Discussion of CEO Ratios Moves to Government and Nonprofits

by Linda M. Lampkin, Senior Nonprofit Compensation Specialist 4. March 2014 14:22

As the US slowly emerges from the recent recession, indications of increasing “income inequality” have become the focus of much discussion, and some action.  Research by the Economic Policy Institute (see www.epi.org/publication/unequal-states/ for more details) reveals the following:

  • Between 1979 and 2007, the top 1% of US taxpayers took home over half of the total increase in US income.
  • Over this same period, the average income of the bottom 99% of US taxpayers grew almost 19%, while the average income of the top 1% grew over 10 times as much—by over 200%.
  • Incomes at all levels declined in the recent recession, but, when income began to grow again in 2009, it was not even – in fact, the top 1% captured 95% of total income growth from 2009 to 2012, according to University of California at Berkeley economist Emmanuel Saez.
  • By 2012, the most recent year for which data are available, the top 1% earned 22.5% of all income in the US.

The recent Securities and Exchange Commission requirement that publicly held companies calculate and disclose the ratio of CEO pay to the pay of the company’s median worker will highlight the salary difference between the executives and the average worker.  In 2012, according to the Economic Policy Institute, that ratio was typically 273:1.  For reference, management guru Peter Drucker once said that the ratio of CEO pay to worker pay should be no more than 20 to 1.

Now some public and nonprofit organizations are joining this discussion, since they exist “to serve the public good,” with salaries subject to public scrutiny.  At St. Mary’s College, a small liberal arts college affiliated with the University of Maryland (a public state university), a proposal to cap the ratio between the president’s salary and the average worker at the college at 10:1 was recently discussed (and then defeated 9:8 in a vote by the Faculty Senate).  The current ratio is 13:1, already very different from the ratio in most corporations and at other universities.

With the SEC ratio reporting coming soon for public for-profit corporations and with federal and state legislative efforts to raise the minimum wage, look for more proposals to address increasing income equality, both from shareholders of companies and from “stakeholders” – such as clients, funders, and the public --  in nonprofit organizations, and even with government entities.  In the meantime, setting compensation using data from comparable organizations is the method most often used – and the only method approved by IRS for nonprofits.  ERI’s Nonprofit Comparables Assessor provides easy access to that needed data for nonprofits, while the Executive Compensation Assessor focuses on for-profit data.