A brief history of wage ratios

Wage ratios are nothing new.

Plato recommended that the incomes of the wealthiest Athenian residents never exceed five times those of its poorest residents. Some two millennia later, no less than the great American robber baron J.P. Morgan argued that the limit should be 20:1. Standing at the summit of America’s Gilded Age, Morgan could see firsthand the social and competitive consequences of growing wage differentials.

As pressure began to rise for America’s middle class in the stagnant economy of the late 1970’s, the leading theorist of modern business management, Peter Drucker, argued vigorously in the pages of the Wall Street Journal that ‘the most radical but also the most necessary innovation would be a published corporate policy that fixes the maximum compensation of all corporate executives…as a multiple…of the lowest paid regular full-time employee.’ To Drucker the exact ratio mattered less than the importance of the policy itself, but he nevertheless suggested that 15:1 would suffice for most small and medium sized businesses and that with few exceptions even the largest multinationals could accommodate themselves to life within a 25:1 maximum wage ratio.

More recently, in 2010 David Cameron proposed a fixed 20:1 wage ratio for the UK public service. Cameron commissioned the Hutton Review of Fair Pay. which concluded that organizations delivering public services should at least track, publish and explain their pay multiples over time.

Of course, many businesses have also recognized that wage ratios are not only about what’s fair. They are also an important tool for creating a strong corporate culture.

Spain’s famed Mondragon Co-operative employs nearly 84,000 people across 256 companies while adhering to a 6:1 maximum wage ratio.

For nearly the first two decades of its operations, Ben and Jerry’s Ice Cream restricted maximum pay to a 5:1 ratio.

Twenty years ago Whole Foods Market set a limit of 8:1, the current Wagemark maximum. As Whole Foods grew to become a multi-billion dollar company, the policy has been maintained, though the ratio has gradually shifted upwards, reaching 19:1 by 2009.

Brazil’s radically decentralized SEMCO SA maintains a 10:1 wage ratio while employing more than 3,000 workers across a range of industries.

While companies often choose to adopt wage ratio policies on their own accord, whether for ethical or pragmatic reasons — or both — governments and the public also act to create the standards they think are appropriate.

The landmark US Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) is the first US statute to require publicly-traded companies to report both the income of their chief executive as well as the median employee income for the corporation. Intense lobbying by the US Chamber of Commerce and other business associations has so far delayed enforcement by the US Securities Exchange Commission.

This spring, Swiss voters took up the question of executives bonuses in a hard-fought referendum, putting severe limits on so-called “golden hellos and good byes”. Even more dramatically, a second referendum this year will ask voters to endorse a proposed law that would place a 12:1 limit on the highest and lowest earnings within companies. Already a petition defending the proposal has obtained more than 100,000 signatures.

 

Do you know of other companies and organizations that have published wage ratio policies?
We want to know. Write to us at ratios@wagemark.org