February 22, 2018

February 22, 2018

It took forever (nearly eight years), but a key provision of Dodd-Frank is finally being implemented. Public corporations have finally begun to report the ratio between their CEO’s pay and the pay of their median worker.

Dodd-Frank mandated that these companies calculate and release these numbers in their annual filings to the SEC. Honeywell (a company whose CEO, before he became W’s vice president, was Dick Cheney) has gone first, reporting that its current CEO makes a modest 333 times what it’s median employee pulls down.

Fifty years ago, when unions were strong and America was notably less plutocratic, the average CEO made roughly 20 times what his (then as now, CEOs tended to be male) average worker made. Indeed, the great management consultant Peter Drucker prescribed that multiple of 20 as the proper ceiling, not to be exceeded, of the CEO-median ratio.

But that was then. Ronald Reagan’s epochal reduction of the taxes on the highest incomes, his SEC’s rule-change allowing CEOs to manipulate share buybacks, Milton Friedman’s very popular (among CEOs) doctrine that the sole purpose of corporations was to reward shareholders, and his emphasis of the power of CEO unions (that is, corporate boards of directors, on which CEOs of other corporations sit and happily approve astronomical pay deals for that company’s CEO, creating a standard that the CEOs who sit on their own corporations’ boards will obligingly meet)—all these have combined to raise CEO pay to dizzying, not to say nauseating, heights. Simultaneously, the weakening of unions was one among many factors that kept median worker pay from rising very much.

Honeywell’s 333-to-1 ratio is within the range of the ratios for all corporations that organizations that have sought to measure this have come up with in recent years: Most of the averages have ranged from 200-to-1 to 350-to-1. As the Institute for Policy Studies (IPS) has noted, Honeywell actually didn’t include the pay of its employees in nations with developing economies in calculating its ratio, presumably because it didn’t want a ratio that could have topped, say, 500-to-1. IPS has cautioned that other corporations are likely to do the same.

One question that CEOs seldom address, partly because it’s too seldom asked, is why they deserve so much more than the CEOs who ran their companies 50 years ago, when the U.S. economy enjoyed a much more broadly shared prosperity than it does today. As the ratio of their pay to their employees’ has grown from 20-to-1 to 300-to-1, why are they worth, on a ratio basis, 15 times more than their mid-century predecessors? Is the American economy doing 15 times better than it was in 1968? Hardly.