Michael Barbella, Managing Editor08.05.15
The controversy is not at all surprising.
In fact, the global debate is precisely the kind of fallout Daniel Price expected from his groundbreaking decision this past spring. The Gravity Payments CEO reopened old pay disparity wounds and exacerbated the long-standing war between the haves and have-nots when he decided in April to cut his million-dollar salary by more than 90 percent to give each of his employees a raise.
Price set a $70,000 “minimum wage” at his credit card processing firm, convinced by research the total would boost workers’ emotional well-being ($75,000 is the reputed going rate for happiness, according to a Princeton University study). The salary hike is set to accrue over the next three years, enabling roughly 30 of the company’s 120 employees to double their pay.
Price is subsidizing the raises by reducing his stipend to employee levels (achieving minimum wage after two years) and using 75-80 percent of the company’s $2.2 million in anticipated 2015 profit.
Naturally, the company-wide salary hike garnered global headlines, turning Price into an anti-establishment hero/
income equality poster boy hybrid. It also triggered a war of words in traditional and social media outlets between business leaders, academics and journalists deliberating the raises’ merits. Critics called the move “pure, unadulterated socialism” that eventually will hurt Gravity employees; Forbes boldly predicted a bad or “quiet” ending for the higher compensation, contending a $70,000 minimum wage will be a “difficult sell” in the capital markets. Supporters, however, argued the move will reduce turnover, increase morale and help Price build a better company.
Some remained neutral but questioned Price’s mindset. During an appearance on MSNBC’s “Morning Joe,” Huffington Post editor Sam Stein bluntly asked the CEO, “Are you crazy?”
Far from it. Price, in fact, is quite a savvy businessman. By setting a company-wide minimum wage, the CEO generated invaluable publicity that ultimately will boost sales, and also provided workers with an incentive to attract more business and better handle clients.
Moreover, in cutting his own salary, Price bucked tradition in generously compensating himself for his work.
“The market rate for me as a CEO compared to a regular person was ridiculous, it’s absurd,” he told The New York Times. “My salary wasn’t $1 million because I need that much to live, but that’s what it would cost to replace me as a CEO. I think CEO pay is way out of whack...I want to be part of the solution to inequality in this country. If corporate America also wants to be a part of that solution, that would make me real happy.”
Price, however, is destined for disappointment. CEOs have enjoyed steadily rising paychecks over the last three decades, their salaries rising 937 percent between 1978 and 2013, according to the Washington, D.C.-based Economic Policy Institute. The rise is more than double stock market growth and substantially greater than the 10.2 percent hike in the average worker’s stipend over that period.
The CEO-to-worker ratio is even more telling. Fifty years ago, chief executives earned 20 times more than their workers; the gap grew to 30:1 in 1978 and 58.7:1 by 1989 before surging in the 1990s to hit 383.4:1 at the turn of the millennium. The Great Recession narrowed the chasm a bit in 2008 and 2009, but the ratios have nearly returned to their 2000 levels, reaching 373:1 last year, up from 331:1 in 2013, AFL-CIO statistics indicate.
Corporate America clearly has no interest in following Price’s lead. And why would it? Annual pay for CEOs jumped 12.1 percent last year, the fastest surge since 2010 and up from a median increase of just 1.6 percent in 2013, a Towers Watson & Co. analysis found. CEOs at small-cap companies ($300 million-$2 billion) received the largest raise—13.7 percent—compared with the 10.6 percent hike at mid-cap firms ($2 billion-$10 billion) and 11.6 percent boost at large-cap organizations (more than $10 billion).
Shareholders aren’t helping Price’s cause, either. Since being given the right to vote on executive pay through passage of the Dodd-Frank in 2010, investors generally have sanctioned top management compensation. In 2014, roughly 95 percent of shareholders at 500 of the largest companies approved administrative salary plans, up slightly from 93.8 percent in 2011, according to data from compensation analysis firm Equilar.
“Most of these votes are pretty perfunctory,” said Matthew Semadeni, associate management professor at Arizona State University’s W.P. Carey School of Business. “People really aren’t using it for what I think both Dodd and Frank intended, which was to try to discipline management.”
Punishment has been few and far between, with failed “say-on-pay” votes declining steadily from 2.6 percent in 2012 to 1.5 percent in 2013 and 1.1 percent last year. Such dissent is rare in the medtech industry, where shareholder approval for executive pay averaged 90 percent in 2014.
