The spotlight on executive compensation packages is about to get hotter. And for healthcare executives, among the highest-paid in the country, it could result in tough conversations about income inequality and how their pay is justified.
Effective Jan. 1, 2017, or when the next fiscal year begins after that date, publicly traded corporations will be required to publish a ratio of how much the CEO makes compared with the median employee, according to a final rule from the Securities and Exchange Commission. The rule is part of the Dodd-Frank financial reform law that was enacted in 2010.
The AFL-CIO has been one of the most outspoken critics of executive compensation and has encouraged the adoption of the CEO-worker pay ratio, which has been stalled by industry lobbying and protest. The national union has tracked CEO compensation by industry, finding that the average CEO of America's top 500 companies made 373 times more than the average worker in 2014. The CEOs of the top 3,000 companies made 152 times what their employees earned.
Healthcare CEOs have some of the richest pay packages in the country. A Modern Healthcare analysis this year found Dr. Leonard Schleifer, CEO of Regeneron Pharmaceuticals, made $42 million in total compensation last year, the most of any healthcare or pharmaceutical company. That's about 1,162 times what the average rank-and-file U.S. worker earns in a year, according to the AFL-CIO.
Other notably high CEO paydays from last year included Larry Merlo, CEO of pharmacy chain CVS Health Corp., who pocketed $32.4 million. Wayne Smith, CEO of hospital company Community Health Systems, is routinely one of the highest-paid healthcare executives and earned $26.4 million last year—732 times more than the average U.S. worker.
Under the CEO pay-ratio rule, companies will have to list the median annual compensation of all employees and compare it with the CEO's pay. An employee is defined as anyone who works for the company inside or outside of the U.S. The SEC allowed companies to exclude 5% of non-U.S. employees from their definition of a median employee.
The pay ratio rule has been one of the most hotly contested mandates of the Dodd-Frank law, which solicited more than 287,000 comment letters and has been on the back burner for five years. “To say that the views on the pay ratio disclosure requirement are divided is an obvious understatement,” SEC Chair Mary Jo White said Wednesday.
Republicans in Congress and companies have vigorously opposed the rule, saying that it would be costly to get all the data together. The SEC estimated it would cost the average publicly traded company between $750,000 and $1 million to comply with the rule, far less than industry projections.
Opponents also said the rule didn't serve a purpose other than to embarrass CEOs. The National Investor Relations Institute, a lobbying group for publicly traded companies, said the ratio “would provide no material benefit to most investors” and would result in “misleading” views of corporate pay. Pharmaceutical giant Pfizer and health insurer WellCare Health Plans sit on NIRI's board of directors.
But unions and advocacy groups have argued the pay ratio will shine a light on the rising gap between America's richest business leaders, who lead profitable companies, and those in the middle class and poverty who have seen minimal wage increases over the past several years.
“This is a huge victory for ordinary Americans who are fed up with a CEO pay system that rewards the guy in the corner office hundreds of times more than others who add value to their companies,” said Sarah Anderson, an analyst at the left-leaning Institute for Policy Studies, in a statement.
While many healthcare employees such as doctors and nurses receive above-average salaries, many other occupations fall among the lowest-paying. Aides and those working in post-acute settings, such as home healthcare workers, usually don't make much more than the federal minimum wage. Home health workers have been fighting this year for a $15 an hour minimum wage.
