Certification touts maximum 8:1 pay ratio between CEO, lowest-paid workers as ‘sustainable’
A new Canadian foundation is hoping its certification process will narrow the wage gap between the highest- and lowest-paid employees.
The Wagemark Foundation will certify an organization, company or non-profit that maintains a pay differential between its CEO and its lowest-paid worker at or below 8:1. That means a company paying a worker $10 per hour ($20,800 per year) would compensate its CEO no more than $166,400 annually.
“We spent a lot of time trying to determine what the ratio should be,” says Peter MacLeod, executive director of the Toronto-based foundation. “We chose eight as the top-most multiple because if you look at the history of organizations — really over the past 100 years — that have used pay ratios in establishing compensation, typically those that have lasted the longest and been the most profitable and resilient had anything from a 7:1 to a 12:1 ratio.”
Although 8:1 may look like a tight difference to many observers, MacLeod says many organizations operate well within this context.
“We wanted to show that, for the most part, this is close to the industry norm,” MacLeod says.
To qualify, employers need a chartered accountant to verify the provided financial information is accurate. Organizations are also required to pay a $200 annual fee, which Wagemark intends to direct to future research.
Wagemark is already planning the next phase of its campaign: tier two certification. This fall, the foundation will attempt to appeal to larger corporations by introducing a sliding scale ratio tied to revenue, capping at a maximum ratio of 30:1.
“Part of the reason for creating tier two is just certain realism that our tier one certification has been principally aimed at small and medium enterprises,” he says. “But we recognize that there are multinational corporations earning many billions of dollars in revenue each year and over the long term we want to see some of these same principles applied to businesses of that scale, as well.”
Wagemark wants to get people thinking about pay ratios, rather than total pay.
“In the 20th century, we relied on two policy levers to control for income inequality,” MacLeod says. “One was the minimum wage and the other was a progressive tax system.”
As recently as 1970, the top marginal rate was 90 per cent, MacLeod says.
“So if the taxman was basically going to take 90 cents on every dollar over a certain threshold, there was no reason to pay CEOs more because their pay was going to disappear,” he says.
As those marginal rates were scaled back, companies were granted the ability to pay people more, leaving low-wage earners far behind their executive counterparts.
On average, CEOs of the largest companies in the United States made 354 times as much as the average worker, according to a recent study by Washington, D.C.-based Institute for Policy Studies. In Canada, CEOs bring in 189 times the average Canadian wage, according to the Canadian Centre for Policy Alternatives, an Ottawa-based think tank.
“The question that I think you have to ask is, ‘Well, are CEOs today 10 times more talented or 10 times more productive or 10 times more scarce?” he says. “The answer has to be no.”
Changing the perspective on pay could be the solution.
“For whatever reason, right or wrong, high-end tax rates are often off the table and we can’t bring up the minimum wage successfully, so we have to do something else to create a rule of thumb — a new norm — around pay,” MacLeod says.
When speaking about the philosophy behind Wagemark, MacLeod references the work of Peter Drucker, an influential American business management consultant.
“It is not professional to pay oneself salaries and bonuses that are so far above the social norm as to create social tension, envy and resentment,” Drucker wrote in his 1986 book The Frontiers of Management. “Indeed, there is no economic justification for very large executive incomes.”
Drucker’s foresight is what inspired MacLeod to get people thinking about pay ratios.
“Drucker said the most radical — but also necessary — innovation in American business was to create a fixed ratio between the top and bottom earners,” MacLeod says. “He said that in 1977 because he already saw this decoupling occurring.”
So far, about 40 organizations have received Wagemark certification. Among them is Impact Mobile, a Toronto-based mobile software company with 30 employees.
“I know my employee base intimately and they know me,” says Gary Schwartz, CEO of Impact Mobile. “I think it’s very important that they also know that there’s an equitable spread of wealth across the organization as we grow.”
If organizations are vocal about their efforts to minimize the ratio between the highest- and lowest-paid employees, consumer perspective may change and influence other businesses to follow suit, Schwartz says.
“I think the more companies that can outwardly count that as part of their badge of honour, the more companies will look to create the same sort of equitable structure,” he says.
Wagemark is a step in the right direction towards equality, says Bill Moore-Kilgannon, executive-director of Public Interest Alberta, a non-profit public interest group that advocates for the implementation of a living wage.
“(Wagemark) actually creates a conversation about why some businesses are actually willing to pay a living wage,” says Moore-Kilgannon. “It’s very important to have business people speaking to business people about that.”
Comparing the certification to the LEED environmental certification, Mac-Leod hopes Wagemark certification logo begins to appear in corporate reports and working groups.
“We hope it will also be good in the marketplace to say, ‘We’re green and we’re sustainable — not only environmentally, but socially sustainable, as well,’” he says.
Schwartz plans on touting Impact Mobile’s certification.
“It makes a whole pile of sense to put it on our website,” he says. “It’s a mark of corporate growth.”
