CEO vs. Average-Worker Pay: Investment Data?

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In a 3-2 vote, the Securities and Exchange Commission just moved a step closer to following through on a Dodd-Frank provision that will require all public companies to report the ratio of their CEO’s compensation to the median for all rank-and-file employees. The SEC has been slow to enact the regulation -- passed in 2010 -- as it dealt with some logistical issues and plenty of blowback.

After a 60-day comment period and the usual mulling, it will likely be well into 2014 before the requirement is active. The AFL-CIO has been doing its own sampling for years. In 2012 it estimated the average S&P 500 CEO made 354 times the average employee. In 1992 the gap was 201 times. (For a good read on how this evolved, the new book, The Firm: The Story of McKinsey and Its Secret Influence on American Business by Duff McDonald lays the blame/credit on a McKinsey push that dates back to the 1950s).

For investors the question is: does this matter?

Right now companies aren’t required to report any aggregate data on their employee compensation. This past spring Bloomberg took a deep dive into the CEO/Worker comp ratio for the 250 largest companies in the S&P 500, based on 2012 data. For employee compensation it relied on government breakdowns by industry. Imperfect? Sure. But it’s the best we’ve got until the SEC regulation forces companies to start coughing up the data.

Bloomberg reported the average CEO made 204 times its estimate of workforce pay in 2012, up 20% since 2009.

The five highest CEO-to-worker pay ratios were JC Penney (JCP) at 1,795x, Abercrombie & Fitch (ANF) at 1,640x, Simon Property Group (SPG) at 1,594x, Oracle (ORCL) at 1,287x and Starbucks (SBUX) at 1,135x.

Three of the five managed to best the S&P 500 in 2012; and the crater in JC Penney cost CEO Ron Johnson his job earlier this year.

JCP Chart

NYSE:JCP data by YCharts

Over the three years through 2012, all but JC Penney managed to beat the index, but as an investor you’ve got to be happier paying the big bucks to Howard Schultz at Starbucks and David Simon at Simon Property Group, whose stock widely outperformed.

At the bottom of the Bloomberg list were Applied Materials (AMAT) where CEO pay was estimated at 176x employee pay, Covidien (COV) at 176x, Life Technologies at 175x, Xylem (XYL) at 174x and Agilent Technologies (NYSE:A) at 173x. Last year, just two of the five managed to handily beat the S&P 500.

AMAT Chart

NASDAQ:AMAT data by YCharts

And over three years, three outpaced the S&P 500, though none had outsize gains of Schultz/Simon magnitude.

AMAT Chart

NASDAQ:AMAT data by YCharts

It will be a few more months before we have ratios based on actual employee pay. (The SEC settled on allowing companies to use sampling of its employee workforce to generate the data, and opted for median, rather than average pay.) While the issue of wage stagnation is a different -- and important issue -- using the Bloomberg data suggests a high CEO/Worker pay gap might actually point you to companies delivering for shareholders. As Ron Johnson, booted as JC Penney CEO earlier this year can attest, a high pay package and poor performance won’t be tolerated too long.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.


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