How to Justify a Breathtaking CEO Pay Ratio

By Theodore Kinni
strategy+business, December 22, 2015

In August 2015, the U.S. Securities and Exchange commissioners voted 3-2 in favor of a new rule that requires public companies to report their CEO’s total annual compensation as a ratio to their employees’ median pay. The SEC didn’t rush into this decision. Far from it. The vote came five years after the passage of the Dodd-Frank Act, which mandated the rule, and two years (and 280,000 public comments!) after the SEC announced that it would consider complying with that mandate. Moreover, the rule has plenty of loopholes. For instance, it doesn’t apply to companies with annual revenues below US$1 billion. And it doesn’t take effect until 2017.

The delay and controversy were blamed on a number of plausible causes: that it was a ploy by unions to gain negotiating leverage; that it didn’t measure anything of consequence; that it would cost too much to implement. But it’s hard not to believe that the real reason corporate lobbyists and leaders weren’t enthusiastic about a swift adoption of this rule was fear. As the Economic Policy Institute has shown, the ratio of CEO pay in major companies to the median pay of their employees is somewhere around 300:1. Formally reporting such ratios in stark terms would likely add fuel to the already roaring fire surrounding economic inequality. In 2014, according to a Pew Research Center survey, the people of Europe and the U.S. pegged economic inequality as “the greatest danger to the world.” (In 2015, inequality dropped a ranking or so because ISIS took the top spot.)

The leaders who fret about class warfare might want to add Harry G. Frankfurt’s slim book, On Inequality(Princeton University Press, 2015), to their reading lists. Frankfurt is a professor emeritus of philosophy at Princeton University. He is also the author of On Bullshit (Princeton University Press, 2005), which topped the New York Times bestseller list a decade ago and opened with this provocative line: “One of the most salient features of our culture is that there is so much bullshit.” His definition of this barnyard epithet: a widespread tendency for people to use words and language to obfuscate.

In his new book, which contains adapted versions of two previously published papers, Frankfurt argues that much of the discourse around economic inequality fits the bullshit bill. He finds nothing morally objectionable about economic inequality per se. “The egalitarian condemnation of inequality as inherently bad loses much of its force, I believe, when we recognize that those who are doing considerably worse than others may nonetheless be doing rather well,” he writes.

On the other hand, Frankfurt also finds nothing inherently beneficial about economic equality. “Inequality of incomes might be decisively eliminated, after all, just by arranging that all incomes be equally below the poverty line,” he writes. “Needless to say, that way of achieving equality of incomes — by making everyone equally poor — has very little to be said for it.”

This might make On Inequality sound like a straw man argument for astronomical CEO salaries. But Frankfurt does not let companies off the hook. Rather than strive to eliminate inequality, he says we should focus on eradicating poverty. He proposes a “doctrine of sufficiency,” which asserts that we have a moral obligation to see that everyone has “enough” money. Frankfurt defines “enough” as a standard that allows people to live a happy life or, at least, one in which their unhappiness cannot be alleviated by more money.

Indeed, what does it matter if some employees have more than others, as long as all employees have what they need? Isn’t this the reasoning behind ideas like the $15 minimum wage? Fast-food workers across the U.S. aren’t going on strike for hikes to CEO-level pay. They simply want to earn enough from their work to live above the poverty line.

On Inequality contains plenty of fuel for flameouts on both sides of the economic inequality debate. And I suspect that Frankfurt would welcome them. (Certainly, they could help him sell lots of books.) But I came away from this volume thinking that any CEO who could run a profitable business that also provided a reasonable living for each of its employees would richly deserve a breathtaking pay ratio.