Such complacency likely is tied to the rising stock market. Research that Semadeni conducted concluded that investors care more about stock performance than the size of a CEO’s paycheck.
“It’s a very human thing,” Semadeni noted. “If you’re doing fine, even if someone else is maybe not, you’re going to not care as much as when you’re not doing fine.”
Perhaps that explains the very fine 88.3 percent salary hike approved for GE CEO/Board Chairman Jeffrey R. Immelt and the 47.7 percent raise given to JNJ CEO Board Chairman Alex Gorsky last year. Though Immelt twice requested that he not receive a bonus and declined an $11.7 million payout under the company’s Long-Term Performance Awards program, 94 percent of shareholders nonetheless approved a $20.7 million increase in his pension value and “non-qualified deferred compensation earnings” to boost his total 2014 earnings to $37.2 million.
Gorsky’s increase—like many in the industry—was based on the company’s fiscal performance in 2014. Despite suffering declines in its Medical Devices and Consumers segments, the multinational still grew sales 4.2 percent (though it was less than the 6.1 percent surge recorded in 2013) and grew stockholder returns by 17 percent. Consequently, 96 percent of JNJ shareholders approved of Gorsky’s $8 million raise and $24.9 million total pay package.
Other considerable salary hikes went to Medtronic plc Chairman and CEO Omar Ishrak, who added $4.7 million to his pension value, non-equity incentive plan compensation and deferred compensation earnings; 3M Board Chairman/President/CEO Inge G. Thulin, given $1.6 million in additional stock/options, and a $4.6 million increase to his pension and non-equity incentive plan/deferred compensation earnings; Becton Dickinson Board Chairman/President/CEO Vincent A. Forlenza, who received an extra $1.6 million in stock/options and increased his pension value by $1.3 million; and Jabil Circuit CEO Mark T. Mondello, awarded a $75,000 base salary boost and $2 million more in stock.
“As the public cried for executives’ pay to be tied to performance, that trend has very much happened,” said Kevin Scott, co-founder/CEO of the ADDO Institute, a branding consulting firm. “And now, as their stocks are performing at very high levels, those CEOs are reaping the benefits.”
In more ways than one: Rising stock prices not only increase executives’ individual share value (most, if not all, own stock in their own companies), they also can warrant considerable bumps in base pay, stock, options and/or 401(k) funds.
Zimmer Holdings Inc. President/CEO David C. Dvorak, for example, profited substantially from his company’s 21.7 percent rise in stock price last year, receiving a $30,000 boost to his base pay, a $149,000 gain in his stock holdings, and a $2.4 million increase to his pension/other compensation.
Orthofix Holdings Inc. President/CEO Bradley R. Mason and former NuVasive Board Chairman/CEO Alexis V. Lukianov and reaped similar rewards from their respective firms’ surging stocks. Lukianov, who helped lead a total shareholder return of 46 percent last year (a result achieved only by those in the 93rd percentile of the S&P 500, the company claims in a U.S. Securities and Exchange Commission filing), earned an additional $1.2 million in stock; Mason was awarded a $157,923 base pay raise, $1.3 million in additional stock and a $616,383 increase to his pension/other compensation in appreciation of the firm’s 30 percent rise in stock price (from $23.11 to $30.06).
Corporate capital, however, can be a double-edged sword. When it falls, shareholder support tumbles with it. Case in point: Hologic Inc. stock slipped 4.2 percent in fiscal 2013 (ended Sept. 28, 2013) amid slumping profits and multiple management changes. As a result, only 34 percent of investors supported the diagnostic giant’s executive compensation plan in fiscal 2014. (Regardless, President/CEO Stephen P. MacMillan earned $24.4 million, more than half of which he received in stock.)
“This was an obvious signal that there were significant stockholder concerns we needed to address,” Hologic’s 2015 proxy statement read. “In response to stockholder feedback we introduced performance stock units tied to ROIC [return on invested capital] as a significant component of fiscal 2014 long-term equity awards...Understandably, however, the biggest concern we heard was about our approach to succession planning during a time of unprecedented change in leadership and disappointing company performance. Accordingly, getting our leadership structure right was a key focus during fiscal 2014. There was nothing more important than stabilizing a new team as quickly as possible.”
