More Disclosure May Be Driving Executive Pay Higher

The gap between what CEOs and the average employee earns is widening. In 1965, the average large-company CEO earned about 20 times as much as their typical employee. Between 1978 and 2011 this gap expanded at a breathtaking pace. According to a study by the Economic Policy Institute, it widened by 876% during that period.

In response, there have been a number of regulatory reforms put in place. Most recently, in September, the SEC instituted a rule requiring companies to disclose the ratio of the CEO’s pay to that of the median worker.  The theory is that making the disparity public will make companies less likely to award outsized pay packages.

So far, other efforts to increase disclosure haven’t worked. In some ways, it has made it easier for executives to demand more pay as they now have a better idea of what peers are earning. In many instances, companies use “peer benchmarking” whereby they look at CEO salaries at peer-group firms and then peg CEO pay to the 50th, 75th or even 90th percentile of the peer group – never lower. With so many companies following the same strategy, salaries continue to ratchet higher and higher.

In addition, a recent study by labor economist Ron Laschever found that boards often include as peers companies that are bigger and that pay their CEOs more. This also helps push salaries higher.

At BWFA, we attempt to assess whether or not companies are good stewards of shareholder capital. Executive pay is a means of disbursing shareholder funds. As such, we take a negative view toward excessive executive compensation. We would like to see corporate boards take a more independent view toward executive pay and improve the way in which peer benchmarking is used in determining CEO salaries. Compensation should be based on performance, especially over the long, rather than the short term.