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THE IMPLICATIONS OF
INCOME INEQUALITY
W ith more Americans turning their attention to the disparity between executive and
employee pay and the fight to raise the minimum wage, organizations increasingly
find themselves exposed to a wide range of reputational and financial risks.
by Will Kramer
NIGEL TRAVIS IS THE CHAIRMAN AND CEO OF DUNKIN’ BRANDS, THE PARENT COMPANY OF DUNKIN’ DONUTS AND
Baskin-Robbins. And as of his July appearance on CNNMoney, where he commented on the news that New York’s Wage
Boaid recommended that fast tood workers earn S15 per hour, he is also an internet merne. A picture of Travis has circulated on
social media with the caption, Dunkin Donuts’ CEO says S15 an hour is outrageous.’ He makes 84,889 an hour.”
Several articles in major newspapers have also criticized Travis
with headlines like Dunkin’ Donuts CEO tone deaf on minimum wage” in The Boston Globe and “Dunkin’ CEO says raising
minimum wage to $i5-per-hour is ‘absolutely outrageous’…as he
lives in mansion and makes $10 million per year” in the Daily
Mail. Seattle Times columnist Jon Talton went so far as to call
Travis “the best advocate for the $15 minimum wage,” writing
that “when high-paid executives get hysterical about improving
the pay of their workers, it doesn’t help their case.”
Nigel Travis is not the first corporate leader to be targeted by
advocacy groups and the media for a compensation package that
dwarfs those of the company’s workers, and he certainly won’t be
the last. In August, the Securities and Exchange Commission
adopted a final rule that will require every public company to
disclose the ratio of their CEO ’s total compensation compared
to that of the organization’s median worker. Although the rule
does not go into effect until the fiscal year beginningjan. 1,2017,
its adoption has already drawn concern throughout the business
community. Considering the uproar stemming from Travis’
brief commentary on a proposed minimum wage increase, corporate leaders must assess all of the risks that can stem from the
increasing focus on income inequality.
THE CONTEXT OF
INCOME INEQUALITY
WHILE t h e United States has always been an economically
unequal society, most economists agree that inequality has been
increasing since the 1970s. According to the Economic Policy
Institute, a nonprofit and nonpartisan think tank, the CEO-toworker compensation ratio was 20:1 in 1965 and grew steadily to
almost 296:1 in 2013. Meanwhile, Emmanuel Saez and Gabriel
Zucman, economic researchers at the University of California,
Berkeley, found that the share of all wealth owned by the richest
0.1% of Americans has grown from 7% in 1978 to 22% in 2012.
22 November 2015
JOHN W. TOMAC

Until recently, many Americans seemed not to know or care
about the growing divide in income and wealth. Even at the
height of the so-called Great Recession in 2009, only 47% of
Americans polled by Pew Research agreed that there were “very
strong” or “strong” conflicts between the nation’s rich and the
poor. By late 2011, that figure had grown to 66%. Since then,
income inequality has become a regular topic of political debate
and public discourse.
Many observers attribute the increasing focus on wealth and
economic inequality to the Occupy Wall Street movement that
began in New York City’s Zuccotti Park in September 2011
and spread to cities and towns across the country. Although
the protestors were derided at the time for not outlining a clear
platform of demands, their efforts to provoke public discussion
about income inequality and the divide between the 99% and
the 1% has had a lasting impact.
Less than a year later, in November 2012, approximately 200
fast food workers in New York went on strike, demanding a $15
minimum wage in what was then the largest labor action in the
industry. The “Fight for 15” movement grew from there, holding strikes and walk-outs, filing lawsuits over wage theft, and
generally keeping the issue of income inequality prominent in
the media. On April 15, 2015, roughly 60,000 workers in more
than 200 cities across the United States took part in the largest
coordinated protest by low-wage workers in history. By then, the
movement had grown beyond the fast food industry to include
home-care workers, child-care staff, security guards and anyone
who earned less than what they considered to be a living wage.
As of mid-2015, Seattle, San Francisco and Los Angeles have
begun phasing in a $15 minimum wage. Democratic presidential
candidate Sen. Bernie Sanders introduced Congressional legislation to raise the federal minimum wage to $15 per hour. W hat
was once considered inconceivable has become more and more
commonly accepted as a necessary and even moral imperative
for many American businesses.
THE RISKS OF THE PAY
RATIO DISCLOSURE RULE
A RECENT online presentation by business law firm Dorsey &
W hitney LLP and Cam Hoang, senior counsel and assistant
corporate secretary at General Mills, examined many of the
risks public companies face as a result of the SEC’s new pay ratio
disclosure rule. At the most obvious level, Dorsey & Whitney
predicts that companies with high ratios between CEO and
median worker pay may see negative consequences related to
media coverage and public relations. The compensation for the
CEOs of public companies is already disclosed in SEC filings,
and such disclosures have led to negative attention for companies
with highly-compensated executives. For example, the AFL-CIO
reports that one of the most highly-trafficked sections of its website it its Executive PayWatch page, which names the 100 most
highly-compensated CEOs in America alongside testimonials
from low-wage workers at their companies. Similarly, Californiabased nonprofit As You Sow recently published a report entitled
The 100 Most Overpaid CEOs: Executive Compensation at S&P
500 Companies. Apart from potentially influencing public opinion, the AFL-CIO, As You Sow and like-minded organizations
also lobby institutional investors, such as mutual and pension
funds, to closely examine executive compensation data for their
stock holdings as a measure of shareholder value. This attention
will only increase as information about the relative compensation
of public companies’ median employees becomes public.
