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The P/E ratio. The PEG ratio. The P/S ratio. The debt-to-capital ratio. These are just a few examples of the many ratios investors use when they're researching potential investments. However, there's one telling ratio corporate managements and boards would rather keep hidden, because it has everything to do with their own bottom lines and it could even put their reputations at stake. It's the CEO-to-worker pay ratio.
The odious "too-onerous" argument
Part of the Dodd-Frank Act that hasn't gone live yet is mandatory disclosure of how a corporate CEO's compensation stacks up compared to the pay of the same company's average worker. Such a ratio would likely be quite telling as far as how much one individual is valued related to the rewards given to all the employees who do their parts to fulfill the company's business model and vision.
The Wall Street Journal recently covered this topic, which underlines what we already know: For many companies, revealing this ratio would be embarrassing and could spur outrage and shareholder revolts. Earlier this year, the AFL-CIO revealed that the pay of the average American CEO to the pay of the average U.S. worker was an astounding 380-to-1. In 1980, that ratio was 42-to-1.
The Securities and Exchange Commission is expected to propose the rule regarding this data disclosure by the end of this month and attempt to adopt it by the end of the year. The business community isn't pleased, though. Many companies argue it would be arduous and expensive to figure out their own ratios.
The argument about large workforces that are increasingly global and supposedly difficult to pinpoint may make logical sense on the face of it, but investors shouldn't take those arguments sitting down. Maybe it implies many companies are so big they have no clue as to what's going on. Or maybe it implies that many chief executives are paid massive amounts of money so they can cut corners by laying off American workers and employee people overseas for wages that are so low they could basically be compared to employing slave labor.
Are the right costs being cut? And at what cost to America's investors, workers, and overall economic well-being?
Enquiring minds want to know
Anyone who has followed Whole Foods Market (Nasdaq: WFM ) knows the organic grocer has long had a policy that caps pay: No one at the company makes any more than 19 times the average worker's wage. A Whole Foods spokesperson told The Wall Street Journal that the company hasn't found this calculation to be onerous or expensive in the least.
A handful of other companies, like MBIA (Nasdaq: MBI ) , voluntarily disclose figures regarding executive pay and average worker compensation. It's hardly common practice, though.
Long-term shareholders should be relentlessly curious about these data points. Pay policies at many companies would be endlessly interesting when compared to what the average worker bee takes home.
Take Hewlett-Packard (NYSE: HPQ ) , which has doled out tons of shareholder capital for a string of chief executive officers, as well as handsome golden parachutes for failed or even disgraced executives, all while executing repeated worker layoffs.
It might be interesting to see CEO-pay-to-worker-pay ratios at retailers, since retail work isn't known to generate big bucks for regular workers. A particularly interesting case study might be the ratio at Abercrombie & Fitch (NYSE: ANF ) . CEO Mike Jeffries has been subject to shareholder scrutiny regarding pay in the past.
Only 56% of Abercrombie's shareholders voted for the company's compensation schemes last year, but the retailer's proxy statement utilizes some fancy footwork to help justify Jeffries' pay. "Although the Company has existed for more than 100 years, Mr. Jeffries' role is more akin to founder than a typical chief executive officer. His vision has transformed the Company into one of the most successful and widely known specialty retailers." Oh, OK.
Although Jeffries' base salary stayed static at $1.5 million, somehow when all was said and done, his total compensation more than doubled on a year-over-year basis to $48.1 million in 2011.
What about compensation at health company McKesson (NYSE: MCK ) ? CEO John Hammergren raised eyebrows as the highest-paid CEO last year. He's made more than $500 million since he first took the helm at McKesson, according to Equilar. Although a majority of shareholders supported the company's compensation policy last year, the company acknowledged that 30% voted no.
This year, Hammergren and McKesson's board have crafted some changes, such as reducing what he's potentially entitled to in severance pay (this figure was previously $469 million) and relinquishing the right to a golden parachute excise tax gross-up. However, Hammergren's base salary still increased a tad to $1.68 million from $1.67 million last year, and his total compensation was valued at $39.7 million. Granted, that total compensation figure has fallen from $45.7 million last year and $54.3 million the year before that.
This comes at shareholders' expense, too
The CEO pay discussion includes the fact that there's a difference between cash compensation and less concrete incentives like stock options, but the truth is, if moderation's the key, somebody lost it a long time ago. While options can influence chief executives by encouraging long-term stock appreciation, showering executives with them has a dilutive effect on shareholders. Meanwhile, typical workers don't enjoy the same level of incentives in any sense.
CEO pay at most American companies has careened out of control. Shareholders need to raise awareness of what is justifiable and how the best-paid CEOs are creating profits and at whose expense. Disclosing individual companies' CEO-to-worker pay ratio would give some much-needed perspective about corporate priorities.
In particular, it could show the stark reality that at many companies, at the end of the long haul, the only stakeholders truly guaranteed to profit are the managements. That's not what investors are here for. We're here for great, growth-oriented companies that reward all stakeholders and boost the U.S. economy, not just a few overpaid American employees with unjustifiable rewards. No wonder many corporate managers would rather this ratio go uncalculated and undisclosed.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's column on environmental, social, and governance issues.