Companies and investors should do more to address income inequality by shifting focus from executive compensation to fair pay for firms’ entire workforces, says the Shareholder Association for Research and Education (SHARE) in a new report.
The Vancouver-based shareholder advocacy group argues that shareholders should seek fair pay throughout companies, not just target executive pay structures, as the way to improve corporate performance and address the growing issue of income inequality.
“We haven’t come to grips with how to recognize and incentivize the contribution the rest of the workforce makes to company performance,” says Kevin Thomas, executive director of SHARE. “If effective compensation is important to attract, retain and incentivize performance for top executives, isn’t that also true for the rest of your employees?”
Most shareholder efforts focus on executive pay through measures such as non-binding shareholder votes on executive pay, the report notes. Despite this, executive pay has continued to grow, and the gap between top executives and the rest of the workforce has continued to widen, it says.
For instance, since “say of pay” votes were first adopted in Canada in 2008, the ratio of median CEO pay to average worker salary in the private sector has risen to 140:1 from 120:1.
“This growing pay disparity should be a concern for investors,” the report says, pointing to research showing that companies with small pay gaps outperform firms with larger gaps. “The effects of income inequality extend beyond the firm level, affecting the growth and sustainability of the economy,” it adds.
SHARE also recommends that fair pay principles be adopted company wide, that executive pay be benchmarked against overall workforce compensation, and that boards take oversight of workforce compensation and curb the benchmarking of executive pay against inappropriate companies.
The report suggests that relevant workforce metrics be incorporated into the investment analysis of a company, and that investors should call on boards to develop their own tools to recognize the importance of the overall workforce.