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Gap between CEO, employee compensation continued to widen in 2020 in the Triad
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Gap between CEO, employee compensation continued to widen in 2020 in the Triad

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Not even the COVID-19 pandemic could slow the ever-widening pay gap between corporate chief executives and rank-and-file employees.

The Winston-Salem Journal does a review each year of CEO compensation for 29 corporations based in the Triad or that have significant operations and workforces here.

For fiscal 2020, the chief executives of 15 corporations received at least $100 in compensation for every $1 paid to their median employee. Median is defined as the middle value in a list of numbers.

Median employee compensation factors in regular pay, overtime, bonuses, incentives, allowances and paid time off.

During the early stages of the pandemic, there was speculation among financial analysts that the CEO pay ratio gap might shrink during 2020.

Several corporations temporarily reduced executive management compensation by between 10% and 50%, along with requiring rank-and-file employees to be furloughed for several weeks or receive lower pay for reduced hours.

However, the astounding recovery in the stock market during the second half of 2020 boosted CEO total compensation. Many corporations have made stock and stock options awards a primary, if not the largest, financial factor in CEO compensation in recent years.

The largest pay gap is at Lowe’s Cos. Inc.

Chief executive Marvin Ellison had total compensation of $23.07 million for 2020, while the median employee compensation was $24,554, a CEO pay ratio of $940 to $1.

Ellison’s largest compensation category was stock and stock option awards valued at $15.76 million in the date they were awarded, along with $5.8 million in incentive pay and $1.45 million in base salary.

By comparison, in fiscal 2019 the CEO pay ratio was $459 to $1 based on Ellison’s total compensation of $14.3 million and median employee compensation of $22,921.

The Lowe’s CEO pay ratio gap in 2020 would have been even larger if not for most rank-and-file employees getting payouts in incentive plan compensation, including special pandemic-related payments and bonuses.

Meanwhile, the corporation with the smallest difference is First Bancorp with chief executive Richard Moore at $21 to $1 based on his total compensation of $1.12 million and median employee compensation at $51,169.

Pay ratio background

Since 1994, the annual salary, bonus and incentives, stock awards and other compensation of top-five executives from publicly traded companies have been disclosed by requirement of federal regulators.

An element of the Dodd-Frank federal regulatory act that went into effect in 2017 requires corporations to put a number and a ratio to the compensation gap between chief executives and their median employee salary.

The act requires corporations to adjust how they determine who their median employee is every three years, which means that change will show up in the 2021 CEO pay ratio calculations.

“The ratio is easy to understand and has served to increase interest in the issue,” said Michael Walden, an economics professor at N.C. State University.

“However, recent data from the pandemic suggest CEO management is highly valued by companies, especially when companies are under stress.

“Many companies substantially increased CEO compensation during the pandemic.”

As has been the case all four fiscal years, corporations with major global operations had the largest CEO pay ratio gap.

For example, Hanesbrands chief executive Stephen Bratspies was second on the list with a $699 to $1 pay ratio gap.

Retired Hanesbrands chief executive Gerald Evans Jr. topped the CEO pay ratio gap in 2018 and 2019.

The actual total compensation was $4.83 million for Bratspies, who took over as Hanesbrands’ chief executive on Aug. 3.

Meanwhile, the median annual employee compensation was $6,900 for Hanesbrands’ nearly 61,000 employees, of which about 88% work in Central America, the Caribbean Basin and Asia. The median employee was determined to be a production operator at a supply chain facility in Honduras.

It was by far the lowest annual compensation for a median employee for the 29 listed corporations.

“Our various compensation programs include the payment of market-based wages and the provision of competitive employee benefits,” Hanesbrands said in its CEO pay ratio explainer.

“The programs vary from region to region and among our various consolidated subsidiaries in each region, from country to country. The vast majority of our employees, about 80%, are compensated on an hourly basis.”

The Hanesbrands CEO pay ratio gap is likely to expand again in 2021. Hanesbrands provided an estimated annualized total compensation for Bratspies for 2020 that found him making $1,056 to every $1 for the median employee.

‘Does not work’

The annual CEO pay ratio disclosures may cause some buzz for a few days, but overall the strategy “does not work,” said Zagros Madjd-Sadjadi, an economics professor at Winston-Salem State University.

“Investors do not seem to care about the ratio. What they care about are results, and with the stock market reaching new heights, the ratio of CEO to worker pay is reaching record levels” for those corporations who closely tie stock awards to executive compensation.

“CEO compensation, even though it looms large in terms of the average worker, still tends to be very small in terms of a firm’s realized profits,” Madjd-Sadjadi said.

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An example of the unwieldiness of the CEO pay ratio comparisons is one of the Triad’s new larger employers in Amazon. Its Kernersville fulfillment center has about 1,000 full-time employees making at least $15 an hour.

