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April 9, 2015

Compensation trends at the extremes: Executive compensation growth and minimum wage hikes

As we were reminded in President Obama’s most recent State of the Union address, middle class interests remain top of mind. However, when it comes to employee compensation, it is the high and low ends of the spectrum that currently attract greatest focus.

Executive compensation trends

The second pay-related prominent rule to be established as a result of the Dodd-Frank Act, following the “say on pay” policy, is the CEO-to-worker pay ratio. The Securities and Exchange Commission (SEC) published a proposed rule on the ratio over a year ago; however, after a lengthy commentary period, during which more than 20,000 letters were received, there has been little progress toward finalizing the rule. The complications highlighted several years ago continue to be the likely cause of the stagnation; namely, there is confusion as to how and if to include part-time employees, international employees and contractors in the calculations and how to calculate the value of equity grants to top executives.

Congress has set no deadline for compliance with this provision of the Dodd-Frank Act, and it is speculated that the SEC’s rule may give companies some degree of flexibility with regard to determining the median worker pay level. Estimates for the CEO-to-worker ratio in 2013 range from 296:1 to 331:1 among the largest 350 U.S. publicly traded companies.

 

Among privately held companies and non-profit organizations, as well as publicly traded companies, executive motivation and retention remain a key objective. While this often results in grants of options or restricted stock in a publicly traded environment, other forms of long-term incentive compensation are more prevalent for other organizations. Deferred compensation programs and other cash-based, long-term incentives have gained considerable popularity among non-publicly traded organizations.

Minimum wage movement

It is common knowledge that the Obama Administration supports raising the federal minimum wage to $10.10 per hour. This initiative is part of a broader push for income equality that also supports the enforcement of pay equity across gender and race.

In the meantime, many states and municipalities have proactively increased the minimum range for their residents. More than half of states have a minimum wage that exceeds the federal level, ranging from $7.50 to $9.47 per hour. Notably, SeaTac, Washington increased the hourly minimum wage to $15.00 per hour last year, and beginning in April, Seattle will implement a six-year plan to increase its minimum wage to the same level. SeaTac’s ordinance has affected approximately 1,500 workers and little impact to workers or businesses has been reported.

Pew Research Center estimates that 24 million American workers receive hourly wages of less than $10.10, and fewer than 15 percent of these earn $7.25. It is suggested that salary inflation may occur to alleviate compression among workers should the minimum wage dramatically increase. However, given the composition of the 114th Congress, it is not probable that significant adjustments will be made to the federal minimum wage in the near term.

Middle class compensation

While there are public initiatives that could have significant impact on executives and low wage earners, most American workers will see little change in their compensation this year. The average projected salary increase in 2015 is 3.1 percent, which is within three-tenths of a percent of the average raise observed in 2011 and each year in between. Until the labor market constricts, there is little motivation for businesses to provide sizable increases to the general workforce. Instead, additional payroll funds may be allocated to higher increases for top performers or performance- or time-based bonus awards that are aimed at retaining key employees.


 

Priya Kapila is a Senior Manager at CBIZ Human Capital Services in St. Louis. Priya can be reached at pkapila@cbiz.com and @PJKapila.



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