“62 People Own As Much As Half of the Global Population” – that’s a catchy headline. Maybe correct, maybe not, but likely conceptually correct. An increasingly small number of people own an increasingly large proportion of the financial wealth in the world.
I suspect that any of the compensation survey firms could perform a similar calculation about the collective compensation in the bottom half of a company and how many people at the top of that company are paid in aggregate that same amount. I know the answer to that for all of my client companies and in some cases the differential is much more extreme than in the headline article herein. That might be much more interesting than the CEO Pay Ratio, which will be a required disclosure for most public companies beginning in 2018.
CEO Pay Ratio
The media and editorial attention to the CEO Pay Ratio are more focused on the numerator – CEO Pay – than the denominator – employee pay – as represented by the “median employee”. No matter how much noise erupts about the gap between CEO pay and the median worker pay, you may remember from your Statistics 101 course that this means that one half of the workers in that company are paid less than the median employee.
The CEO Pay Ratio rules require computing the median employee pay amount using the same methodology of executive pay disclosures in SEC filings – including wage/salary, bonus, and – important to this discussion – equity-based compensation.
Where ISS Comes In
The pressure from institutional investors and proxy advisers, like ISS, to reduce the “burn rate” – the amount of equity compensation granted to employees as a percent of outstanding shares – has had one effect: reducing the participation in equity compensation below the executive level. There has been no proportional reduction in equity compensation from top to bottom, but rather an elimination of equity at lower levels and a continuing increase in equity awards at the top. This is well-documented and has been met with a collective “so what?” shrug among compensation professionals.
Fixing the income inequality problem can’t be accomplished globally with a change in equity compensation practices…today. But if the ISS mentality continues as developing countries grow into the global business environment, employees in those companies in those countries will never have the opportunity that employees of Amazon, Facebook, Google, and others have had to realize personal wealth from their collective efforts. This is because ISS has decided, with its static burn rate model, that employee ownership doesn’t matter, that incentives don’t change behavior, and that employees shouldn’t share in the value that they create from their work.
Companies should show courage, tell ISS to take a hike, grant equity to all employees, risk losing the meaningless say-on-pay vote, and watch the power of employee ownership create value. A few years from now, the CEO Pay Ratio might look quite different.
Because ISS burn rate criteria are based on the average within industry sectors, a collective increase in equity compensation within an industry sector would keep all companies in their same relative position, and in compliance. Despite all of the noise, there is no significant movement against equity compensation in shareholder voting trends. Companies should stop spending time engaging shareholders over meaningless say-on-pay votes, and return to engaging shareholders over what benefits shareholders: employee ownership which is only “dilutive” in the short-term and is value-creating over time.