Amazon chief executive Jeff Bezos is considered as the world’s richest individual with an estimated net worth of $191 billion.

Yet, for Amazon executive compensation and CEO pay ratio considerations, Bezos was paid $81,840 in salary and $1.68 million in total compensation. According to Amazon, Bezos has never received stock awards from the company.

So, when compared with a median employee salary of $29,007, his pay ratio was $58 to $1 and his base salary ratio was $2.82 to $1.

However, Amazon’s stock and stock option awards do play a significant role with its other top-five executives.

David Clark, chief executive of Amazon’s worldwide consumer business, was paid $160,000 in salary and stock awards valued at $46.12 million. Andrew Jassy, chief executive of Amazon’s Web Services business, was paid $175,000 in salary and stock awards valued at $35.64 million.

Compensation Advisory Partners, a national executive compensation consulting firm, said in a Jan. 19 blog post that “since inception, comparing CEO pay ratios across companies has been of limited usefulness.”

“For example, beyond variability across industries, when looking at two competitors, the workforce of one may be largely U.S.-based while the workforce of the other may be mostly located in lower-cost countries.”

The firm said those differences were exasperated in 2020 by “inconsistent disruptions in business and workforces in 2020 due to the historic COVID-19 pandemic.”

Those disruptions “may significantly impact the numerator and/or denominator of the CEO pay ratio calculation — has only reinforced the inherent issues with comparing CEO pay ratios across companies.”

Stock awards

The CEO pay ratio chart continues to reflect decisions by corporate boards of directors to reward top staff based on stock performance, rather than profits and revenue.

That shift began during the 2008-11 economic downturn and at the height of backlash against executive compensation.

Although federal regulators require corporations to declare the value annually, executives typically are required to wait a specified amount of time — often one to three years — to receive those shares or exercise the options.

The prevailing theory is that executives will be more inclined to be prudent with shareholder value, potentially taking less risk, if their own compensation is weighted primarily toward share-price performance.

Of the other top-six CEOs in terms of pay gap, two have a retail presence in Tanger Factory Outlet Centers Inc. and Wells Fargo & Co., while Caterpillar Inc. has a major global workforce that works to pull down the salary of its median employee.

For example, Wells Fargo chief executive Charlie Scharf has a $274 to $1 gap between his total compensation of $20.39 million and the median employee compensation of $74,416.

Meanwhile, Tanger chief executive Steven Tanger had a $414 to $1 ratio based on $5.28 million in total compensation and a median employee compensation of $12,742.

Opposition remains

Some pro-business groups, such as the U.S. Chamber of Commerce and National Retail Federation, fought efforts to disclose the CEO pay ratio.

The retail trade group calls the ratio “a flawed measure that unfairly singles out industries, like retail, that have high percentages of part-time, seasonal and entry-level employees.”

“Failing to adjust for the large number of part-time and seasonal workers inflates retail’s ratios by an estimated 31% over typical employers.”

The federation recommends comparing median earnings that factor out part-time workers.

The chamber has referred to the reporting requirement of the CEO pay ratio as an example of an unnecessary financial burden for corporations.

The chamber said global companies shouldn’t be overly criticized because they source lower-cost production offshore; the strategy has led to lower prices for U.S consumers on many imported products.

The left-leaning Institute for Policy Studies determined that of the 50 publicly traded U.S. corporations with the widest pay ratio gaps in 2018, “the typical employee would have to work at least 1,000 years to earn what their CEO made in just one.”

The institute said it supports a CEO pay strategy of U.S. Sen. Bernie Sanders, I-Vt.

Sanders favored tax penalties ranging from 0.5 percentage points on pay ratios over $100 to $1, to 5 percentage points on ratios above $500 to $1.

“S&P 500 corporations as a whole would have owed as much as $17.2 billion more in 2018 federal taxes if they were subject to (those) tax penalties,” the institute said in a September 2019 report.

“Tax penalties on extreme CEO-worker pay gaps would encourage large corporations to narrow their divides — by lifting up the bottom and/or bringing down the top of their wage scales.

“Such reforms would also give a boost to small businesses and employee-owned firms and cooperatives that spread their resources more equitably than most large corporate enterprises.”

Analysts and economists say the CEO pay ratio tends to get mixed reactions among shareholders.

“The whole purpose of compensation disclosures is to allow shareholders to make an informed judgment regarding the say-for-pay decisions that are also enabled by Dodd-Frank,” said Tony Plath, a retired finance professor at UNC Charlotte.

“So far, anyway, it looks to me like most shareholders (except large institutional shareholders and the shareholder advisory services) are basically ignoring this information, or at least they’re not expressing much criticism of CEO compensation rates these days,” Plath said.

“Once the pandemic crisis passes later this year, and things get back to normal or the new-normal, whatever that is, CEO pay may again surface as a concern issue,” Plath said.

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@rcraverWSJ

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