This morning we’re hearing a little, and soon we’ll be hearing much more, about the new statistic du jour, the ratio of a CEO’s pay to the pay of the median worker at his or her company. So here’s my advice on how to think about this trendy new statistic: Ignore it. As a bit of data, it’s meaningless, and as a gauge of a CEO’s value, it’s worse than useless because many people will believe it actually means something.
The SEC this month imposed a rule requiring the companies it regulates to start reporting this ratio in 2017. Glassdoor, the employment website, yesterday released its own calculation of the ratios for the S&P 500 companies. The highest ratio, being reported this morning across the web and around the country, belongs to Discovery Communications CEO David Zaslav; his pay last year was $156,077,912 vs, $80,000 for the median employee, for a ratio of 1,951.
Except that this seemingly precise figure means nothing. About $145 million of Zaslav’s huge pay number came from stock awards, not cash. The amount of that $145 million he actually received was $0, and that’s all he may ever get. Much of it is in the form of restricted stock units that he gets only if the company meets certain performance targets; even if it does, he wouldn’t get some of that stock until 2019, and who knows what the stock will be worth then. He also received stock options, which are doled out over a four-year period. They were granted at strike prices in the $42-$44 range; this morning the stock is around $26. Whether those options will ever be in the money is impossible to say.
Yet, by the rules of accounting, Zaslav was “paid” $145 million in stock awards last year. Thus the towering ratio.
Even if a meaningful ratio could be calculated, it would be useless because of the differing nature of different businesses. No. 2 on Glassdoor’s list is Chipotle CEO Steve Ells, with a ratio of 1,522. His company employs about 53,000 workers, most of them in its fast-food restaurants. Down at No. 433 on this list is Intuitive Surgical CEO Gary Guthart, with a ratio of just 21. His company, which makes da Vinci robotic surgery machines, employs about 3,000 workers, many of them in high-tech R&D. Those ratios cannot be usefully compared.
The really unfortunate aspect of all this is that when the ratios start showing up in companies’ SEC filings, charts like Glassdoor’s will become irresistible, and even people who should know better, like legislators, will think they mean something. Company directors will have to remember that the ratios are only a distraction from their most important job, evaluating leaders. CEOs who are pilloried in the press for their high ratios may be excellent (or awful). Ditto those who are lauded for their low ratios.
Evaluating leaders is always hard, requiring wisdom and judgment. It has never been reducible to a number. But this newly fashionable number is particularly pernicious.
What We’re Reading Today
Discovery Communications has the largest CEO-to-median worker pay gap
That’s according to Glassdoor, which found that CEO David M. Zaslav makes 1,951 times the pay of the median Discovery worker. Chipotle Mexican Grill came in second, followed by CVS Health. But you could also argue we still don’t actually know the real pay gap. Fortune
Feds give a recipe lesson to Hampton Creek
If you want to call it mayonnaise, then you need eggs, the Food and Drug Administration informed the eggless condiment maker of Just Mayo. Hampton Creek CEO Josh Tetrick said he doesn’t believe that the name will change, but he plans to sit down with the FDA to discuss. ABC News
Donors like Biden but are funding Hillary
Many large Obama donors say that although Vice President Joe Biden‘s likeable, his time “has passed.” Their support of Hillary Clinton in the Democratic primaries will influence his decision on whether to run against her for the 2016 nomination. Reuters
Coca-Cola reaches water goal
In 2007, when Neville Isdell was CEO, the soda maker set a goal to replenish all the water it uses in the making of its products, which is around 300 billion liters a year, by 2020. Current CEO Muhtar Kent continued pursuing the goal, which the company expects to reach by year end, five years early. The announcement comes days after Kent apologized for Coca-Cola’s funding of organizations that favor lifestyle changes over calorie reduction to fight obesity. NYT
Man dies in tank accident at Jelly Belly chairman’s home
A World War II tank driven by Jelly Belly CEO Lisa Rowland Brasher‘s husband, Dwayne Brasher, accidentally ran over a man. Rowland Brasher is the daughter of Herman Rowland Sr., chairman of the candy maker. Los Angeles Times
Boeing struggles with employees, layoffs
Due to a slowdown in military spending and delays in satellite orders, Boeing expects to layoff ‘several hundred’ employees in its satellite business. In an unrelated issue, a federal judge will begin weighing a class action lawsuit against Boeing brought by 190,000 employees over the handling of a retirement plan. The case has sat in court for almost a decade. WSJ
Building a Better Leader
Accenture follows IBM’s lead
It will pay for working moms to ship breast milk to their infants when traveling for work. Fortune
Can mindfulness succeed in the office?
Companies have grown obsessed with turning the practice of ‘being’ into one of ‘doing.’ Harvard Business Review
If your CEO looks toward the past…
…then he or she is practicing ‘rear-view leadership.’ Learn to imagine the future instead. SmartBrief
Donald Trump’s media attacks continue
Trump attacked Fox News host Megyn Kelly again Monday night, retweeting messages that called her a ‘bimbo’ or ‘a waste.’ Fox News Chairman Roger Ailes came to Kelly’s defense, calling Trump’s comments “unacceptable” and “disturbing.” Then last night he mocked and evicted a Univision reporter from a news conference. Fortune
Jeb Bush walks back ‘anchor babies’ comment with new offense
After being asked to explain his use of the term ‘anchor babies,’ the Republican presidential candidate said it referred more to ‘Asians,’ angering Asian-American groups and Senators. CNN
Obama calls his opponents “the crazies”
While discussing opposition to the proposed Iran deal, Obama referred to those against the deal as “the crazies.” The demented ones presumably include prominent Democratic Senators, such as New York’s Chuck Schumer and New Jersey’s Bob Menendez, who have said they’re against the treaty. Politico
Up or Out
For the second time in a year, Jon McCormack, Amazon’s chief technical officer for products like the Kindle, has left the company. He’ll join Google’s Advanced Technologies and Projects group. Re/code
Drew Vollero, a former Mattel executive, will join Snapchat as head of finance. Fortune
Universal Music Group has named Jeffrey Remedios its president and CEO of Universal Music Group Canada, starting September 21. Music Week
Fortune Reads and Videos
The Fed could hold off interest rate hikes through the year
The reasons involve more than China. Fortune
Burger King offers McDonald’s the chance for a McWhopper
It’s a cheeky shot by a McDonald’s competitor to offer ‘help’ through full page ads in the New York Times and Chicago Tribune. Fortune
Kraft Heinz recalls 2 million pounds of bacon
Turkey bacon, that is. It’s a class II recall, which means there’s a “remote probability of adverse health consequences.” Fortune
A takeover of Twitter is inevitable…
…says one analyst. That’s because Twitter can’t innovate easily as a public entity. Fortune
“I don’t want any incidents there. But I’m always going to be myself. If anything happens, I’m always going to be myself, true to myself.” – Tennis star Serena Williams discussing her on-court incidents while balancing her will to win in the upcoming U.S. Open, which begins Monday. NYT
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|Produced by Ryan Derousseau|