Shared Prosperity and CEO Pay Ratios

Benito Teehankee
MAPping the Future
Inquirer
August 23, 2024

Laws in the United States, the United Kingdom and India require the disclosure of CEO-to-employee pay ratios (or CEO pay ratios) among companies to promote transparency and address concerns about income inequality.

In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires publicly listed companies to disclose the ratio of the total compensation of their CEO to the median compensation of their employees.

In the United Kingdom, the Companies (Miscellaneous Reporting) Regulations of 2018 likewise require large and listed companies to disclose CEO pay ratios. In India, the disclosure of CEO pay ratios is also mandated under the Companies Act of 2013 and the Securities and Exchange Board of India regulations.

The disclosure of CEO pay ratios is intended to give investors and other stakeholders insight into how well a company is managing its human capital and whether there is excessive executive compensation relative to the broader workforce.

This measure is part of broader corporate governance reforms aimed at increasing accountability and encouraging a fairer distribution of pay. It also helps investors assess whether a company’s remuneration practices are in line with its stated values and whether they could pose reputational or operational risks.

In the Philippines, where CEO pay ratio disclosure is not mandated by law, the Global Reporting Initiative (GRI) is a major ESG (environment, social and governance) and sustainability reporting framework that calls for CEO pay ratio disclosures.

The GRI is an international, independent, nonprofit entity that provides a widely recognized framework for sustainability reporting. Its mission is to “sustainably improve the world by enabling organizations to understand and communicate the impacts of their activities on people and the environment.”

The GRI’s guideline on CEO pay ratios states: “The organization shall … report the ratio of the annual total compensation for the organization’s highest-paid individual to the median annual total compensation for all employees (excluding the highest-paid individual).” The Philippines’ Securities and Exchange Commission (SEC) endorses the GRI as a sustainability reporting framework for publicly listed companies in line with the stakeholder orientation of the agency’s Code of Corporate Governance.

Income inequality

What do CEO pay disclosures reveal about shared prosperity within big public companies in 2023? In the United States, the disparity between CEO compensation and average worker pay is quite significant, particularly among the largest publicly listed companies.

As of 2023, the average CEO-to-worker pay ratio for S&P 500 companies was 268:1. This means that, on average, a CEO earns 268 times more than the median employee in their company. This average ratio is many times higher than the 45: 1 ratio of the late 1980s or the 30:1 ratio of the 1970s!

US companies with higher than the average CEO pay ratio include McDonald’s (1,212:1), Starbucks (1,028:1), and Apple (672: 1). These figures highlight the growing gap between executive and worker compensation in the United States.

CEO pay ratios in the United Kingdom have also shown a substantial gap between the compensation of top executives and the average worker. For instance, companies in the FTSE 100, the UK’s top 100 listed companies by market capitalization, have seen CEO pay ratios averaging around 120:1.

In India, CEO pay ratios among top companies can be quite significant, with some CEOs earning hundreds of times more than the median employee. For example, the CEO pay ratio at Wipro is around 916:1 and the Infosys ratio is 627:1.

Surprisingly, CEO pay ratio disclosures are not mandatory in the Philippines even though the country has the highest income inequality among Association of Southeast Asian countries, with a Gini coefficient of 42.

Furthermore, while the SEC’s template for executive pay disclosures from companies include spaces for the CEO’s compensation, these are routinely left blank by reporting companies. Instead, they report the total pay of the top five executives.

Hence, despite claims by top companies and the government that we are aligned with global standards of corporate governance transparency and accountability, CEO pay ratios are never publicly disclosed.

Even GRI-reporting companies in the Philippines do not disclose their pay ratios. This lack of disclosure is puzzling since GRI adheres to the principle that material impacts on stakeholders should be disclosed.

Surely, compensation is a material matter to employees as stakeholders. Security concerns and the lack of readiness among companies have been cited as reasons for nondisclosure.

In the absence of CEO pay ratio disclosures, I tried to estimate the ratios for a few Philippine publicly listed companies based on disclosures on the PSE Edge website. I computed the average monthly pay of the top five executives and added 30 percent to approximate CEO pay. I then divided this by P100,000, which is my estimate of the median pay in these companies.

This very rough method came up with the following estimated CEO pay ratios: Metrobank (62:1), PLDT (55: 1), San Miguel (57: 1), Meralco (92:1) and BDO (42:1).

The lower, the better

My estimates of CEO pay ratios for selected companies are lower than the United Kingdom, United States and India ratios I mentioned above. This is an encouraging sign and should be celebrated! If these ratios are accurate, the next step would be to move toward lowering them further to improve shared prosperity within big businesses.

Peter Drucker, the renowned management consultant and author, recommended that the ideal CEO pay ratio should be no more than 25:1. Drucker believed that a higher pay ratio could harm employee morale and organizational cohesion, leading to negative consequences for the company. Interestingly, this was quite near the average CEO pay ratio in the United States of 30:1 in the ’70s.

Of course, my estimates could be completely off because the CEO pay could be more than 30 percent higher than the average top executive pay and the median employee pay could be much different than P100,000. Even definitions of compensation could vary among these companies.

I hope that CEO pay ratios will be systematically disclosed in the future so that we can have a better understanding of shared prosperity within big Philippine businesses. After all, fairness, transparency and accountability are fundamental to good corporate governance.