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Wider gap: Pay gap between CEOs and median employees grew in 2021

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The pay gap between chief executives and rank-and-file employees widened sharply again during 2021 for most of the 29 publicly traded corporations based in the Triad or with a major operational presence in the region.

Three corporations paid at least $1,000 in total compensation to the chief executive for every $1 paid to their median employee. Only one corporation did that in 2020.

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

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.

The three corporations with at least a $1,000 to $1 ratio were:

Amazon: Andrew Jassy with a $6,474 to $1 ratio, or $212.7 million compared with $32,855 in compensation. It was the first Amazon report with Jassy as chief executive.

Kontoor Brands Inc.: Scott Baxter with a $1,936 to $1 ratio, or $9.98 million compared with $5,102. Baxter’s pay ratio was $1,278 to $1 in fiscal 2020.

Hanesbrands Inc.: Stephen Bratspies with a $1,564 to $1 ratio, or $11.8 million compared with $7,855. Bratspies’ pay ratio was $699 to $1 in fiscal 2020 in his first — but not full — year in the post.

Krispy Kreme Inc. was not far off, with an $867 to $1 pay ratio, or $23.6 million compared with $27,278, between chief executive Mike Tattersfield and the median employee. It was Krispy Kreme’s first proxy report since re-emerging as a publicly traded company in July.

Kontoor also has the largest gap when it comes to measuring chief executives’ annual base salary to annual median employee compensation at $210.85 to $1, followed by Hanesbrands at $155.91 to $1.

As foreign-based corporations, British American Tobacco Plc and Gildan Activewear Inc. are not required to participate.

Global impact

What was the main common denominator for Amazon, Kontoor, Hanesbrands and Krispy Kreme?

Their median employee salary was affected greatly by having a substantial global workforce where annual wages are much lower than in the U.S.

Using Kontoor as an example, the Greensboro jeans manufacturer said in its 2021 proxy report to shareholders that as of Dec. 31 just 20% of its 14,070 full-time workers, or 2,898, were in the U.S.

“Approximately 70% of our workforce is located in Latin America and Mexico, 20% is located in the U.S., and 10% is located in the Asia-Pacific countries and Europe, Middle East and Africa regions,” Kontoor said.

“For fiscal 2021, we selected the same median employee as fiscal 2020 — a full-time, Mexico-based production operator whose fiscal 2021 annual total compensation was $5,102.”

Meanwhile, Hanesbrands said in its 2021 proxy that 12% of its 59,000 employees, or 7,080, as of Dec. 31 were in the U.S.

“Over 83% of our workforce (49,000 employees) is employed in our large-scale supply chain facilities located primarily in Central America, the Caribbean Basin and Asia,” Hanesbrands said.

Hanesbrands identified its global median employee as a dry-cleaning operator located in a supply chain facility in the Dominican Republic.

“Our various compensation programs include the payment of market-based wages and the provision of competitive employee benefits,” according to the proxy.

“The programs vary from region to region and among our various consolidated subsidiaries in each region, from country to country.”

Krispy Kreme told shareholders that “as a multi-national organization, we have employees operating in several countries.

“To provide context for this disclosure, it is important to understand the scope of our operations. The compensation elements and pay levels of our employees can vary dramatically from country to country based on market trends, cost of living and cost of labor.

“These factors, along with fluctuations in currency exchange rates, impact the median employee compensation and the resulting ratio.”

Growing gap

Altogether, the number of corporations with a major Triad presence and at least a $100 to $1 CEO pay ratio gap jumped from 15 to 21 when comparing 2020 and 2021 proxies.

As has been the case in recent CEO pay ratio reports, the stock market has played the biggest role in boosting 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 strategy has been more directly tying CEO compensation to overall company financial performance, particularly share price.

Another major factor: many chief executives have benefited immensely from company share-repurchase programs, which typically make the remaining outstanding shares more valuable.

Those factors showed up more when reviewing the CEO pay ratios in the financial services, manufacturing, logistics, health care and retail sectors.