In fact, the global debate is precisely the kind of fallout Daniel Price expected from his groundbreaking decision this past spring. The Gravity Payments CEO reopened old pay disparity wounds and exacerbated the long-standing war between the haves and have-nots when he decided in April to cut his million-dollar salary by more than 90 percent to give each of his employees a raise.
Price set a $70,000 “minimum wage” at his credit card processing firm, convinced by research the total would boost workers’ emotional well-being ($75,000 is the reputed going rate for happiness, according to a Princeton University study). The salary hike is set to accrue over the next three years, enabling roughly 30 of the company’s 120 employees to double their pay.
Price is subsidizing the raises by reducing his stipend to employee levels (achieving minimum wage after two years) and using 75-80 percent of the company’s $2.2 million in anticipated 2015 profit.
Naturally, the company-wide salary hike garnered global headlines, turning Price into an anti-establishment hero/
income equality poster boy hybrid. It also triggered a war of words in traditional and social media outlets between business leaders, academics and journalists deliberating the raises’ merits. Critics called the move “pure, unadulterated socialism” that eventually will hurt Gravity employees; Forbes boldly predicted a bad or “quiet” ending for the higher compensation, contending a $70,000 minimum wage will be a “difficult sell” in the capital markets. Supporters, however, argued the move will reduce turnover, increase morale and help Price build a better company.
Some remained neutral but questioned Price’s mindset. During an appearance on MSNBC’s “Morning Joe,” Huffington Post editor Sam Stein bluntly asked the CEO, “Are you crazy?”
Far from it. Price, in fact, is quite a savvy businessman. By setting a company-wide minimum wage, the CEO generated invaluable publicity that ultimately will boost sales, and also provided workers with an incentive to attract more business and better handle clients.
Moreover, in cutting his own salary, Price bucked tradition in generously compensating himself for his work.
“The market rate for me as a CEO compared to a regular person was ridiculous, it’s absurd,” he told The New York Times. “My salary wasn’t $1 million because I need that much to live, but that’s what it would cost to replace me as a CEO. I think CEO pay is way out of whack...I want to be part of the solution to inequality in this country. If corporate America also wants to be a part of that solution, that would make me real happy.”
Price, however, is destined for disappointment. CEOs have enjoyed steadily rising paychecks over the last three decades, their salaries rising 937 percent between 1978 and 2013, according to the Washington, D.C.-based Economic Policy Institute. The rise is more than double stock market growth and substantially greater than the 10.2 percent hike in the average worker’s stipend over that period.
The CEO-to-worker ratio is even more telling. Fifty years ago, chief executives earned 20 times more than their workers; the gap grew to 30:1 in 1978 and 58.7:1 by 1989 before surging in the 1990s to hit 383.4:1 at the turn of the millennium. The Great Recession narrowed the chasm a bit in 2008 and 2009, but the ratios have nearly returned to their 2000 levels, reaching 373:1 last year, up from 331:1 in 2013, AFL-CIO statistics indicate.
Corporate America clearly has no interest in following Price’s lead. And why would it? Annual pay for CEOs jumped 12.1 percent last year, the fastest surge since 2010 and up from a median increase of just 1.6 percent in 2013, a Towers Watson & Co. analysis found. CEOs at small-cap companies ($300 million-$2 billion) received the largest raise—13.7 percent—compared with the 10.6 percent hike at mid-cap firms ($2 billion-$10 billion) and 11.6 percent boost at large-cap organizations (more than $10 billion).
Shareholders aren’t helping Price’s cause, either. Since being given the right to vote on executive pay through passage of the Dodd-Frank in 2010, investors generally have sanctioned top management compensation. In 2014, roughly 95 percent of shareholders at 500 of the largest companies approved administrative salary plans, up slightly from 93.8 percent in 2011, according to data from compensation analysis firm Equilar.
“Most of these votes are pretty perfunctory,” said Matthew Semadeni, associate management professor at Arizona State University’s W.P. Carey School of Business. “People really aren’t using it for what I think both Dodd and Frank intended, which was to try to discipline management.”
Punishment has been few and far between, with failed “say-on-pay” votes declining steadily from 2.6 percent in 2012 to 1.5 percent in 2013 and 1.1 percent last year. Such dissent is rare in the medtech industry, where shareholder approval for executive pay averaged 90 percent in 2014.
