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Date: 2024-08-16 Page is: DBtxt003.php txt00016636

Metrics
Two Metrics ... Climate and CEO pay

New Dashboard Wants to Distinguish Heroes from Villains Based on Climate Action and CEO Pay Ratio

Burgess COMMENTARY

Peter Burgess
New Dashboard Wants to Distinguish Heroes from Villains Based on Climate Action and CEO Pay Ratio

While it may be difficult to fit sustainability into a Marvel comics’ narrative, we find ourselves at a moment where we desperately need to know which companies behave more like Captain America and which act more like Thanos. A new dashboard offers some help!


Introducing the Sustainability Dashboard

Last year I wrote here about my frustration with lengthy sustainability reports and suggested to consider the use of a new tool — a smart dashboard that can be read in 30 seconds and understood even by 5-year-olds. The dashboard idea was based on two parts. First, articulating what is it that we expect companies to do. Second, finding benchmarks we can use to learn on how well companies perform vis-à-vis the expectations we defined for them.

In the first stage, we decided that we expect every company to do at minimum the following:
  1. Take climate change seriously and respond with urgency.
  2. Treat stakeholders responsibly.
These expectations represent a clear set of priorities, addressing climate change — “the single greatest crisis the planet has ever faced, while paying close attention at the same time to companies’ relationships with their stakeholders. They are also grounded in the understanding that no trade-offs should be allowed — you can’t treat your employees poorly while fighting climate change and vice versa.

The second stage is perhaps even more challenging. Do we have indicators that are material, public (so you don’t depend on the good will of companies), comparable, easy to understand (i.e. you don’t need to be a sustainability expert to make sense of them), and can represent well our expectations from companies?

With the initial brief in mind (a smart dashboard that can be read in 30 seconds and understood even by 5-year-olds), we decided to focus only on two indicators that we believe meet the criteria described above: 1) Application of science-based targets, representing the need of every company to take bold action on climate change, and 2) CEO pay ratio, representing companies’ commitment to treat their stakeholders responsibly.


2) Treating stakeholders responsibly

Why? Here we take a page from a number of thought leaders, from Bucky Fuller, whose vision was “to make the world work for 100% of humanity in the shortest possible time through spontaneous cooperation without ecological offense or the disadvantage of anyone” to Kate Raworth’s doughnut framework, “which brings planetary boundaries together with social boundaries, creating a safe and just space between the two, in which humanity can thrive.”

The logic is very clear — while we have no choice but to take bold actions against climate change, we cannot do it without taking action at the same time to secure a more equitable and just future. One cannot go without the other. In the context of companies it means we would like to see them fulfilling the Green New Deal’s vision to “achieve net-zero greenhouse gas emissions through a fair and just transition for all communities and workers.” Our vision goes even further, assuming we need to ensure all key stakeholders are treated fairly.

How? This was by no means the most challenging part. How do we find one benchmark that can meet all of our criteria? After a long exploration we came up with our choice: CEO pay ratio, which compares CEO and median employee pay.

At the beginning the choice in this indicator was mainly driven by the fact that is publicly available for all U.S. public companies due to a provision included in the Dodd-Frank Act requiring companies to disclose their median employee pay and CEO pay ratio. After learning more about this indication we believe that with all its flaws it is still a good way to evaluate how fairly a company its stakeholders.

While “the public reactions from the public were minimal” as Pearl Meyer & Partners, an executive compensation consulting pointed out in its analysis last October, we believe that with more tools like the dashboard and greater exposure to this benchmark, the public will start finding it useful. The latest public remarks of filmmaker and Disney Heiress Abigail Disney on Bob Iger, Disney CEO’s pay, making use of the CEO pay ratio in Disney (1,424-to-1) and the discussion that followed it on questions of responsibility, fairness and corporate practices overall demonstrate the potential of this indicator to provide an effective lens for examining a company’s level of responsibility.

What does the dashboard tell us? The dashboard tries to respond to a quite difficult question: What CEO pay ratio is a fair one? To answer it we tried to create different levels that we believe can provide a comprehensible perspective on fairness.

