Women NEOs Earn Less Than Men, but Still Earn Too Much

Ruth Saldanha: If there's one thing with which investors across the world are dealing, it's inflation. But one metric that has far outpaced inflation, though, is the average CEO pay, especially in North America. According to shareholder advocacy firm, As You Sow, some CEOs can receive a payment in one year that it would take one of their own employees 670 years or even more to make. A majority of these CEOs are men, but female CEOs outdid male CEOs in the most recent reporting period. So, what does all of this mean? Jackie Cook is a Director of Stewardship in Morningstar Sustainalytics Stewardship Services team. She's here today to help us make sense of some of this. Jackie, thank you so much for being here today.

Jackie Cook: Ruth, thank you for the invitation. In your introduction, you connected the dots between some of the key issues that I think will be driving investor votes in the 2023 proxy season. One of the regular issues on corporate proxy ballots is approval of executive pay practices, where investors are moving beyond narrow financial performance considerations in deciding how to vote, particularly since the start of the pandemic.

CEO Pay Up 23% in Canada, at a Record High in the U.S.

Saldanha: So, let's talk about that a little bit. Can you give us a sense of how CEO pay has trended in the U.S. and in Canada since the start of the COVID-19 pandemic?

Cook: Well, in Canada, large company CEO pay actually dipped a little in 2020, but it jumped by 23% in 2021, which is the most recent period for which we have full reporting based on 2022 reports. In the U.S., large company CEO pay jumped 7% in 2020 to a record high of $15.3 million on average across the S&P 500, and then it jumped again in 2021 with a further 21% increase to a new record average high of $18.6 million. So, over the past 10 years, S&P 500 CEO pay has increased 57%.

How Many Women are CEOs in North America

Saldanha: We'll talk about pay a little bit more in some time. But first let me ask you this. What percentage of the CEOs in the S&P 500 or in North America are women and how does this affect the overall gender wage gap?

Cook: In Canada, across all executive offices, about 20% of positions are held by women. Typically, women are less represented further up the corporate ladder. In the U.S. at the named executive officer level, and this is the CEO, the CFO and three other of the highest paid executives, only 15% are women as of 2021 and only 6% of S&P 500 CEO positions are held by women. But in both countries, women have made better gains at the board level where they now make up more than 30% of the largest company board seats.

When it comes to pay, S&P 500 women in the C-suite earn just $0.82 for every dollar earned by their male counterparts in 2021. But even among the non-CEO named executive officers, women earned $0.91 for every male dollar. And this is important from a distributional point of view. One of the ways of quantifying this disparity is, over 10 years, the cumulative difference between the amounts paid to men versus women in these top positions at the largest companies amounts to $152 billion.

Men or Women, CEOs Earn Too Much

Saldanha: Well, that's a huge number. Before we talk a little bit more about that though, I have to ask, with CEOs and named executives being paid so much, why should we worry at all about the gender gap in the C-suite?

Cook: Yeah. It's a good question because it's hard to feel outraged by a gap between pay packages that are in the 7 to 9 digits. But in addition to fairness and equity considerations, which of course have significant economic value when it comes to societal impact, there's a lot of evidence that diverse leadership teams lead to better long-term performance at the firm level. And so, where this has been studied, findings indicate that when women are added, senior leadership teams take less risky, more long-term views of value creation and are more ready to challenge the status quo. But importantly, the gender gap at the top of the firm is indicative of obstacles that women face further down the corporate ladder.

Why High CEO Pay Is a Problem

Saldanha: Well, that makes sense. Let's take a step back now and talk about CEO pay in general. Why should investors be so concerned about such high CEO pays?

Cook: Well, it erodes trust among stakeholders. And skyrocketing pay doesn't sit well, for instance, with workers or the general public. Workers' real wages have been falling through 2021 and 2022 under the cost of living – some call it a cost of living crisis. At the same time, the ratio of CEO to typical worker pay has reached 243 at the largest Canadian companies in 2021 and 324 at the S&P 500. But that a few individuals are able to command such high salaries and that very few of these are women also suggests that there's something wrong with the market for corporate leadership and that there are probably fundamental problems with pay practices as well – overly complicated, not sufficiently linked to factors that generate long-term value.

How Else Might CEOs Be Compensated?

Saldanha: So, in your opinion, are there any alternatives with how CEOs might potentially be compensated?

Cook: Well, there's definitely pushback against the overuse of share-based performance metrics, and there's a lot of investor interest in the inclusion and weighting of material ESG metrics that focus attention on longer-term strategic priorities. There also seems to be growing appetite for voting down outsized pay packages, with average support for say-on-pay resolutions inching down from year-to-year over the past five years at the largest U.S. companies. But it may not be enough to rely on shareholders alone to solve the problem of CEO pay or the gender pay gap in corporate leadership. The solution is probably multifaceted and linked to things that have to be tackled at the regulatory level. And some of these might be as more supportive environment for collective bargaining, tackling workplace barriers to advancement up the corporate ladder so that those at the very top have less bargaining power, and of course, better diversity reporting and pay transparency.

Saldanha: Well, that makes sense. Thank you so much for joining us today with your perspective, Jackie.

Cook: Thank you for having me, Ruth.

Saldanha: For Morningstar, I'm Ruth Saldanha.