As U.S. stock investors contemplate the biggest long-term risks facing the market, such as a global economic slowdown, trade tensions or rich equity prices, they shouldn’t overlook a critical one: the pay disparity between corporate bosses and workers.
In 2015, the Securities and Exchange Commission adopted a rule that required public companies to disclose the median compensation of employees and that of the CEO, beginning with fiscal year 2017. The numbers have confirmed what many suspected: Chief executives are paid tremendously more than workers.
The numbers also revealed that hundreds of the biggest U.S. public companies pay their workers less than a living wage. That’s not sustainable. As the grim pay disclosures pile up year after year, the backlash against the corporate elite will intensify. If corporate boards can’t find a better balance in their pay structure, outside forces will, and at a potentially far greater cost to companies and their shareholders.
My Bloomberg colleagues Alicia Ritcey and Jenn Zhao compiled the CEO-to-worker compensation ratios for companies in the Russell 1000 Index, which represents roughly the 1,000 largest U.S. public companies by market value, and laid them out in a superb interactive chart.
The median employee compensation for 104 of the companies, or roughly 10 percent of the Russell 1000, is below the federal poverty level of $25,750 for a family of four. That’s the number below which workers are eligible for government assistance.
In reality, the cost of living is considerably higher, and many more firms fail to pay workers an adequate wage. The Economic Policy Institute, a nonpartisan think tank, estimates that a family of four needs an annual income of roughly $70,000 to maintain a “modest yet adequate standard of living” in the most affordable U.S. locales. The median employee compensation is below that for 497 companies, or roughly half of the Russell 1000.
Meanwhile, CEOs are paid lavishly. The average CEO in the Russell 1000 received total compensation of $11.8 million during the most recent year for which numbers are available, including salary, bonus, stock grants, options and other benefits. The average CEO-to-worker pay ratio was 248-to-1. For the 104 companies whose median employee pay falls below the poverty line, the ratio is a whopping 917-to-1.