Such complacency likely is tied to the rising stock market. Research that Semadeni conducted concluded that investors care more about stock performance than the size of a CEO’s paycheck.
“It’s a very human thing,” Semadeni noted. “If you’re doing fine, even if someone else is maybe not, you’re going to not care as much as when you’re not doing fine.”
Perhaps that explains the very fine 88.3 percent salary hike approved for GE CEO/Board Chairman Jeffrey R. Immelt and the 47.7 percent raise given to JNJ CEO Board Chairman Alex Gorsky last year. Though Immelt twice requested that he not receive a bonus and declined an $11.7 million payout under the company’s Long-Term Performance Awards program, 94 percent of shareholders nonetheless approved a $20.7 million increase in his pension value and “non-qualified deferred compensation earnings” to boost his total 2014 earnings to $37.2 million.
Gorsky’s increase—like many in the industry—was based on the company’s fiscal performance in 2014. Despite suffering declines in its Medical Devices and Consumers segments, the multinational still grew sales 4.2 percent (though it was less than the 6.1 percent surge recorded in 2013) and grew stockholder returns by 17 percent. Consequently, 96 percent of JNJ shareholders approved of Gorsky’s $8 million raise and $24.9 million total pay package.
Other considerable salary hikes went to Medtronic plc Chairman and CEO Omar Ishrak, who added $4.7 million to his pension value, non-equity incentive plan compensation and deferred compensation earnings; 3M Board Chairman/President/CEO Inge G. Thulin, given $1.6 million in additional stock/options, and a $4.6 million increase to his pension and non-equity incentive plan/deferred compensation earnings; Becton Dickinson Board Chairman/President/CEO Vincent A. Forlenza, who received an extra $1.6 million in stock/options and increased his pension value by $1.3 million; and Jabil Circuit CEO Mark T. Mondello, awarded a $75,000 base salary boost and $2 million more in stock.
“As the public cried for executives’ pay to be tied to performance, that trend has very much happened,” said Kevin Scott, co-founder/CEO of the ADDO Institute, a branding consulting firm. “And now, as their stocks are performing at very high levels, those CEOs are reaping the benefits.”
In more ways than one: Rising stock prices not only increase executives’ individual share value (most, if not all, own stock in their own companies), they also can warrant considerable bumps in base pay, stock, options and/or 401(k) funds.
Zimmer Holdings Inc. President/CEO David C. Dvorak, for example, profited substantially from his company’s 21.7 percent rise in stock price last year, receiving a $30,000 boost to his base pay, a $149,000 gain in his stock holdings, and a $2.4 million increase to his pension/other compensation.
Orthofix Holdings Inc. President/CEO Bradley R. Mason and former NuVasive Board Chairman/CEO Alexis V. Lukianov and reaped similar rewards from their respective firms’ surging stocks. Lukianov, who helped lead a total shareholder return of 46 percent last year (a result achieved only by those in the 93rd percentile of the S&P 500, the company claims in a U.S. Securities and Exchange Commission filing), earned an additional $1.2 million in stock; Mason was awarded a $157,923 base pay raise, $1.3 million in additional stock and a $616,383 increase to his pension/other compensation in appreciation of the firm’s 30 percent rise in stock price (from $23.11 to $30.06).
Corporate capital, however, can be a double-edged sword. When it falls, shareholder support tumbles with it. Case in point: Hologic Inc. stock slipped 4.2 percent in fiscal 2013 (ended Sept. 28, 2013) amid slumping profits and multiple management changes. As a result, only 34 percent of investors supported the diagnostic giant’s executive compensation plan in fiscal 2014. (Regardless, President/CEO Stephen P. MacMillan earned $24.4 million, more than half of which he received in stock.)
“This was an obvious signal that there were significant stockholder concerns we needed to address,” Hologic’s 2015 proxy statement read. “In response to stockholder feedback we introduced performance stock units tied to ROIC [return on invested capital] as a significant component of fiscal 2014 long-term equity awards...Understandably, however, the biggest concern we heard was about our approach to succession planning during a time of unprecedented change in leadership and disappointing company performance. Accordingly, getting our leadership structure right was a key focus during fiscal 2014. There was nothing more important than stabilizing a new team as quickly as possible.”