For example, of the 29 corporate chief executives in the analysis, Wells Fargo & Co.’s Charlie Scharf had the highest base salary for 2021 at $2.5 million, as well as total compensation at $21.36 million.

When compared with a median Wells Fargo employee compensation of $73,528, Scharf’s CEO pay ratio was $290 to $1 for total compensation and $33.98 to $1 for base salary.

Meanwhile, Chief Executive Adam Schechter of Laboratory Corp. of America Holdings had a CEO pay ratio of $357 to $1 for total compensation ($20.55 million compared with $57,614) and $22.17 to $1 for base salary at $1.28 million for Schechter.

Truist Financial Corp. listed a combination of both Kelly King, who retired as chief executive on Sept. 12, and his successor William Rogers Jr.

Truist reported the chief executives were paid $14.6 million in total compensation for a $153 to $1 CEO pay ratio compared with median employee compensation of $95,659. The base salary of $1.2 million yielded a $12.54 to $1 ratio.

By comparison, the lowest CEO pay ratio involved Jeffrey Haley with American National Bancshares Inc. at $16 to $1 based on his total compensation of $1.002 million and median employee compensation of $64,201.

Pay ratio background

Since 1994, the annual salary, bonus and incentives, stock awards and other compensation of Top 5 executives from publicly traded companies have been disclosed by requirement of federal regulators.

The Dodd-Frank act requires corporations to adjust how they determine who their median employee is every three years, a schedule that 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.

“Many companies substantially increased CEO compensation during the pandemic. The specifics of CEO pay depend on a broad range of factors, many of which change over time.

“Ultimately, the tenure of a CEO will depend on performance, as evaluated by the company’s board of directors and major investors,” Walden said.

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 the 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.

Sanders submitted Senate Resolution 794, titled “Tax Excessive CEO Pay Act” on March 17, 2021, that includes those penalties. There has been no committee action on the bill.

Sanders was quoted recently by Bloomberg during congressional hearing as saying that, “It has always been true, of course, that CEOs make more than their employees.”

“But what has been going on in recent years is totally absurd.”

The Institute for Policy Studies said in a September 2019 report that 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.”

“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.”

‘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.

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.

Other 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.

“There’s just too much other immediate and pressing stuff going on for most middle-class American families,” Plath said.

Plath cited influences such as rising inflation, rising market interest rates on credit cards and mortgages, a nationwide housing crisis that’s left most rapidly growing communities without an adequate supply of middle-class housing, the threat of food and agricultural product shortages looming for the months ahead, and “the growing likelihood that we’re about to enter a recessionary period across the national economy.”

“When you’re worried about paying for groceries and finding baby formula for your youngest kids, after all, just who has the time, or the mental energy, to worry about how much some overpaid CEO at some distant corporation made last year,” Plath said.

Bowman Gray IV, a local independent stockbroker, said he recalls just one CEO compensation controversy — involving General Electric — that resulted in enough pushback to prompt changes to lower compensation.

“The last statistic I read reflected that CEO pay since 1978 has risen 940%, while the average worker has only realized a 12% increase,” Gray said.

“For the most part, shareholders will go along with whatever is suggested by the boards as long as the stock performance has been reasonable.”

Gray said CEO pay ratio and other financial disclosures “would be far more effective if employees and shareholders were given the same rights and expected to vote on board seats and CEO pay packages.”

“I believe that this not only would reign in some exorbitant pay packages, but would improve employee morale. This is a breeding ground for resentment and transient employees who, at this low level of compensation, many times cannot afford the very services/products that their employers provide or make.”

Gray said that with minimum wage in N.C. stuck at the federal $7.25 level, and “basic living expenses require $18 an hour for full-time employees, it’s no wonder so many companies cannot find employees.”

“If corporate America truly values its employees, it will step up by giving them a voice in company governance and start paying a living wage.”

336-727-7376

@rcraverWSJ

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