The Securities and Exchange Commission (SEC) voted yesterday to adopt a new federal rule requiring companies to publish top executive pay as a ratio to workers’ median pay. The rule came from the 2010 Dodd-Frank Act, and while the information required in the rule is already publicly available, the rule would make it more transparent and simpler for stakeholders to find and understand.
Though the rule is not perfect and still allows for the exclusion of some employees from calculations, we applaud the rule as a step toward greater business transparency and more equitable pay.

We wanted to republish our story from a few months ago about our CEO’s decision to have his staff set his salary for 2015. All businesses have an opportunity to tackle the issue of the enormous gaps between CEO and worker pay. We hope our story inspires other leaders to not stop at simply disclosing pay ratios but to take a serious look at executive compensation, engage employees in the discussion and make a substantial change that will strengthen your company in the long term.

THE DAY WE SET OUR CEO’S COMPENSATION

Written by the Sustainable Business Consulting (SBC) team

One day toward the end of 2014, our CEO, Kevin Wilhelm, turned to our team and said, “You know, with all this press about the pay differential between CEOs and front-line workers, I want all of you to set my salary in 2015.”

That’s not something you hear every day, especially in today’s business world.

The vast difference between CEO and worker pay has been all over the headlines in recent years. In 2013, US CEOs were paid a whopping 331 times more than the average worker. Perhaps more alarming than that number itself is how rapidly it has increased over the years. According to the Economic Policy Institute, the CEO-to-worker pay ratio in 1978 was 29.9, and CEO compensation rose by 937 percent between then and 2013, more than double stock market growth. Over the same period, workers’ pay grew by only 10.2 percent.

Without looking at the numbers, many of us have an understanding that CEO-to-worker pay ratio is high, but do we have a concept for how high it really is? A recent Harvard Business School study revealed that people’s perceptions of CEO salaries are far different from reality. Individuals surveyed in forty countries estimated current CEO salaries to be about ten times that of workers, and stated their ideal ratio would be about 4:1. That’s a little different from our 331:1 in the US, which also happens to have the largest ratio by far (the next highest is Switzerland at 148:1).

According to the same study, sentiments related to CEO compensation are fairly universal: “It turns out that most people, regardless of nationality or set of beliefs, share similar sentiments about how much CEOs should be paid — and, for the most part, these estimates are markedly lower than the amounts company leaders actually earn.”

Back to our company, SBC, and our challenge. We thought, “How can our small firm be part of a solution on such a large issue?” Kevin’s answer was simple — lead.  SBC is a company that empowers its employees. And what’s more empowering to employees than deciding what your CEO’s work is worth to your company?

Like many ideas that seem simple on paper, the actual implementation was a terrifying prospect, not just for Kevin but actually for our entire team. None of us had ever done this — it had never even occurred to us! Who were we to say how much our CEO should make? Moreover, what if we set the salary lower than he was expecting? Would there be repercussions in our salary discussions? Or what if we accidentally blew the budget by compensating him too much? We knew this was important work, though, so we trudged through the discomfort and came up with a plan.

How did we do it? We researched traditional tactics and guidelines that Boards of Directors use to evaluate CEOs and came up with our own evaluation criteria. We decided on eight categories and assigned each a weight according to how important we thought they were to our organization. The three that rose to the top were knowledge and skills; relationships with clients, the community and suppliers; and business development.

Then we sat down and evaluated our CEO to truly determine his value to the organization.

We used the results from our evaluation to nail down Kevin’s actual salary number, and once again, what seemed like a relatively simple step got complicated. We had to get past the idea that we weren’t choosing the salary of anybody – this was our CEO.

We scored our evaluation results and determined which salary levels to assign to each range of scores. This involved digging in to our budget, forecasting the following year and perhaps most importantly, determining our own CEO-to-worker ratio that felt authentic to our organization.

It wasn’t easy, but we decided on a base salary ratio range between 1.5:1 and 3:1, depending on our budget in any given year.

The whole experience was invaluable. As a company that already fosters open communication and transparency, this formal process took it to a new level.

And while developing our own evaluation criteria and engaging in meaningful conversations with Kevin were important, perhaps the most significant step was the most simple: choosing the final salary ratio. So often, organizations engage in lofty conversations and make plans without taking action. It took courage and a few weeks of discussion, but settling on our CEO-to-worker ratio and implementing it allowed us to walk the talk and take a step toward a larger, societal solution to a major issue.

And Kevin’s feelings after the whole process? “It was a big leap of faith and a bit risky. I wasn’t sure how it would all play out, and in the end, what I might end up getting paid! Looking back, I’m confident we made the right decision, and our company is stronger for it. I invite other CEOs to follow our lead.”