing, so comparisons will be difficult if not impossible. This questions the point of producing the ratios to begin with.

What is the right ratio?
A difficult question to answer, some first-world economies have looked to address this as follows. The Swiss had their 2013 referendum on the matter, with a vote on a 12:1 limit being rejected. The TUC in the UK would like to see a 20:1 ratio. One US state, Rhode Island, is putting a 25:1 ratio into some pending legislation. Peter Drucker believed a 20:1 ratio was the limit without company morale and productivity being damaged. In the US (where executive pay in listed companies has been publicly available since the 1930s) the ratio is currently estimated to be 300:1, a marked increase from 30:1 in 1978.

Some ratios may of course stand out, but they would likely be highlighted under any criteria. The job holders (US again) with 2000:1 ratios, defies belief and is a world away from our practices.

Here in New Zealand we have published CEO data since the introduction of the 1993 Companies Act. Although not as long as North America, the introduction of this information (and I would add an ability to relatively easily calculate CEO to employee ratios) has had no effect on CEO pay levels. So why would publishing the ratios explicitly have any effect?

Apples with apples
An issue adding further confusion to the debate is the tendency for commentators/media to compare CEO to average pay in the economy generally, a completely different denominator to that noted above. This will give bigger ratios of course and we will be presented with yet more debate that generates much heat, many letters to the editor, and confuses the issue even further.

It seems a general willingness to try this method of assessing CEO pay is gaining some momentum and organisations, including some in NZ, will publish the data. So, notwithstanding all of the above, be prepared to see the information become available, to some extent anyway, but do not necessarily expect to be enlightened in any manner.  

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