CINCINNATI - Long before he climbed to the top of the Kroger Co. pay scale, Rodney McMullen toiled at the bottom.
That gives the Kroger CEO a unique perspective on the oft-debated issue of income inequality.
“When I started at Kroger, I made a little over $3 an hour,” McMullen said. “I ate bologna sandwiches and tuna because that’s all I could afford. So, I would never try to explain why I make what I make. I just feel incredibly honored.”
A WCPO analysis shows McMullen ranked fourth among Cincinnati-based public company executives, with total compensation worth $11.2 million in 2015. That’s 416 times the average grocery store worker in the U.S. When asked about the disparity, McMullen stressed the opportunities that Kroger provides for income growth.
“You can make Kroger a career,” he said. “And I guarantee you, as you grow, you’ll end up making more money than you make today. The opportunities are endless. We’re a company that tries to make sure that everybody has an opportunity to take advantage of what it is they want to do.”
Union leaders in Roanoke, Virginia, offered a different take on the income potential of Kroger workers in a June 2 statement urging members to vote yes on a new contract for 1,100 members of the United Food and Commercial Workers Union. The UFCW Local 400 bargaining committee said the deal was the best that could be achieved for now.
“We are not satisfied with this agreement,” the committee added. “It is not enough and it is far from what we deserve for our hard work and what we do every day to serve customers and make Kroger successful and profitable. Right now we believe we need to remain united, organized and mobilized to continue to build our strength for the next fight.”
Those disparate outlooks reflect rising frustration over pay disparity, said Heather Slavkin Corzo, director of the investment office at the AFL-CIO.
“People are more frustrated with excessive CEO compensation,” she said. “Power has really been concentrated in our economy in the CEO class at a time when workers are struggling to provide just the basic necessities for themselves and their family.”
That frustration is rising even as the pay gap may be shrinking between “Average Joes” and CEOs. Average compensation among the nation’s 200 highest-paid executives declined 15 percent, according to an Equilar analysis of executive pay for the New York Times. It’s the first time since 2012 that no executive made more than $100 million.
WCPO’s analysis of data supplied by S&P Global Market Intelligence shows the average pay of 28 local CEOs was $4.6 million in 2015, same as the year before. But the average pay of U.S. workers increased 4.5 percent last year. So, local CEOs made 94 times the average worker, down from 101 last year. There were 27 local executives who made more than 100 times the average worker in their industry, same as last year.
“It’s too soon to identify any trends,” Slavkin Corzo said. “There was a small decline in CEO pay largely because a lot of the compensation that executives receive is tied to stock prices and the markets were down last year. There was also a small uptick in workers’ pay, which is a positive development. But I think we need a longer time period to determine whether this is a trend or a fluke.”
Digging into the Data
Several trends emerged in WCPO’s annual look at compensation. For example:
Cincinnati’s stable of public companies continued to shrink in 2015, as Omnicare Inc., Frisch’s Restaurants Inc. and Bank of Kentucky Financial Corp. all were acquired. A fourth company, Cheviot Financial Corp., was purchased in May. Cincinnati had 33 public companies in 2013. Now, there are 28.
The median pay of Tri-State CEOs who’ve held the job for at least two years climbed 21 percent to $4 million last year. That’s a more robust raise than the 4.5 percent bump in median pay that Associated Press reported for 341 executives in its annual pay survey.
WCPO’s searchable database (below) for executive pay includes 99 bosses who made at least $1 million in 2015. That’s up from 90 last year and 92 in 2013.
There were 22 executives with more than $5 million in total compensation, compared to 17 last year and 16 in 2013.
Fifteen women are among the highest-paid bosses in their companies, unchanged from 2014.
Median shareholder return for Cincinnati-based public companies was 12.6 percent in 2015, better than last year’s return of 7.8 percent and better than the 1.2 percent achieved by S&P 500 companies.
