Leading the fight against income inequality: Mary Jo White, Chairwoman of the SEC, which last year voted in favour of a system in which publicly listed companies had to disclose their ratio of CEO-to-worker pay 

Fast food workers earlier this year tore themselves away from their tills and chip pans, choosing instead to take to the streets and protest against the gross margins of inequality that exist between them and their employers in the $200bn industry.

In among the ranks of disillusioned workers and union activists stood a low-ranking KFC employee, whose ambition it was to have her hourly pay raised to $15. The worker’s demands, however, were promptly dismissed, despite the fact that her superior, Yum Brands Chief Executive David Novak, enjoyed an annual compensation, according to Forbes, of $37.42m in the previous year.

Worst of all is that the ratio of executive-to-worker pay is not exclusive to the fast food industry, where it stands at over 1,000-to-one, and inequality is seen as a natural consequence of the capitalist system.

Relative to the remaining 99.9 percent of earners, executive compensation has risen by an extraordinary rate in the past three decades, near enough doubling the income share of the top 0.1 percent of households through 1979 to 2007, according to the Economic Policy Institute (EPI). What’s more, research undertaken by the left-leaning think tank shows that CEO compensation through 1978 to 2012 increased 875 percent – double that of the stock market’s growth and far beyond the 5.4 percent equivalent rate for typical workers over the same period.

Granted, the chasm between executive and worker pay has existed for decades, but it is only in the previous 30 years or so that the distance between the two has reached such extremes. Whereas 50 years ago CEOs, on average, earned close to 20 times more than their typical employees, the reality today is pushing on 270.

Competition for executives has stiffened, purse strings have loosened, and as a result companies are attempting to lure executive candidates with increasingly excessive pay packages; some argue to the detriment of the economy.

Worst of all is that the increase in some instances has continued on its upward curve irrespective of productivity and profitability fluctuations, resulting in an increasingly disconnected labour market and a catalogue of consequences for those at the bottom of the ladder.

“Much of the increase in CEO pay has come from performance pay i.e. bonuses and share plans,” says Deborah Hargreaves, Director of the High Pay Centre. “However, there has been little link with company performance. These elements are increasingly taken for granted as part of overall pay instead of being a reward for exceptional performance.”

Discontent and disclosure
Fortunately, a surge in shareholder activism and a crackdown on corporate governance is today going some way to keeping a lid on executive pay. On September 18 last year, the US Securities and Exchange Commission (SEC) voted 3-2 in favour of a new rule requiring all publicly listed companies to disclose their ratio of CEO-to-worker compensation – though stopped short of enforcing a specific methodology. “This proposal would provide companies significant flexibility in complying with the disclosure requirement while still fulfilling the statutory mandate,” said the SEC Chair Mary Jo White.

The SEC ruling, however, is far from the only regulatory obstacle on the way to astronomical executive pay, and governments across the globe, in particular in the past decade, have instigated various say-on-pay initiatives to grant shareholders greater powers when deciding upon the issue of executive remuneration.

Across the pond in Europe, EU Internal Market and Services Commissioner Michel Barnier has unveiled fresh measures to cut short the widening margins of pay inequality that exist between workers and executives. Under the new EC measures, European companies must first seek shareholder approval for the gap before they’re allowed to push forward with their remuneration policy. And while there is no binding cap for the amount, companies must disclose clear, comparable and comprehensive information on the reasons why they have arrived upon their pay and employment terms.

“The last years have shown time and time again how short-termism damages European companies and the economy,” said Barnier when the proposal was first announced. “Sound corporate governance can help to change that. Today’s proposals will encourage shareholders to engage more with the companies they invest in, and to take a longer-term perspective of their investment.”

The central idea is that making pay disparity public should disincentivise companies from awarding bloated pay packages to executives, and transparency should reverse the upward spiral of executive pay, bringing oversized offerings to a standstill. And while it’s true that increased disclosure is an effective means of centring the spotlight on pay disparity, some suspect that the approach could actually have the opposite effect in terms of reducing executive compensation.

Peer benchmarking is a method utilised by many boards to arrive at an appropriate pay package for their executives, but releasing the executive-to-worker-pay ratio to the public could be seen by some as a green light for awarding similarly obscene salaries and bonuses.

Shareholder activism
It’s important that increased disclosure is coupled with appropriate action. Major shareholders were quick to oppose Martin Sorrell’s pay this April, after WPP announced that the CEO’s pay had risen by more than two-thirds in 2013 to reach £29.8m. Critics claimed that the raise did not in any way align with the interests of shareholders, and that such a sizeable package would raise costs and lower dividends as a consequence. Similarly, AstraZeneca’s most recent remuneration report prompted outrage among investors, many of whom were opposed to the measures. In total, 40 percent of shareholders attending the company’s annual general meeting refused to back the report, which would have increased Chief Executive Pascal Soriot’s base pay by three percent for the year and awarded him a further £4.35m in bonuses.

These instances illustrate that it isn’t just financial industry executives in the firing line, as has been the case historically, but also those in other sectors that have until very recently been considered relatively free of activism.

50 years ago CEOs, on average, earned close to 20 times more than their typical employees, the reality today is pushing
on 270

The most significant revolts began with the so-called ‘shareholder spring’ of 2012, which saw those at various companies – in particular those in financial services – rebel against overly excessive pay packets, and even depose certain individuals from the position of CEO. And although popular shareholder opposition failed to turn a positive result in every instance, the period served as an indication of how remuneration policies from thereon would be subject to sharpened shareholder scrutiny.

The wave of shareholder scrutiny that came crashing down on the likes of Aviva and Trinity Mirror left them with little option but to get rid of their executives. The circumstances at firms such as Citigroup, UBS and Barclays have resulted in an air of tension between boards and shareholders that to this day has not quite died down. Gone are the days when annual meetings were seen as little more than routine hearings, and in place has come an opportunity for disillusioned shareholders to have their concerns heard.

It’s clear, considering the rate at which equality-related policies are gathering support, along with the success of texts such as Piketty’s Capital in the Twenty-First Century, that there is a mounting interest in matters of inequality. And while executive compensation constitutes an ever-so-slight part of the wider issue, this is not to say that finding a resolution to spiralling CEO compensation is any less crucial.

Finding the right path
Executive pay looks to be entering into a new era in which pay, detached from performance, will be held to account. As shareholders gain more say on the specifics of executive pay, appeasing shareholders first time around at annual meetings will be seen as essential for boards looking to win their approval.

In decades gone by, shareholders have watched executive compensation reach stratospheric levels, regardless of the fact that margins have shrunk and productivity has fallen short of what it was. What’s clear now is that, increasingly, shareholders are opposed to oversized pay packets for executives, although are still unconvinced as to the best course of action to take.

“Some shareholders have become more vocal about excessive pay and they now have a binding vote on pay policy over the next three years,” says Hargreaves. “But many of them are short-term or not engaged enough, so it is hard to muster a majority vote against. That’s why we have always said they can’t hold companies to account on their own. We need more say for the workforce on pay with employees voted on to remuneration committees or boards.”

Despite greater powers for shareholders, executive pay continued on its upward curve in 2013. Analysis conducted by USA Today, using Standard & Poor’s 500 companies as a sample, showed that median CEO pay last year rose 13 percent to reach $10.5m, far above the three percent rise for the typical American worker.

Installing the mechanisms to vote down excessive executive pay and actually doing so are two very separate parts of a much larger issue.