Beyond the public relations implications, Dorsey & Whitney
also noted potential employee-related issues for firms with low
median employee pay, such as reduced morale and a negative
impact on hiring and retention. While pay is often a taboo subject among co-workers, disclosing the median compensation for
workers at any firm will inevitability lead employees to compare
themselves against that measure. Particularly for those who fall
below the median, this information may hurt morale and productivity, and even lead some to seek employment elsewhere if
they feel the median compensation is too low to justify putting
more time and effort toward moving up in the organization.
Conversely, morale may be boosted among those employees who
are paid above the median thanks to their improved understanding of their value within the organization.
Finally, it remains an open question how the public will be
affected by this information. In a recent working paper, Harvard
Business School researchers Bhavya Mohan, Michael Norton
and Rohit Deshpande found in six separate studies that pay ratio
disclosure can indeed affect the intentions of consumers. Given
an informed choice, they found consumers would prefer to purchase from firms with relatively low CEO-to-median-workerpay
ratio such as 5:1 or even 60:1, as opposed to firms with high ratios
such as 1000:1. Lower CEO-to-median-worker pay ratios also
improved consumer perceptions of products at different price
points as well as their ratings of the firm’s warmth and competence. Further, the researchers found that firms with a high CEOto-median-worker pay ratio must offer a 50% price discount to
achieve the same customer satisfaction that a firm with a low ratio
achieves at full price.
From negative publicity to reduced investor stock valuation,
and from reduced employee morale to diminished customer
opinion, it appears that the increased social focus on income
inequality from the SEC’s pay ratio rule may have significant
potential risk management implications for public companies.
24 N ovem ber 2015
MITIGATING PAY RATIO
DISCLOSURE RISKS
GIVEN THAT the ever-increasing disparity between executive
and worker pay is such a widespread phenomenon, risk managers
at individual companies might be at a loss to imagine what they
alone can do to address the issue. Fortunately, experts in the field
have already begun to weigh in.
Eleanor Bloxham, founder and CEO ofThe Value Alliance,
an advisory firm for multinational public companies and private start-ups, provided a comment letter to the SEC supporting the pay ratio disclosure rule as an important development
for both investors and companies. She acknowledged the risks
of the new rule for public companies, but also suggested its
implementation could be an opportunity for corporate leaders
to reexamine their compensation strategies for the long-term
benefit of their employees and shareholders.
Because the SEC rule requires the calculation of total compensation including benefits, Bloxham suggested that companies could increase employee stock ownership as a method
to boost the compensation of the median worker. Even more
important, she said, corporate leaders need to begin to understand how their employees actually live in order to better
inform decision-making about compensation.
One unconventional way to increase this understanding
would be to take a note from the Undercover Boss television show
where executives work alongside low-level employees, Bloxham
said. In her experience, too many companies have gotten away
from the age-old strategy of “management by walking around.”
Crucially, she noted, “communication at the workers [regarding
compensation] is not going to get anywhere. Instead, we need
communications that begin with understanding and learning
from the workers, and with the workers.”
For a company with a higher CEO-to-median-worker compensation ratio, there is no easy answer to how it will mitigate the
risks to its reputation, stock value, employee morale and customer
opinion. One thing risk managers can agree upon is that the time
to begin addressing these issues is now, rather than in 2017.
THE BROADER IMPLICATIONS
FOR ALL ORGANIZATIONS
PERHAPS THE greatest risk to American organizations regarding income inequality is the greatest unknown: How far will
the public take its concern? W hat began as the rallying cry of an
encampment of disenfranchised people in New York City has
gone on to propel one of the largest labor movements in recent
memory and has imbedded itself into the consciousness of
Americans of all races, classes and creeds. The unfairness of the
current economic system is no longer just a discussion topic in
universities and coffee shops, but in factories and on the streets
of every American city.
W hile the SEC’s pay ratio rule only directly impacts public
companies, privately-held organizations should consider the
likelihood that their stakeholders and customers may begin asking for this information as well. As the Fight for 15 movement
continues to have success, employers offering less to their workers may rightly wonder how that decision will affect their reputation in their communities and among their own employees.
All indications are that discussions around income inequality and specific proposals such as the $15 minimum wage will
only increase as the 2016 election season ramps up. Corporate
leaders must therefore begin intentionally addressing the
related risks, or risk joining D unkin’ Brands’ Nigel Travis in
the world of internet infamy. ■
Will Kramer CPCU, A R M -E , A R M -P , is an independent risk management
consultant and writer.
Risk Management 25
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