WCPO obtained compensation data from S&P Global Market Intelligence, which pulled it from annual proxy statements companies filed with the Securities and Exchange Commission. Specifically, compensation data from the "summary compensation table" in each company's proxy document was analyzed. The pay category Changes in Pension Value was excluded from tabulations, because it is an actuarial estimate and does not reflect actual gains and losses. Some executives benefit from above-market interest rates in their pension plans. Those benefits, when disclosed, are counted as cash-based pay.
That data was combined with average worker salary data from the Bureau of Labor Statistics report: May 2015 National Industry Specific Occupational Employment and Wage Estimates.
North American Industry Classification System (NAICS) data was also used to most closely match each company to determine average industry worker salary, although many companies actually compete in multiple categories. NAICS data is the standard used by federal agencies to classify businesses in order to collect, analyze and publish statistics tied to the U.S. economy.
Performance data for each company was supplied by S&P Global Market Intelligence, which pulled total shareholder return estimates over one year and three years for the fiscal year in which that company operates.
A 'Difficult Task' for Board Members
As in past years, more than half of all compensation awarded to local executives came in the form of stock grants and options that vest over time and fluctuate in value based on the company’s stock price. At Kroger, for example, McMullen’s pay includes stock options valued at $2.3 million on the date of the grant. They give McMullen the right to buy 235,000 Kroger shares in the future at $38.33. If the stock goes higher, he makes a tidy profit. But Kroger shares have been trading below that level since April, so the options aren’t worth anything now.
Investors rarely have a problem with the pay plans of Cincinnati companies. At 14 local firms, in fact, shareholders voted more than 95 percent in favor of the pay packages described in annual proxy statements. Two companies received less than 80 percent approval: Cincinnati Bell Inc. at 73 percent and Hill-Rom Holdings Inc. at 78 percent.
But such nuances aren’t typically part of the public discourse on CEO pay, which has blended into a broader societal debate on income inequality. The gap between the rich and everyone else in the U.S. economy emerged as a driving force in the presidential campaigns this year, a theme that Bernie Sanders described as “the great moral issue of our time.” Donald Trump stoked middle-class rage over Wall Street wealth and corporate investments overseas, while Hillary Clinton called for raising the minimum wage and tax reform to ensure that “no millionaire pays a lower effective tax rate than their secretary.”
Even after the campaign ends, U.S. companies will face more questions about pay disparities because of new rules that will force firms to explain how their executive pay compares to the median salaries of all workers in their company. The Securities and Exchange Commission is requiring companies to collect median pay data next year and report them to shareholders in 2018.
“It’s going to impact the conversation about executive compensation because we’re going to have more details,” said Slavkin Corzo, who has led the AFL-CIO’s shareholder-reform initiatives since 2014. “I would hope that once boards start looking at the reality of how much executives are paid compared to how much the workers are paid, it’s going to help them understand there’s a serious problem that needs to be addressed.”
WCPO has tracked pay-disparity numbers since 2013, but the analysis uses average pay data for industries, not specific companies. The software company PayScale has been gathering company-specific numbers by surveying more than 80,000 workers about their pay. So far, the company has released “typical median worker pay” estimates on two Cincinnati-based public companies: Ashland Inc. and Procter & Gamble Co.
PayScale’s estimate for Ashland’s median pay is $72,900. So, CEO William Wulfsohn’s $13.4 million pay package is 183 times the median pay for all workers in his company. In WCPO’s analysis, Wulfsohn’s pay is 207 times the $64,310 average pay for all workers in the chemical manufacturing industry.
PayScale’s estimate for P&G is $76,800, significantly higher than the Labor Department’s annual wage estimate of $48,370 for workers in soap and detergents manufacturing industry. In WCPO’s analysis, former CEO A.G. Lafley made 378 times the average worker. Using PayScale’s numbers, Lafley made only 238 times the average P&G worker.
McMullen said corporate directors, including the board he serves at Kroger, face “a difficult situation” in developing pay plans that attract and retain the best talent at all levels of the company.
“Different people are motivated by money in different ways,” McMullen said. “That’s a balance they’re trying to manage as well. I think the board would be very concerned if people didn’t have the opportunity to grow and make a career of it. That would be a different concern. But you know, people can continue to take on more responsibility and grow here. That’s the thing that’s special about Kroger.”