Stoking the Corner Office Compensation Controversy

If only the real world functioned as it does in academia. Or in human imagination.

Consider the possibilities: world peace, racial/gender harmony, financial security, and perfect health are just a few that come to mind. Even eternal youth wouldn’t totally be out of the question.

Neither would wage parity, though there’s a good chance that jobs and salaries probably don’t exist in such a fantastical world. And if they do, they likely prevail without the protections of human resources departments, labor unions, or anti-discrimination laws. Compensation would finally even out (bye-bye glass ceiling), and the long-standing executive pay ratio would shrink considerably.

But not disappear entirely.

Granted, it wouldn’t be too far-fetched to dream of more humbled CEO salaries—at least not in a world of happily-ever-afters—yet there is also an argument to be made for supporting higher executive pay. CEOs are accountable for their firms’ overall performance and also indebted to employees, suppliers, and customers. Surely, all that oversight and pressure is worthy of greater compensation, no?

Corporate America certainly thinks so. Over the last 35 years, the wage gap between S&P 500 company leaders and their employees has steadily increased, going from 41:1 in 1983 to a staggering 361:1 in 2017, according to AFL-CIO data.

“This…provides further proof of America’s income inequality crisis,” AFL-CIO Secretary-Treasurer Liz Shuler said. “Too many working people are struggling to get by, to afford the basics, to save for college, to retire with dignity, while CEOs are paying themselves more and more. Our economy works best when consumers have money to spend. That means raising wages for workers and reining in out-of-control executive pay.”

Easier said than done. Despite all the controversy surrounding exorbitant CEO pay, there have been few, if any, attempts to curb it. Retired King Broadcasting CEO and serial corporate director Steven Clifford—who admits to grabbing his fair share of the corner office jackpot—makes a case for base salaries and restricted stock in his 2017 book, “The CEO Pay Machine: How it Trashes America and How to Stop It.” Politicians, of course, have tried solving the issue through legislation, specifically by mandating non-binding shareholder votes on executive pay, but the results are only advisory.

Now, the U.S. Securities and Exchange Commission (SEC) is taking its best shot via a CEO pay ratio disclosure law that took effect this year. Though eyebrow-raising, the data is unlikely to spawn any meaningful salary reforms because the disclosures are mainly designed to be an informational tool rather than an impetus for change.

“Bottom line, it’s not telling us anything about income inequality that we didn’t already know,” Dan Marcec, director of content at executive pay data firm Equilar, told the financial information website MarketWatch in May.

Indeed, the disclosures may prove more pointless than motivational in effecting change, but the data nevertheless is sobering. Healthcare, for example, has one of the highest CEO-worker pay ratios (150:1) of any industry, playing third string to the consumer discretionary and staples sectors, Equilar statistics show. Not surprisingly, the ratios are proportionate to size: The largest firms (>43,000 workers) have the biggest wage gaps, while the smallest firms (<2,310 employees) boast the lowest disparities.

That pattern is clearly evident in the medtech sector, where OEMs like J&J, Baxter, 3M, Abbott Labs, Stryker, and Boston Scientific beget significantly larger pay ratios last year than their small- and medium-sized counterparts. J&J’s whopping 452:1 ratio, for instance, makes Intuitive Surgical’s 32:1 quotient seem like a bargain—until company size, workforce, job duties, and revenues are considered.

J&J CEO/Chairman Alex Gorsky last year earned nearly six times the $5.06 million salary of Intuitive Surgical President/CEO Gary S. Guthart, Ph.D., according to Bloomberg data. In fairness, though, J&J’s workforce of 134,000 is 37 times greater than Intuitive Surgical’s (3,625), and the gargantuan entity generated substantially more revenue in 2017 than the smaller company—$76.4 billion to $3.1 billion. Contrarily, Intuitive Surgical’s median employee salary is more than double that of J&J ($157,491 to $66,000).

Other medical device OEMs have similarly high CEO pay ratios: Baxter recorded a 355:1 disparity last year, 3M generated a 324:1 gap, Abbott produced a 251:1 inequity, and Danaher elicited a 218:1 ratio. Edwards Lifesciences, Stryker, Boston Scientific, and GE followed in sequence with 215:1, 209:1, 205:1, and 157:1 wage gaps, respectively.

Zimmer Biomet and W.R. Grace & Co. proved to be exceptions to the large firm-large pay ratio rule. Zimmer Biomet’s salary imbalance was 88:1 last year, while the discrepancy at W.R. Grace was 74:1.

While they are significantly lower than those of their peers, the salary gaps at Zimmer Biomet and W.R. Grace may not be entirely accurate. Analysts note the SEC allows flexibility concerning wage calculations, and the differences can provide deceptively high or low salary information for both median worker pay and CEO compensation. Zimmer Biomet President/CEO Bryan C. Hanson, for example, earns a $1.05 million base salary and was given a $573,000 cash bonus upon assuming the position. He was also awarded $7.1 million in stock options and $8.58 million in “replacement” stock to recoup the shares he forfeited to his former employer, Medtronic.

“We encourage anyone looking at these numbers to read them with an open and curious mind and to investigate the fundamentals that went into the calculations,” Jamie Teo, an associate director for compensation consultancy Willis Towers Wilson, told CBS News this past spring. “That’s important rather than assuming the numbers are an indication of whether a company may be overpaying or underpaying their employees.”