CINCINNATI - Procter & Gamble Co. shareholder James McRitchie thinks the gap between rich and poor has gotten too wide in America. So, when the company asked stockholders to ratify its pay practices last October, McRitchie voted ‘No.’
“We have growing rifts between Democrats and Republicans, between the rich and poor,” said the California investor who owns 100 P&G shares. “I go down to Silicon Valley meetings, where people talk about how they basically have bomb shelters. They have places you go when riots break out because they want to be prepared.”
McRitchie is more than just a casual observer. As publisher of the blog Corporate Governance, he tracks compensation trends and promotes shareholder activism. P&G is one of 80 companies where he voted against pay practices in the annual “Say on Pay” vote that all publicly traded companies are required to seek.
“If they’re paying above average, I’m going to vote against the pay package,” he said.“There has to be a way to get past this bracket creep.”
The protest vote had little impact. P&G shareholders voted 94 percent in favor of a pay plan that made David Taylor Cincinnati’s highest-paid executive in 2016. His $14.4 million in cash and stock awards amounts to 281 times the average annual salary of U.S. workers in the manufacturing sector for soap and cleaning compounds.
“Our approach is to pay competitively at all levels and pay in a way that drives P&G’s long-term success,” said P&G spokesman Damon Jones.
Two different communities?
Taylor is one of 25 local executives who made at least 100 times the average worker in their industry in 2016, as the gap between those at the top and bottom of the corporate pay ladder widened in Cincinnati.
WCPO’s analysis of data supplied by S&P Global Market Intelligence shows the average pay of 28 local CEOs was $5.1 million in 2016, up 10.8 percent from last year. The average pay of U.S. workers increased 1.4 percent to $49,630 in 2016. So, local CEOs made 104 times the average worker, up from 94 last year and 101 the year before.
What those numbers mean depends on whom you ask.
“We live in two different communities,” said Brennan Grayson, director of the Cincinnati Interfaith Workers Center, a nonprofit that helps low-wage workers fight against unfair labor practices. “We live in a community that’s living hand to mouth. We live in a community that can’t find enough hands to grab all that it needs, all that it wants.”
Xavier University Management Professor Lynda Kilbourne said market forces dictate what people make.
“It has to do with supply and demand,” she said. “The greater the supply of people for those jobs, the less an organization can pay. When you get to the C-Suite, the people capable of doing those things are fewer and further between so they demand a higher price.”
This is the fourth year that WCPO has analyzed compensation at publicly traded companies based in Cincinnati. Here are some trends worth noting in this year’s analysis.
Among CEOs that held the job for at least two full years, median pay – or the midpoint of all salaries-- increased 6 percent to $4.25 million. That’s down from last year’s median pay increase of 21 percent. It’s inline with a 6 percent median pay increase documented by the research firm, Equilar, in its early look at 100 CEO pay packages nationwide.
Median shareholder return for Cincinnati’s public companies hit a three-year high of 22.48 percent, much better than the 11.96 percent rate achieved by the S&P 500.
WCPO’s searchable database (below) includes 108 executives who made at least $1 million in 2016. That’s up from 99 in 2015, 90 in 2014 and 92 in 2013.
There were 18 executives with more than $5 million in total compensation, down from 22 in 2015, 17 in 2014 and 16 in 2013.
Fifteen women were among the highest-paid executives at their companies in 2016, unchanged in the last three years.
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 2016 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.
More than half of employees don’t know what their CEO makes, according to research by PayScale, a Seattle-based company that tracks salary trends by surveying visitors to its website.The company asked 22,000 workers about CEO pay last summer. Of those who knew what their CEO made, only 21 percent thought it was excessive. Of those who disapproved, only 43 percent said it negatively impacted their view of the company.
“It's less about how much the CEO is making, and more about whether it's an inequitable distribution of compensation across the organization," said PayScale CEO Mike Metzger, in PayScale’s 2016 report on CEO pay ratios.
But it can be difficult to judge how equitable a company’s pay plans are if details are provided only for a handful of salaries at the top. That’s why some critics welcome new SEC rules that will require companies to explain how CEO pay compares to the median pay of workers in their company.
If the rule survives recent attempts in Congress and at the SEC to repeal or revise the measure, pay-ratio disclosures will start next year. In the meantime, WCPO asked PayScale to provided median-pay estimates for Cincinnati-based companies. Here's how PayScale's estimates compare to the CEO's cash-based pay at 20 local firms.
PayScale’s median-pay estimate for P&G is 56 percent higher than the $51,340 average worker salary that WCPO used in in this year’s searchable database. So, Taylor’s pay ratio could be as low as 180 times the median pay of P&G workers. Another wrinkle is that PayScale regards cash-based pay as “most directly comparable” to its median salary data. If you exclude Taylor’s stock awards, his compensation is only 52 times the median worker at P&G.
Procter & Gamble is an example of how complicated pay can be for companies trying to attract and retain the best talent, satisfy shareholders and steer clear of critics that cite king-sized pay plans as evidence of wealth inequality.
P&G devoted 30 pages and more than 15,000 words to its annual compensation disclosures last August, explaining in detail how it uses a mixture of short-term cash awards and long-term stock incentives to promote profitable and sustainable growth.
Since 2011, when the SEC first required companies to seek advisory votes on pay, P&G shareholders have never dipped below 91 percent support for the company’s pay practices. Last year’s 94 percent yes vote was the third highest in the last six years.
But P&G’s pay plan failed to keep Global Beauty President Patrice Louvet from voting with his feet this month when Ralph Lauren Corp. offered a $12.6 million signing bonus and $12.5 million in annual cash and stock awards to make Louvet its next CEO. Louvet made $4.6 million as the leader of P&G’s beauty brands in the 12 months ended last June. It was the first year he ranked as one of P&G’s highest-paid bosses.
For P&G shareholder James McRitchie, Louvet’s departure is another example of the “bracket creep” that keeps driving CEO pay upward. In addition to nearly tripling his P&G pay, Louvet received a new perk that no P&G boss currently enjoys: “Mr. Louvet will receive an annual education allowance of $30,000 for each of his school-aged children.”
Louvet’s new compensation elements could find their way into other CEO pay plans, especially if he’s able to turn the fashion retailer around following two years of declining profits, revenue and share price.
“We’ve got this fascination with CEOs,” McRitchie said. “Like they’re saviors. That happens sometimes but more often you have to get the whole culture of the company to change. Not just at the top level.”