Investors who take the time to wade through corporate reports on what their top executives are paid are all too familiar with the problem of information overload. But no matter how hard they look, there is one figure investors won’t find in the jumble of tables, charts and dollar signs in a proxy filing. And that is a comparison of what the company paid its chief executive with what its typical employee earned.
This piece of the compensation puzzle is known as the C.E.O. pay ratio, and it was supposed to have been included in public company disclosures by now. In 2010, Congress approved the Dodd-Frank law requiring such information to be an element in each year’s pay disclosures. The idea was to expose how wide the gap was between a company’s chief executive and its rank-and-file workers. To meet that requirement, the Securities and Exchange Commission in 2013 proposed a specific pay-ratio rule that companies disclose the median annual total compensation of all their employees — the level at which half of them earn more and half earn less — and compare that figure with the amount awarded to the chief executive.
How much does a C.E.O. make compared with a typical employee? To get a rough idea, the Center for Economic and Policy Research calculated the gap for some highly paid C.E.O.s. From left: Starbucks’s Howard Schultz, Disney’s Robert Iger, and Oracle’s Lawrence Ellison. “The pay ratio was designed to embarrass, but I think it’s actually a pretty good thing,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “The C.E.O.’s pay has to have a relationship to the pay scheme of everyone else, and I think it will force companies to rethink how they design their compensation packages.” But the rule ran into a buzz saw of opposition. Deploying the usual arguments — such a rule would be too costly and burdensome to calculate and wouldn’t provide meaningful information to shareholders — corporate lobbyists have so far kept the S.E.C.’s proposal in limbo.
Academic research shows that the worker-to-C.E.O. gulf has been widening. According to a 2014 study by Alyssa Davis and Lawrence Mishel at the Economic Policy Institute, a left-leaning advocacy group in Washington with a reputation for rigorous studies, chief executive pay as a multiple of the typical worker’s pay rocketed from an average of 20 times in 1965 to 295.9 in 2013.
Even though the S.E.C. has not approved the rule, that doesn’t mean we can’t calculate rough estimates for C.E.O. pay ratios. So I asked Dean Baker, co-founder of the liberal Center for Economic and Policy Research, to do just that for a dozen of the highest-paid executives. First, Equilar, the compensation analytics firm in Redwood City, Calif., provided figures on executive compensation in 2014 at a number of the nation’s largest companies. Filings from 64 companies that had submitted their proxies by March 30, 2015, were included in this exercise. Compensation consisted of base salary, cash bonuses, perquisites and the grant-date value of stock and option grants. Equilar found that among these 64 companies, the median C.E.O. pay package was $11.5 million, down 4 percent from last year. (A subsequent analysis, the Equilar 100 C.E.O. Pay Study, using proxies filed by April 3, found the median package was $14.3 million, an almost 5 percent increase from last year.)
Using the March 30 figures, Mr. Baker, an expert in labor economics, worked with Nicholas Buffie, a research assistant, focusing on the 12 highest-paid executives in the group. They estimated the median wage for all the other employees of each company and compared that with the corresponding C.E.O.’s total 2014 compensation. These are imprecise and rough estimates. Given the absence of detail companies provide about their work force — such as how many employees work in the United States versus abroad — it is impossible for any outsider to nail down a precise number.
Nevertheless, Mr. Baker said he felt comfortable with the median wage estimates, which were based on figures from Occupational Employment Statistics, a program of the Bureau of Labor Statistics, or from Payscale, a compensation analytics firm in Seattle. “Clearly the big winners in the economy over the last three to four decades have been those at the top,” Mr. Baker said. “This is one way to illustrate that.”
Several of the companies objected to the figures when asked to comment on them. But only one, Honeywell, provided a precise median wage figure of its own: $58,000, versus the $31,000 that Mr. Baker calculated. Some companies also argued that stock and option grants are paid out over time, not all in one year, skewing pay figures higher for their chief executive.
The company with the widest pay gap on the list was Walt Disney, whose chief executive, Robert Iger, received $43.7 million last year. Given Mr. Baker’s estimate that Disney’s median worker received $19,530 last year, that translates to a C.E.O. multiple of 2,238 to one. A Disney spokesman said that 92 percent of Mr. Iger’s compensation was based on the company’s financial performance, which was outstanding in 2014.
Second on the list was Satya Nadella, Microsoft’s chief. His pay package of $84.3 million last year placed him at 2,012 times the estimate of $41,900 for the median employee’s earnings at Microsoft. A Microsoft spokesman disputed the calculation, saying that a typical employee at the company earned “well north of $100,000,” and that much of Mr. Nadella’s pay would be realized only in coming years — if the company performed well. He contended that a better measure of Mr. Nadella’s pay for 2014 was $22.75 million. Using Microsoft’s figures, Mr. Nadella’s pay ratio would still be at least 150 to one.
Oracle’s founder, Lawrence J. Ellison, ranks third on the pay gap list: 1,183 to one by Mr. Baker’s calculations. Oracle’s spokeswoman declined to comment.
Next up was Steven M. Mollenkopf, chief executive of Qualcomm, whose $60.7 million in compensation puts him at 1,111 times the median worker estimate at the San Diego company, which makes wireless telecommunication equipment and software. A Qualcomm spokeswoman said only $28.7 million of Mr. Mollenkopf’s package should be used for a pay comparison. This would lower his ratio to 526 to 1.
Howard D. Schultz, founder and chief executive of Starbucks, ranked fifth. He received $21.5 million last year, or 1,073 times the typical barista’s salary. A company spokeswoman said its executive compensation was linked to company performance, “and our board has determined that Howard Schultz’s pay reflects both competitive considerations and value to the company.” She added that lower-level workers receive a wide array of benefits in addition to their salaries.
After Mr. Schultz, the pay gaps fall to 682 for Richard D. Fairbank at Capital One; 396 for David M. Cote at Honeywell, using its number; 340 for Rupert Murdoch at 21st Century Fox; 316 for Meg Whitman at Hewlett-Packard; 296 for W. James McNerney Jr. at Boeing; 291 for AT&T’s chief executive, Randall L. Stephenson, and 284 for Alex Gorsky, chief executive of Johnson & Johnson. A Honeywell spokesman said “more than 90 percent of our C.E.O.’s pay is variable, at-risk and long term,” emphasizing profit growth and stock appreciation.
An AT&T spokesman said 92 percent of the C.E.O.’s target compensation was tied to company performance, including stock price. Officials at the other companies declined to comment or didn’t return calls.
Again, these are rough estimates. But without an S.E.C. rule, the public companies that reveal their chief executives’ pay over the next few months will not have to account for the pay ratio comparison with their workers. That’s too bad. “These C.E.O.s are smart, hard-working people,” Mr. Baker said. “But there is no basis for believing that if companies don’t pay $84 million they won’t attract top talent. You go back 40 years and they had smart, hard-working people too. They were well-paid, but not like they are today.”