It’s been over 50 years since the Equal Pay Act was passed, and we’re still talking about income inequality. With daily reminders of the gender and racial pay gap, misclassified employees, and the growing number of workers who rely on food stamps to survive despite working a full-time job, it’s hard not to talk about it.
But while we have this valuable conversation as a society, we often underestimate one of the most shocking forms of pay disparity: the difference in pay between CEOs and their workers.
Everyone knows that Chief Executive Officer is a highly compensated role, and rightfully so. No one would deny it’s a hard job. A CEO is the highest ranked executive in an organization, the person in charge of an organization’s day-to-day operations, and the public face of the company during a public relations crisis.
Most Americans don’t realize the shocking difference of income between CEOs and their employees, and how this disparity in pay has been growing astronomically since the 1970s...
But most Americans don’t realize the shocking difference of income between CEOs and their employees, and how this disparity in pay has been growing astronomically since the 1970s — despite the stagnation in the average worker’s salary.
That’s about to change. Starting in 2018, the U.S. Securities and Exchange Commission will require publicly traded companies to disclose the median of the annual total compensation of all its employees except the CEO, the annual total compensation of its CEO, and the ratio of these two amounts. While information on CEO pay is already accessible online, this law will be the first to require companies to disclose a clear, certified ratio of CEO-to-worker pay for the public to see.
But will disclosure actually change anything? Today, Morgan & Morgan labor & employment] attorney Christina J. Thomas will talk about what the new CEO pay disclosure rule could mean for workplace equality in America and the steps that lawmakers, attorneys, and even some CEOs are taking to bridge the gap.
What the CEO Pay Rule Could Mean for Labor & Employment Cases
While many companies are beginning to improve wages and working conditions for their employees of their own volition, others companies continue to allow workers’ wages to stagnate while CEO pay grows.
Some even deny their workers their lawful wages and rights under the guise of “protecting the bottom line.” This is where labor & employment attorneys like Christina J. Thomas come in.
“If a company is publicly traded, the first thing that I do before I file a lawsuit is pull their most recent annual or quarterly report to see what their profits are,” said Thomas. “Almost every case that I have involves an employee who wasn’t getting paid correctly, or was fired for some unjust reason, and the company’s excuse typically has to do with a business justification. ‘This employee wasn’t productive enough, they didn’t sell enough, they didn’t make enough widgets...’ that’s always their defense.”
In these cases, the CEO-to-worker pay rule can help to bolster labor & employment cases on behalf of workers who were unjustly fired, retaliated against, or denied proper wages due to “business costs” by clearly showing the company’s profits and CEO compensation package in comparison to the average worker.
“For example, if my client gets sexually harassed in the workplace and she complains about it and gets fired, and the company comes back and says, ‘We didn’t fire her because she complained, we actually fired her because she wasn’t productive, and we have these standards of productivity,’ I’m going to argue to the judge that the jury needs to understand what the ‘standards of productivity’ mean in the larger context of the corporate culture,” said Thomas. “And that includes CEO pay and median wage rates for all workers.”
“As an employment lawyer, I’m looking at it from this perspective: We have these goliath corporations that are saying that they’re trying to do right by their stockholders and pay out dividends, but really there are just a few people at the top who are getting all the cash, and the workers are suffering as a result,” she added.
The CEO pay ratio data that companies will have to disclose to the SEC starting next year may become a valuable tool for helping attorneys like Thomas to tell their clients’ stories to the judge and jury.
What Cities and States Are Doing to Address the CEO-Worker Pay Gap
Beyond the courtroom, changes may be coming to the local and state level, as officials look to surtaxes as a way to remedy the CEO-to-worker pay gap in their own backyard.
Portland, Oregon became the first city in the country to charge a 10 percent surtax on companies with CEOs earning more than 100 times the median pay of average workers.
Portland, Oregon became the first city in the country to charge a 10 percent surtax on companies with CEOs earning more than 100 times the median pay of average workers after adopting the tax ordinance in late 2016, according to The New York Times.
“If other jurisdictions follow Portland’s lead in enacting policies based on the Securities and Exchange Commission disclosure, shareholders may realize that extreme chief executive officer to median worker pay ratios reduce their profits and, with this result in mind, make changes to their pay structure,” the ordinance reads.
The tax is estimated to generate between $2.5 and 3.5 million annually for the city’s general fund, which would help to pay for basic public services including housing, police salaries, and more, according to Portland city officials.
Since the tax law went into effect in Portland, other cities and states have looked into passing similar measures. For example, Rhode Island and Minnesota have both proposed similar legislation to the Portland pay ratio surtax, according to Bloomberg.
“If a corporation doesn’t want to pay the surtax, they don’t need to — they can simply lower their outrageous CEO compensation, or increase their employees’ salaries,” said Rep. Aaron Regunberg in a statement introducing H. 5141, Rhode Island’s proposed surtax bill.
Connecticut, on the other hand, went a step further and proposed a corporate income tax rate of five percent for companies with a CEO pay ratio of 25:1; 7.5 for pay ratios between 25:1 and 100:1; 10 percent for pay ratios between 100:1 and 250:1; and 25 percent for companies with a pay ratio of over 250:1, according to Bloomberg.
Only time will tell if Portland’s surtax will be an effective method of tackling pay inequality, and if other cities or states will successfully follow in suit.
Demand for Pay Transparency & Fair Wages Growing: How Will CEOs Act?
The SEC’s imminent pay disclosure rule, efforts by CEOs to stem the wage gaps within their companies, and state-implemented surtaxes on companies with large CEO-to-worker pay ratios are all part of a greater movement towards pay transparency, and with it fair wages and benefits that allow all workers to live with dignity.
As pay transparency and liveable wages are increasingly expected by workers and shareholders alike, it will become harder than ever before for corporations and their CEOs to hide — and to justify — enormous wage gaps.
Ultimately, how corporations use the information disclosed to the SEC to manage their business won’t just impact the quality of their workers’ lives: it’ll be vital to the success of their company.
“Which companies will survive the waves of social media wrath we see happening every day in this country? The ones who take a proactive approach to income inequality, or the ones who try to hide their business strategies in the boardroom?” said Thomas. “To me, the answer is obvious.”