Global Solutions to Bringing Salaries Back to Earth

There apparently are limits to human opulence, even in America. Incredibly, the nation that long flaunted its “bigger is better” tenet with mile-high skyscrapers, gas-guzzling SUVs, McMansions, megamalls and giant superstores may finally have reached its limit.
The tipping point? CEO salaries.

Historically, executive pay was never a big concern in the Land of Opportunity, having risen steadily and mostly inconspicuously for nearly three decades to help the top 1 percent and 0.1 percent of all U.S. households double their income shares through 2007. Then the Great Recession struck, and CEOs—especially those in the financial industry—became Public Enemy No. 1 for the big bonuses and exorbitant salaries they collected in the wake of their failings (former A.I.G. Financial Products executive Joseph Cassano, for instance, pocketed a $34 million bonus in 2008 despite costing the insurance giant $99 billion).

Such handsome rewards for the leaders of taxpayer-funded bailouts like A.I.G., Citigroup Inc., Bank of America Corporation and JPMorgan Chase spawned public outrage as well as a groundswell of political support for financial reform. Congress appeased the angry masses (and itself) in 2010 with the Dodd-Frank Act, a sweeping set of laws designed to better regulate the U.S. financial industry.

Among the Dodd-Frank bill’s numerous provisos is a “say-on-pay” clause that requires public companies to put their executive pay practices to a non-binding shareholder vote at least once every three years. Another provision—yet to be implemented—commands corporations disclose the salary ratio between their CEOs and their employees. Neither one, however, has had much effect on executive pay:  Salaries jumped 9.1 percent in 2014 to a nine-year high of $22.6 million, and the average S&P 500 CEO-to-worker ratio swelled to 373:1, up from 331:1 in 2013, AFL-CIO statistics show.   
 
“Today’s CEO-to-worker pay ratios are simply unconscionable,” the AFL-CIO said in the latest installment of its compensation report, Executive Paywatch. “America is supposed to be the land of opportunity, a country where hard work and playing by the rules would provide working families a middle-class standard of living. But in recent decades, corporate CEOs have been taking a greater share of the economic pie while workers’ wages have stagnated.”

The gluttony, though, is not confined to the United States. Pie lovers exist on nearly every continent, with Australians and Europeans among the most hungry (Americans, naturally, still have the biggest appetites). Germany, Spain and France boast some of the highest CEO-to-worker pay ratios in the European Union (147:1, 128:1 and 104:1, respectively), while Australian chief executives earn 93 times the average worker’s salary. In the United Kingdom, the earnings gap—estimated at 84:1—is wider than at any point since Queen Victoria’s rule (1837-1901), according to a British commission’s findings.

Attempts to narrow that chasm have fallen short, prompting legislative reform throughout the European Union and Australia. Laws regulating executive pay gradually are gaining traction and support for both the visibility they afford the general public and the enhanced powers they give to shareholders, whose traditional non-binding votes have done little—if anything—to curb runaway salaries over the last half-decade. Employment analysts believe government mandates may be the best way to level the CEO-worker playing field, although they have yet to catch on in the United States.

“Politicians need to do more to stand up to big business and the super-rich,” Deborah Hargreaves, director of the British independent think tank High Pay Centre, told a London-based business daily earlier this year. “We must also give workers the power to force employers to share pay more fairly throughout their organization.”

U.K. workers have had that power for more than 18 months now. New laws implemented in the fall of 2013 require British companies to publish exit payments for directors who are fired or resign as well as the salary totals of all top directors. More importantly, however, the legislation gives shareholders a binding vote on executive pay schemes, and mandates the packages be approved by more than 50 percent of investors. Companies that fail to muster enough shareholder support must abide by its last approved salary plan. Approved compensation packages are valid for three years.

The rules are tougher in Switzerland, where publicly traded firms also are beholden to investors but additionally are forbidden to award golden handshakes, signing bonuses and golden parachutes to top management. Violators face a three-year jail term and fines equivalent to six years of pay.

Executives, though, can still earn big bucks. Swiss voters rejected a proposal in November 2013 to cap administrative salaries at 12 times the amount of the lowest-paid employee, thus ensuring the CEOs of Swiss-based multinationals such as Novartis AG, UBS AG and Glencore plc continue to make more in a month than most workers earn in a year.

Emboldened by the legislative victories in Britain and Switzerland, the European Commission now is considering increasing shareholder power throughout the continent. If adopted, all remuneration policies by E.U.-listed companies will be subject to binding investor votes very three years.

Australia has perhaps been most empowering to shareholders with its “two strikes” policy, implemented in July 2011. The law requires company boards be “spilled” if 25 percent or more of a firm’s investors reject its remuneration plans at two consecutive annual meetings. Once the second resolution is passed, all board directors (except the managing director) must be re-elected to their positions within a 90-day timespan. Experts contend the legislation—among the world’s strictest—has helped shareholders find their voices and effectively fight for salary equity. — M.B.