About Those Low CEO-to-Worker Pay Ratios

This year, for the first time ever, publicly traded corporations in the United States must disclose the ratio between what they pay their CEOs and what they pay their median — most typical — workers. The disclosures reported so far have been eye-popping. We have quickly learned just how obscenely wide pay gaps between CEOs and average workers can stretch.

Some 20 major companies have revealed CEO-median worker pay gaps over 1,000 to 1. Kohl’s CEO Kevin Mansell, for instance, last year drew compensation equal to 1,264 times the median wage of Kohl’s workers. Auto parts maker Aptiv reported a 2,264 to 1 CEO-to-worker pay ratio.

But not all major corporations are reporting ratios at anywhere near these stratospheric levels. Some enterprises are reporting 2017 pay ratios that seem, especially by comparison, almost reasonable — or even astonishingly low.

One example: Berkshire Hathaway CEO Warren Buffett’s modest $100,000 salary only doubles the pay of his company’s median worker. Overall, 13 S&P 500 companies have so far reported CEO-median worker ratios of 52-to-1 or less.

In other words, we actually do have some major corporations whose top execs do not make more in one week than their workers make in one year.

Do these low pay ratios give us cause for hope? Do they signal a meaningful countertrend against excessive CEO compensation? Do they indicate that we have a significant chunk of Corporate America that rejects the avarice that so pervades American society?

In a word: No.

The low ratios at these 13 companies do not in any way reflect a rejection of standard-issue corporate avarice. The corporate cultures at the 13 companies appear to be just as greed-driven as the cultures at corporations where CEOs make hundreds of times the wage of their most typical workers.

So why do some S&P 500 companies have low ratios? In each low-ratio case, we can point to a unique reason that has nothing to do with an egalitarian sensibility.

Take Berkshire Hathaway, for example. Practically all of Warren Buffett’s $85 billion net worth consists of his just over 17 percent ownership stake in the company. Any salary Buffett pays himself would be trivial compared to what he can pull in from even a miniscule upward movement in Berkshire Hathaway’s share price. For every 0.1 percent bump up in that share price, Buffett’s net worth rises an astounding $830 million.

Ditto for Dish Network Corporation chairman Charles Ergen. In 2017, Ergen pulled down $2.4 million in compensation, a pittance compared to the typical take-home of his fellow corporate chief execs. But Ergen owns 41.2 percent of the equity in Dish. The tiniest jump in the value of Dish stock means far more to Ergen than a few extra million in annual pay.

Over at J.B. Hunt Transport Services, another low-ratio enterprise according to the new data for 2017, CEO John Roberts only grabbed $859,000 last year, just 15 times the pay  of the median J.B. Hunt worker. But Roberts had been grabbing annual pay packages in the $5 million range before last year, and earlier this year, in January, the company granted Roberts additional shares valued at $4,877,428. So that 15-to-1 ratio reported for 2017 appears more than a little misleading. This year will see Roberts back at his $5 million level, about 100 times what his typical workers are making.

What about the other companies on our low-ratio list? Nearly half don’t at all resemble typical publicly traded corporations. They enjoy special tax or regulatory treatment. Some states, for instance, have regulatory limitations on how much top utility executives can make. Our list of low-ratio firms includes two utility holding companies

Two of the other companies on the list qualify as real estate investment trusts. These trusts typically contract out most of their labor to property management companies. Their actual employee workforces tend to be small, highly educated, and highly paid. The median pay at HCP, one of the real estate investment trusts on our list, stood at $181,076 in 2017.

HCP CEO Thomas Herzog, according to the new pay-ratio disclosures, took home $7.3 million in 2017, 40 times more than that median worker. But that ratio significantly understates the inequality a company like HCP can generate, as we can see from a close reading of the 2017 HCP annual report.

This report notes that HCP expects to record charges of $9 million for severance pay and other items related to the previously announced departure of HCP executive chairman Mike McKee, who had served as the company’s CEO before Herzog. In 2016, HCP also paid a large severance package to a departing CEO.

What does all this mean? HCP’s executive compensation package apparently includes a healthy severance bonus that’s not reflected in its CEO pay package in any given year.

Other companies on our low-ratio list also have atypically small worker populations.

So we end up with several unique reasons that explain the low CEO-worker pay ratios of the companies on our low-ratio list. We have CEOs whose upside potential from stock ownership renders their actual annual compensation practically meaningless. We have CEOs whose 2017 pay dropped significantly from their normal annual levels. We have CEOs at companies that face special tax or regulatory treatment. We have corporations with small, highly paid workforces.

The bottom line? Sift through the list of corporations with low CEO-to-worker pay ratios and you’ll find nothing that contradicts the stark reality — reflected in the pay ratios of the great majority of publicly traded corporations — of a horrifically unequal society where those at the top nearly always earn more in a single week than their workers earn over the course of an entire year.

Institute for Policy Studies associate fellow Bob Lord practices tax law in Phoenix.