Eye-Opening Pay Ratios Not Affecting Executive Compensation . . . Yet

dormant volcano

The subject of executive compensation tends to linger around America’s boardrooms like a dormant virus. It can go quiet for months at a time. But at any moment, corporate scandal can trigger an outbreak of outraged reports and political speechifying about the generous pay lavished on management while their companies ran amok.

We know all about the compensation packages of top executives because publicly traded companies are required by law to report them to the Securities and Exchange Commission. In fact, pay disclosures actually touched off one of the more prominent corporate scandals of the last year at Nissan Motor Co. The Japanese automaker and its former chairman Carlos Ghosn reached settlements with the SEC last month over charges they underreported Ghosn’s income on financial filings by roughly $140 million.

The company is on the hook for $15 million in civil penalties, and Ghosn is putting up $1 million himself. For the next 10 years, he’s also barred from serving as an officer or director at a publicly registered company.

According to the SEC, Ghosn’s compensation obfuscation started back in 2011, spurred on by a change in Japan’s disclosure rules for executive pay. The SEC alleges Ghosn feared the public backlash that would come when the full breadth of his compensation package was revealed to the public.

You have to wonder if the architects of the Dodd-Frank financial reforms in the United States hoped for a similar chastening in C-suites when they drafted the requirement that registered companies report their so-called pay ratios. These pay ratios compare chief executives’ annual pay to their median employees’ compensation, and U.S. companies have been forced to disclose them in financial filings since the 2017 fiscal year.

The disclosures have produced some eye-popping, if not unexpected, numbers. However, as compensation consulting firm Aon noted in a recent analysis, pay-ratio reporting hasn’t exactly changed the world. “Despite being a hotly contested rule, the CEO pay ratio has been a relatively quiet topic to-date,” Aon said. “Neither proxy advisory firms or major institutional investors cite this ratio in their say-on-pay votes, policy guidelines or recommendations.”

That doesn’t mean reform-minded corporate activists won’t eventually use the metrics in their campaigns. For example, a group of pension-fund representatives and advisers have started poking around at S&P 500 companies for supplemental information on their pay ratios, to better inform their proxy votes. They have asked, for instance, for companies to provide their median employee’s job function, the percent of their workforce that is full time, and to break down their employee headcount by country – all of which provides additional context for assessing the pay-ratio figure. If such requests from institutional investors start coming more regularly, it’s easy to see more detailed compensation disclosures becoming best practice or even required by law.

Meanwhile, as companies continue to embrace broader concepts of corporate purpose, executive compensation models like the one Ghosn enjoyed at Nissan will undoubtedly evolve. Ultimately, he could be seen as the first serious test case in our anti-viral attacks on excessive compensation.

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