Wells Fargo Becomes First Victim of CEO Pay Ratio Rule

Wells Fargo Becomes First Victim of CEO Pay Ratio Rule

Tim Sloan, the CEO of Wells Fargo & Co., earned $17.6 million in 2017. That’s nearly 300 times the $60,446 estimated median annual compensation of the company’s employees.

We know that because the San Francisco-based bank reported its so-called pay ratio in a proxy statement released in March. According to SEC guidance issued in September, 2017, all publicly traded companies must disclose the ratio of their chief executives’ annual total compensation to “reasonable estimates” of the pay of their median employees. The requirement went into effect with the 2017 fiscal year as part of the Dodd-Frank financial reforms.

The new requirement sounds like catnip for disgruntled employees and corporate governance activists, who have long taken companies to task over lavish executive compensation packages. They can now point to data from the companies themselves to illustrate the whopping disparities between chief executives and rank-and-file workers.

Yet, issuers’ investors and employees for the most part have taken the pay ratio disclosures in stride. The metric appears to have little credence with stakeholders, given that companies have wide latitude in how to derive their pay ratios, among other issues. This is true even for companies with far more outrageous ratios than Wells Fargo. Weight Watchers, for instance, reported a ratio of nearly 6,000 to 1 without suffering too much pay shaming.

Wells Fargo presents a special case, though.

The embattled bank has suffered a slew of setbacks beginning with its 2016 admission that employees created potentially millions of accounts without the authorization of customers. The resulting investigations into the scandal by regulators and the bank itself turned up abuses in its mortgage and auto-lending businesses that ultimately led the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau (CFPB) to issue a combined $1 billion in fines to Wells Fargo last month. Additionally, the Federal Reserve in February ordered the bank to cap its growth until the Fed deems its practices to have improved.

Against that backdrop, it’s less surprising that Wells Fargo is one of the few companies to which the pay ratio controversy has stuck. Reuters reported last month that employees grumbled about it on an internal communications website. Meanwhile, the Committee for Better Banks, a coalition of advocacy groups, has called on the bank to raise its minimum hourly wage by 33 percent to $20. The issue of executive pay also was a point of contention at the company’s eventful shareholders meeting in Iowa in April, which drew protests for the second year in a row.

Even though stakeholders have mostly reacted to the pay ratio disclosures with shrugs, Wells Fargo’s case demonstrates how the new disclosure requirements can stoke the fires of critics who wish to pile on beleaguered companies. Of course, the brouhaha also shows that the wounds suffered from taking fire over pay ratios don’t have to be fatal: At the shareholders meeting, investors voted 92 percent in favor of the bank’s executive compensation plan.

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