Here is the range used in the dashboard:

>400:1 (0%) — the start point of the range is as difficult to choose as then end point. What should be the point in which we begin to consider fairness in the first place? Is it AFL-CIO’s estimate of CEO-to-worker pay ratio of 361 to 1 (2017 data for S&P 500)? Maybe it should be 400:1, based on the lowest level of the congressional bill (H.R.6242 — CEO Accountability and Responsibility Act) that was introduced in 2016 by Congressman Mark DeSaulnier, looking to adjust corporate tax rates according to companies’ compensation ratio? Or perhaps even 500:1 as a shout out to filmmaker and Disney Heiress Abigail Disney’s remark: “Jesus Christ himself isn’t worth 500 times median workers’ pay”?

We decided to go with the congressional bill, which seems to suggest that less than 400:1 ratio is the bottom of the barrel when it comes to CEO pay ratio. Therefore we set the start point on any 400:1 — any ratio below it is considered to be on a 0% level.

100:1 (25%) — this level is mainly informed by Portland’s Pay Ratio Surtax, which considers the 100:1 ratio to be a threshold between acceptable and unacceptable CEO pay ratios. Portland’s surtax (the only one in the U.S. that has actually been applied to date) says the following: “Publicly traded companies that are subject to the Business License Tax in the City of Portland must pay a surtax on the tax paid if the CEO-to-median worker compensation ratio is equal to or above 100:1. If the ratio is equal to or above 100:1 but less than 250:1, the surtax is 10%. If the ratio is equal to or above 250:1 the surtax is 25%.”

50:1 (50%) — this level represents the average between the 25% and the 75% levels. This ratio is mentioned in California Senate Bill no. 1398 that was introduced last year by Senator Nancy Skinner. The bill offers to connect the corporate tax rates to the compensation ratio (using the following equation: the compensation of the CEO or the highest paid employee of the taxpayer/the median compensation of all employees employed by the taxpayer, “including all contracted employees under contract with the taxpayer, in the United States for the calendar year preceding the beginning of the taxable year”), with the lowest tax rate provided to companies with compensation rate up to 50:1.

25:1 (75%) — the 75% level is inspired by no other than management guru Peter Drucker, who made the case in 1977 that the ratio should be limited to 15:1 in small businesses and 25:1 for large companies. Rick Wartzman, Executive Director of the Drucker Institute wrote to the Securities and Exchange Commission in 2011 that Drucker even suggested a 20:1 ratio in a 1984 essay and several times thereafter. “Widen the pay gap much beyond that, he said, and it makes it difficult to foster the kind of teamwork and trust that businesses need to succeed,” Wartzman wrote.

Other references of this ratio can be found in the 2016 congressional bill mentioned earlier, which offers maximum reduction in corporate tax rates for public companies with compensation ratio that is up to 25, and in a similar proposal in Connecticut to tie the tax rate to the pay ratio, with the lowest rate of 5% offered for companies with ratios of 25:1 or less.

<10:1 (100%) — the top level is inspired by the wisdom of the crowds — in this case the survey data of more than 50,000 people from 40 countries who estimated the gap between CEO and unskilled worker pay is 10:1 and the ideal ratio to be 4.6:1. In addition it is somewhat along the lines of the 8:1 ratio of the Wagemark Foundation (this ratio is between the highest earn and the average earnings of the lowest decile of earners), as well as the (failed) 2013 referendum in Switzerland to limit the pay of executives to 12 times that of a company’s lowest-paid employee.

Source: This indicator is based on public data available on Bloomberg and AFL-CIO.


What’s next for the dashboard?

The dashboard we present here is work in progress and we hope to continue developing and improving it with your help. After conducting initial tests (including with my 6-year-old son to check the initial premise of the brief), we plan to reach out now to companies, stakeholder groups, and people in our network who work on similar initiatives, like our friends at Reporting 3.0 for feedback. We’d like to learn more on the usefulness of the dashboard and where it can create value, so if you have any comment about it feel free to email us here — we’ll be happy to hear you!

Our plan is to create a database for all the S&P 500, and as a first step we’ve created dashboards for the 25 largest companies in the S&P 500, which you can find on the Sandbox Zero website.

Clarifying which company is a hero and which one is a villain on sustainability won’t happen tomorrow and probably not next week, but it is our hope that the sustainability dashboard will be a useful tool that will help make this aspiration into a reality.

Go to the profile of Raz Godelnik Raz Godelnik Medium member since Aug 2018 Assistant Prof. at Parsons School of Design. Interested in new business models, strategic design, sharing economy, innovation & making sustainability work.
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