Theresa May’s plan to force companies to publish the ratio of their boss’s pay to the staff average is getting bogged down in statistical argument. That’s a shame. Pay ratios make good sense.
Government officials have warned the British prime minister that disclosing pay ratios could produce perverse results because some companies are more equal than others, the Financial Times reported on Thursday. The risk is that the ratio between the CEO of, say, a big financial firm such as Goldman Sachs and his staff comes out lower than that of, say, a retailer like John Lewis (even though it's known for an enlightened pay policy). This, the thinking goes, undercuts the shame value of publishing such a ratio.
Take Dave Lewis at Tesco. He earned 4.1 million pounds ($5.4 million) in 2015, most of which was compensation for losing option awards at Unilever. Now consider Luke Ellis, the recently appointed CEO of hedge fund manager Man Group. His predecessor Manny Roman earned $5.4 million too last year. It’s safe to say that Tesco's 507,000 workers earn considerably less on average than Man’s 1,200 staff. So in a pay ratio world, Lewis gets the same dosh but more shame than Ellis. Doubtless Ellis is a busy man, but Lewis arguably has a lot more on his plate.
Much needs to be done to improve disclosure on CEO pay -- in particular around the equivalent cash value of complicated bonus packages, which are almost impossible to track. But in spite of this, investors are capable of seeing the good reasons why Lewis might be paid a higher multiple of the average than Ellis.
The value of the pay ratio is not making comparisons between companies in different sectors, with their own circumstances, such as banking and supermarkets. It’s to make comparisons over time and to look at trends. And the trend here isn't flattering. Average FTSE 100 pay went up from 4.72 million pounds to 5.48 million pounds between 2013 and 2015. That’s a compound annual average rate of 7.8 percent, well in excess of near-zero inflation, which is the peg for most ordinary workers’ pay increases.
As it happens, the ratio for FTSE 100 bosses dipped from 148:1 to 147:1 between 2014 and 2015, High Pay Centre data show. But this may be a symptom of companies using more contractors and laying off higher-paid staff on the payroll. Either way, pay consultants generally agree that the pay ratio is about three times what it was two decades ago.
Inter-company differences in pay ratios are going to be what they are. But a discernible widening of ratios over time requires an explanation. And that starts with disclosure.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
(A previous version of this story was updated to correct Manny Roman's pay last year.)
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