Companies Need to Share More of Their Riches With Workers

(Bloomberg Opinion) -- For two generations, workers’ wages have stagnated. During this period, powerful institutional investors have tied executive pay to stock performance and created a corporate-governance system solely focused on delivering for stockholders. The bulk of the rewards for improved corporate performance shifted to stockholders and top management, at the expense of other company stakeholders, particularly employees. The result has been soaring inequality, increased economic insecurity and a growing anxiety that our capitalist system is stacked against working people.

Our fraying social compact has led to calls to give workers a stronger voice in corporate governance. Business leaders have even acknowledged that an economic system that doesn't work for everyone is unsustainable, most prominently in the Business Roundtable’s statement last August that the purpose of a corporation shouldn't be just to serve shareholders, but workers as well. We would go further: Revise the mandate of board compensation committees, which have presided over inflating executive pay and diminishing returns to other employees, to make them responsible for overseeing a more equitable pay distribution for the entire company workforce.

The necessity of doing this is made more urgent by the Covid-19 pandemic. Corporations that spent a decade using the benefits they reaped from tax cuts and 10 years of economic growth to buy back shares and pay out hefty dividends didn't have the cash cushion to weather even a few weeks of the coronavirus shutdowns. Meanwhile, millions of workers were cut, with the most vulnerable taking the biggest hit: More than 85% of jobs subject to lockdown layoffs pay less than $40,000 a year. 

Not only that, the pandemic made clear that the people doing the risky work essential to our economy make much less than the national average. And the pandemic has highlighted the persistent racial inequality in our economy, with black workers suffering more from layoffs, having less wealth to ride out the storm, and -- if employed -- being more likely to be a low-paid essential worker.

Basic fairness requires us to right these inequities, especially because taxpayers have once again bailed out big business.

This is where reform of the corporate compensation committee comes in. Instead of just focusing on executive pay, compensation committees must widen their lens to consider pay policies for the company’s entire workforce. Boards must then make more sensible decisions about senior executive compensation, situating it within the overall context of the company’s workforce. Likewise, a focus on workers will help directors make more enlightened decisions about balancing shareholder returns with equitable compensation for workers and the maintenance of prudent reserves to help the company better withstand future adversity.

This approach will require directors and senior executives to set baselines for more equitable pay along with metrics to track the workforce’s share of gains in productivity and profitability. That policy should recognize that stockholders deserve a solid, long-term return but also that employees have a deep incentive to sustain corporate profitability and deserve fair wages and encouragement for working hard to achieve that objective.

Although it would be unproductive for a board committee to enmesh itself too deeply in the details of worker pay, a solid grasp of essentials is necessary. For example, the committee could ask company management and advisers to identify -- both company wide and along major business lines -- data such as the mean and median pay and benefits package of each quartile of employees, with corresponding data about their function, educational level, skill set and business relevance. The committee should also collect information on whether there is a race- and gender-pay disparity so that it can work with management to fix it. Importantly, the committee must also consider the company's use of contract labor and whether those workers are fairly treated. This information will also be useful in considering if the company pays a living wage to all of its workers, including contract workers.

To that same end, the committee should understand how management sets employee compensation and whether the company bargains with workers or gives them any other meaningful form of leverage. If there are metrics that management uses in this process, they should be understood, compared to the approach used to establish senior management pay, and evaluated and designed to properly motivate the workforce and provide a fair distribution of the company’s profits. This demands reflection on the company’s attitude toward labor unions and whether the company respects the right of its workers to voluntarily organize and collectively bargain. The company then must match its rhetoric about treating workers fairly with company policies to allow workers’ voices to be heard.

But the committee shouldn't stop at issues of pay: it must approve company policies to ensure that employees have safe working conditions, reliable and family-friendly schedules, are treated with respect and dignity, and have a welcoming and inclusive workplace that is free from discrimination and harassment.

By doing this, the well-being of the workers whose labor is critical to the company’s success can become a central consideration in corporate decision-making. Perhaps most of all, if corporate America is serious about capitalism working for the many, the reconceived compensation committee can ensure that workers receive their fair share of the value they create. Nothing would do more to show that the recent Business Roundtable statement was a genuine commitment by business leaders to do the right thing.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leo E. Strine Jr. is the former chief justice of the Supreme Court of Delaware and chancellor of the Delaware Court of Chancery. He now serves as adjunct professor at Harvard and Penn law schools, and is of counsel to Wachtell, Lipton, Rosen & Katz.

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