A generous compensation package used by Wells Fargo & Co. to land its new boss hurtled the bank to the highest ratio of CEO pay to median employee compensation among a group of large peers.
Wells Fargo hired Charles Scharf in September 2019 after a six-month search during which the bank was dogged by media reports that qualified candidates were reluctant to take responsibility for leading it out of an era of consumer abuses and regulatory purgatory. Including an award meant to make up for compensation Scharf gave up by leaving his previous job as CEO of Bank of New York Mellon Corp., Wells Fargo calculated that his annualized total pay in 2019 was $36.3 million, or 550x the $65,931 in annual compensation for its median employee.
That vaulted it past the ratio of 482x at Citigroup Inc., which had the top spot in the previous two years. Without the award for the forgone Bank of New York compensation, Wells Fargo said, its CEO pay ratio was 349x, which would have kept it in third place, but still represented a jump from 283x in the previous year.
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Companies have disclosed CEO pay ratios for three years as a result of provisions in the Dodd-Frank Act. The disclosures underscore compensation inequalities within companies. Economists have calculated that the CEO pay ratio was about 20x in the mid-1960s. Some have argued for a return to much higher marginal tax rates that would negate enormous executive compensation packages and undermine the CEO bargaining power they say has driven executive pay inflation, as opposed to the inherent economic contribution of top executives to the firms they run.
Industry lobbyists and some compensation consultants have condemned the disclosures as pointless and arbitrary, saying they fail to deliver additional information that investors can use to evaluate and compare companies, since median employee pay can vary for idiosyncratic reasons, such as varying labor costs across geographic areas where staff is based or the type of work typical employees do.
Comparing pay ratios across companies can also be difficult because of differences in approaches to calculating compensation for median employees, such as whether to include the value of health coverage. In its most recent disclosure, Truist Financial Corp. said its pay ratio fell to 113x from 125x the year before, mostly because of the impact of a change in the discount rate it used to value pension benefits both for its CEO, Kelly King, and its median employee. The 125x ratio was a decline from 150x the year before that, which the bank said was also driven mostly by a change in the discount rate it used. (The previous figures are for BB&T Corp., which merged with SunTrust Banks Inc. to form Truist.)
Because such complexities have made it hard to use pay ratios as a benchmarking tool, investors generally have not used the figures to "determine whether pay is appropriate for executives," said Amit Batish, an editor with Equilar, a company that provides data for board recruiting and executive compensation. Instead, they have continued to focus on whether pay is aligned with measures of performance such as revenue growth and profitability.
Indeed, through three years of data so far, the pay ratio disclosures appear to have had little impact on pay practices, intracompany compensation gaps or relative CEO pay ratios across banks.
Broadly, the median CEO pay ratio reported in 2020 proxies by a group of 20 of the largest banks, at 141x, remains close to where it was two years before, at 149x. Pay ratios increased at 12 of the 20 banks in the most recent disclosures and at 15 banks the year before.
The banks with the six highest pay ratios in the 2020 disclosures had the six highest pay ratios the year before and were all in the top seven the year before that. These six banks — Wells Fargo, Citi, JPMorgan Chase & Co., Bank of America Corp., U.S. Bancorp and PNC Financial Services Group Inc. — also reported the highest CEO compensation figures in the most recent year.
With gaps between CEO pay and median employee pay so wide, the vast majority of variance in CEO pay ratios among the 20 large banks is explained by the size of CEO pay itself, which largely tracks with the size of the bank. Scharf's annualized compensation in 2019 was the highest in the industry, with the other three CEOs of banks with more than $1.9 trillion in assets also among the top four. Statistically, median employee compensation has explained less than 10% of the variation in CEO pay ratios across the group over the past three years.
Figures reported for median employee compensation have been rising, however, with 16 of the banks posting year-over-year increases in the most recent disclosures. A number of banks have given supplemental payments to front-line workers during the COVID-19 crisis, but they are not reflected in the most recent figures, which are for 2019.
SVB Financial Group, which has a focus on technology and venture capital companies, has consistently ranked near the top in median employee compensation at more than $130,000 in each of the last three years. It has also ranked near the bottom in CEO pay ratios, but its pay ratio jumped to 81x in the most recent data, from 56x the year prior, as annual pay for CEO Greg Becker increased almost 40% to $10.7 million in 2019.
At Wells Fargo, median employee compensation increased 1.1% from the year prior in the most recent disclosure, after a 7.8% increase the year before. The bank has said it is seeking to rein in expense growth driven in part by work to improve risk and compliance processes, and it has lined up job cuts to execute after a pause because of the pandemic.