Driving Down the Median

Stratospheric CEO pay correctly draws criticism as looting shareholder value, as evincing sleeping, complicit board directors, as splitting the seams of income justice. There’s simply no justification for the CEO of JP Morgan to get a major raise in a year his firm settles multiple misconduct cases. In what universe should the Blackstone’s CEO pocket $126 million, as he did in 2017? (Which by the way is $630,000 a day, or $78,750 an hour, more than the annual wage of most Americans.)

To shed further light on these inequities we have a new data point in town…the CEO Pay-Ratio regulation, which is adding important pay detail to the other side of the coin, and broadcasting the contours of pay for workers at those same firms. Until now, analysts could only make estimates about the ratio of the CEO’s pay to average workers, and this rule is adding important contrast and understanding.

With this rule in place, each publicly traded firm must report the median pay of workers at the firm. Median pay is the level where half the employees are paid more, and half less. The rule comes from the Dodd-Frank Wall Street Reform and Consumer Protection Act, specifically, Section 953(b). It’s the simplest of all the Dodd-Frank Rules and aimed, in part, to equip investors with the ability to understand better where CEO pay may be misaligned given the compensation of workers who, after all, are the main drivers of a company’s success.

Here are a few

  • At Whirlpool, the median pay is $19,906. The firm explains that it employs a total of 93,447 workers. Of these, 71,985 are located outside the United States. It identified the median-paid employee as a worker in Brazil. Of the firm’s 93,000 workers, then, half, or about 46,000 make less than $19,000 a year. The firm claims that it’s an “industry leader by attracting, developing, and retaining talented people.” Paying them, however, seems not to be part of the strategy. The CEO received $7 million, making the ratio 356 to 1.
  • At Manpower Group, the ratio is a depressing 2,483 to 1. That’s because the CEO received $11.9 million, while the median employee received $4,828. This is a temporary employment firm, so most of these workers are not at the job for very long

This rule came in a banking reform law, where destructive incentive packages led to reckless loan-making. The reform law contains many pay reforms, and almost all remain unimplemented by the regulators, principally the Securities and Exchange Commission (SEC). Some of the banks have reported their ratios under the section that the SEC does enforce.

  • At Wells Fargo, guilty of massive consumer frauds for false accounts, auto insurance, brokerage fees and more, the CEO received $17.4 million. The median paid employee received $60,444. For a firm with 200,000 employees, that’s a respectable figure given that tellers at the firm make as little as $25,000 a year, with “personal bankers” paid $37,000, according to Glassdoor.
  • At Citigroup, the median paid employee received $48,249. The company reports that the CEO received $17.8 million in its discussion of the ratio. It reports the ratio as 369-1. But Citi also reports elsewhere that the CEO received $23 million, when combining all compensation. That would make the ratio 476-1.
  • At Bank of America, the median paid employee received $87,115. The CEO received 250 times more, or $21.8 million. Bank of America includes Merrill Lynch, where brokers may be paid more. Of note, for all these firms, this median pay includes compensation such as health insurance. The firm’s don’t explain how much of the compensation comes in the form of insurance.
  • At JP Morgan, the CEO received $29.5 million, 364 times the median paid employee, which was $81,043. That’s nearly double the median-paid at Citi, and 30 percent more than at Wells Fargo, yet still shy of Bank of America.
  • At BB&T, which is one tenth the size of Bank of America, the CEO received more than half of what the BoA CEO received–$12.7 million. The median paid employee received $84,000. The ratio is 150-1. BB&T stands to benefit from a new banking bill that recently cleared the Senate. This reduces oversight of banks up to $250 billion in assets, a class that received some $50 billion in bailout funds during the 2008 financial crash. BB&T received a $3 billion bailout.
  • At M&T, another beneficiary of the Senate bill, the median paid employee received $57,571. This bank, with about $50 billion in assets, gave its CEO $4.1 million in 2017. (The CEO position changed during the year, and the company used an annualized amount.) Its ratio: 72-1.  M&T received a $600 million bailout.
  • At Comerica, the firm reports 8,163 employees and median pay of $79,951. With CEO pay of $12.1 million, the ratio is 152-1. Comerica received a $2.2 billion bailout.

These figures are self-reported, and it isn’t clear how closely the SEC will check company results, but the ratios we are seeing are shocking overall.

Critics of this rule complained that firms would find the calculation burdensome. That’s an incriminating confession for any publicly traded company that wants investors to trust they will account for their money scrupulously. SEC Commissioner Michael Piwowar invited companies to share their problems with implementation, and received only a handful comments, largely addressing their opposition to the rule itself, not with compliance problems, and of course this reflects the embarrassment at the revealed ratios that they anticipated, and were hoping to avoid by blocking the rule.

Other critics have asserted that investors wouldn’t find it useful, a claim contradicted by thousands of investors writing the SEC in support of the rule.  These ratios, with the revelation of median pay, do indeed shed an important light inside the company’s workings. These ratios can help investors understand whether firms are truly promoting employees, or exploiting them. Ultimately, it will leave the firms vulnerable to more enlightened firms who might recruit these workers with better pay. Investors can understand that a firm with better pay practices may be more sustainable.

Until now, the only specific information about employees at publicly traded companies was the number. Now, we know the median pay. Companies should report far more data regarding employment, such as investment in worker training, turnover, the number of full-time, part-time, domestic and foreign employees. At least with this new Wall Street reform law figure, the number of data points has doubled.