Workplace

How many years would you have to work to earn one year of your CEO's pay? 63? 96?

Companies have been reporting CEO pay for decades. Now they are disclosing how that compares with the typical employee's pay.
Companies have been reporting CEO pay for decades. Now they are disclosing how that compares with the typical employee's pay.

Here's Stephen C. Hooley, the CEO of Kansas City-based DST Systems. And there are thousands of the company's employees, ranked according to pay.

Under a new federal rule, one special employee — the one in the middle of the ranking — gets to compare his payday to the boss’s.

According to DST, that median employee would need to toil 96 years at 2017’s compensation to reach the nearly $7.5 million in total compensation that Hooley earned last year.

Commerce Bancshares found its median employee would need to work 90 years at 2017's pay to equal CEO David Kemper's $4.87 million.

At Waddell & Reed Financial, it would take the median employee 63 years to make the $4.8 million that CEO Philip J. Sanders earned in 2017.

So say federally mandated calculations by these — and soon other — area companies whose shares trade in the stock market.

"It's all for perspective," said Brandon Rees, deputy director of the AFL-CIO's office of investment.

Workers already know that many executives earn millions of dollars each year. It is tougher to understand just how much money that is. Comparing the CEO's compensation to that of a typical employee at the company puts top pay into perspective.

"For most people, that's a lifetime or many lifetimes' worth of compensation," Rees said.

Rees and others expect to learn from this new disclosure, called the CEO pay ratio. It measures how many times larger the CEO's compensation is than the typical employee's compensation.

These first looks also require some caution.

Companies have plenty of leeway in how they choose the typical employee to make the comparison. Retail workers tend to make less than the rank and file at financial firms, and that can drive up the CEO pay ratios for an entire industry. Businesses that farm out traditionally lower paying work such as custodial duties would tend to have lower CEO pay ratios than those that keep those jobs on the payroll.

Moreover, most area publicly traded companies have yet to report their CEO pay ratios. Sprint's report, for example, isn't expected until June.

Advocates of the disclosure said the reports would help shareholders evaluate CEO pay levels. The reports also could help document discrimination in workplaces because companies disclose the compensation of the middle employee.

The expectation is that a few years of data will add meaning that isn't yet found in the first round of reports.

"We don't have a base line yet to see how companies differ," Rees said.

Finding Nemo

Publicly traded companies have disclosed the pay of top executives for decades. Their new task requires finding one typical employee among the rank and file to compare with the CEO.

Officially, that worker is the company's median employee. Being the median employee means half of your coworkers earn more than you and half earn less.

Employers find the median employee essentially by lining up everyone on the payroll, except the CEO, and picking the employee in the middle.

Waddell & Reed, the mutual fund company in Overland Park, did this by reviewing the W-2 forms it recently sent to employees for their personal income taxes.

One twist: Waddell & Reed had an even number of workers once the CEO stepped out of the payroll line. It had a choice between two employees. Its CEO pay ratio report, part of the annual proxy statement to shareholders, disclosed how the company decided which employee to call its median employee.

"Of the two potential median employees, we selected the employee with a vested benefit in the Pension Plan," its report said.

Once a company finds its median employee, it calculates a total compensation for that person using the same methods it is required to use in calculating the CEO's total compensation.

For CEOs, that includes restricted stock shares and stock options granted that year, long-term and short-term incentive pay and other kinds of compensation often not available to the rank and file. It also includes more mundane compensation not counted on W-2 forms but readily available to most on the payroll.

At Waddell & Reed, the median employee's total compensation included the company's matching contribution to that employee's 401(k) retirement account as well as a second company contribution to the 401(k) account. The second contribution was tied to a decision last year to freeze the traditional pension plan. The median employee's total compensation also included the increase in accumulated pension benefits that year.

The final number: Waddell & Reed's median employee earned $76,370 last year.

Commerce, the Kansas City-based banking company, found that its median employee, from among 4,755, earned $54,058 last year, according to the company's report.

Count me out

Not everyone counts when it comes to seeing who stands in the middle of the payroll lineup.

At DST Systems, for example, 45 percent of its employees fell out of line when the company began its effort to find the median employee. The Kansas City-based company declined to talk about the disclosure.

The exclusions started small, skipping over small pockets of employment on three continents. Regulation S-K, which governs CEO pay ratios, allows companies to exclude employees in countries that account for less than 5 percent of the total workforce.

Specifically, DST Systems excluded 244 employees in Australia, 13 in Canada, 12 in Hong Kong, two in South Africa and "approximately 1 employee in China," according to its filing.

DST also excluded an additional 6,200 employees. They work at BFDS and IFDS U.K., which are two joint ventures DST and State Street Corp. co-owned until March 2017. DST bought out its partner and has owned both companies since.

One provision of Regulation S-K allows a company to exclude employees of a business that was acquired during that year.

DST said it included some employees who hadn't worked at the company for the entire year. These were new hires and employees who left the company. To count them, DST "annualized" their pay before adding them to the lineup.

All told, DST said it had 14,400 employees on the payroll at Oct. 1, 2017, the date for which it did the lineup. Its exclusions left only 7,900 in line for the median check.

From that lineup, DST determined its median employee earned $77,550 last year.

Lake Wobegon effect

Steve Quinlivan wonders about a side effect from the CEO pay ratio reports. What happens when workers find out what median pay is?

"By definition, you sort of offend half the workforce," said Quinlivan, an attorney who helps companies find their median employees and calculate CEO pay ratios. "The companies know this could become an employee relations issue."

More troublesome, he said, will be the temptation to compare CEO pay ratios among companies. They won't be comparable, said Quinlivan, a partner with Stinson Leonard Street in Minnesota.

Companies have "significant discretion" even within one industry when it comes to finding the median employee and calculating the CEO pay ratios, he said.

The ratio requirement was part of the 2010 Dodd-Frank financial reforms that grew out of the 2008 financial crisis. This year's first round of reports emerged after years of battle between advocates and opponents over how companies would handle the calculations and disclosures.

Congress required the information on behalf of shareholders. It's why the information is reported in the annual proxy statement to shareholders ahead of the company's annual shareholders meeting. Companies also may make the disclosure in their annual 10-K report to shareholders, which DST Systems did.

Proponents of the CEO pay ratio say it will help shareholders evaluate executive pay for their vote each year on executives' pay packages, commonly referred to as the say-on-pay vote. The votes are non-binding and shareholders typically approve the executive compensation.

In 2012, shareholders voted down executive pay at Eqiq Systems Inc. in Kansas City, Kan., showing their disapproval of how the company and their investment were performing.

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