It is proposed that the annual report and the management’s proxy voting circular give the “equity ratio”, that is the ratio of the total compensation of the CEO to that of employees’ average compensation, and the ratio of the designated senior executives’ total compensation to employees’ average compensation.
The current proposal is close to the one presented in 2007 aiming at the internal equity ratio of compensation. The impact of the financial crisis of 2008-09 on shareholders’ confidence in management justifies Médac to come back a second time on the same issue. Recent events have underlined the negative impacts on risk taking of senior management compensation. According to a study made by the Economic Policy Institute of Washington, in 2005, CEOs earned 262 times the annual pay of their average employee. Or to put it differently, in one business day, a CEO earns a full year worth of an average employee’s pay.
The ever growing chasm between CEO’s compensation and the average employee’s pay is a concern to shareholders: such discrepancy between compensation is bound to have an impact on cohesion within the organization, morale and productivity. Indeed, the perception of unfairness in compensation may lead to lack of motivation. Furthermore, from a social point of view, by providing for excessive pay to the happy few, corporations create a new class of well-to-do, disconnected from day to day life of their own employees, small investors and ordinary citizens.
Confronted to their population’s indignation, governments are looking into ways to limit senior management’s compensation. To pick one from the USA, the SEC started a survey on proxy circular asking for ways to improve their worthiness. SEC asked: “Are investors interested in knowing the internal equity ratio of salaries? For example, should we publish the ratio between the global compensation of designated senior management and of each of them to that of the average employee?”
Médac believes strongly that divulging the equity ratio is of interest to shareholders. It should help them reach an informed opinion on compensation policy of the corporation, and exercise their rights through voting and dialogue at the annual meeting.