While we all wait breathlessly for the Securities and Exchange Commission to release its final CEO pay ratio disclosure rule this week, let’s also take a moment to consider the ethical subtext to this very difficult compliance issue.
To wit: CEO pay is still too large for most people’s liking, and income inequality is too. Until companies learn how to solve those challenges internally, as a governance matter, expect them to be solved externally, as a compliance matter. It’s that simple.
Solving them as a governance matter is not easy, a fact made painfully clear in a New York Times article this weekend that profiled a company bravely trying to do just that. The company is Gravity Payments, a business in Seattle that helps local merchants process credit card transactions. Gravity Payments employs 120 people and is led by CEO Dan Price. Three months ago Price decided to raise the minimum salary of all his workers to $70,000, and paid for it by cutting his own seven-figure pay package.
Grand gesture. Superb leadership from Price. All the governance thought leaders out there constantly harp about the need for a strong tone at the top, with tangible actions that re-enforce the company’s core culture and values. Price did exactly that—and all hell has been breaking loose at his business ever since.
Some customers quit Gravity Payments because they interpreted Price’s salary policy as a socialist political statement. Others quit because they feared that Gravity would raise prices to cover the higher payroll costs. New customers flocked to Gravity hailing Price as a hero; now he’s scrambling to hire more manpower to meet demand. He has been praised, vilified, denounced, and heralded. Two employees quit because they didn’t like newer coworkers getting lofty raises so quickly. Harvard Business School professors flew out to consider Gravity Payments as a case study.
To answer the ultimate question—will Price’s policy on payroll help his business and his community more than it harms them—right now, nobody knows.
What intrigues me most, however, is that Price is trying to address income inequality rather than CEO pay; reducing CEO pay just happens to be the vehicle by which Price could achieve his goal. That’s not the same as trimming CEO pay for its own sake, which is what most shareholder activists clamor for companies to do. I would argue that Price’s approach is smarter, because even if we restrain CEO compensation and keep income inequality narrower, prices still rise for everyone. Eventually people at the bottom still feel a squeeze regardless of pay for those at the top.
Some Fortune 500 businesses (and let’s be honest, they’re the ones in the public stockade over CEO pay and income inequality) have already been trying to raise wages too. Walmart announced in February that it would implement a series of raises to pay all employees at least $10 an hour. Aetna raised its minimum wage to $16 an hour earlier this year.
Those are sincere starts, and the companies should be praised for them. And thanks to investor activism, the growth in CEO pay at large corporations has decelerated in recent years—even if it still outpaces the growth everyone else sees in our own paychecks.
Still, remember the fundamental dynamic at work here: people want a sense of fairness. If the CEO’s paycheck is rising faster than the average worker’s, that strikes the average worker as unfair. Ditto for supplemental executive retirement plans, personal use of corporate aircraft, health clubs, car services, and the like. All these things offend the sensibility in most people’s heads, that management should not keep too much of the benefit created by employees. Whether the CEO is deliberately keeping all the benefit to himself, or is the lucky winner of economic forces we don’t quite fathom yet is beside the point—people see concentration of wealth grow unchecked, and they resent it.
At its core, the pay ratio rule may indeed be a cheap political stunt, but it’s a hugely clever one too, intended to make the beneficiaries of today’s unequal economic growth squirm. The details of the rule may be flawed, and critics have a fair bit of ammunition when they argue that some calculations likely to go into the ratio make no sense. But have no illusions about what is really afoot here. The pay ratio rule is a compliance solution to an ethics problem because too few companies, and too few CEOs, exercise restraint and good judgment on CEO pay. Applause to businesses like Gravity Payments stepping up to make corporate values reflect human values more accurately, but we all have a long way to go.
Until we get there, compliance officers can expect to be calculating those pay ratios for a long time.
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