Why B Corps Should Cap Executive Pay

This is a recurring series of excerpts from the book “The B Corp Handbook: How to Use Business as a Force for Good (Berrett-Koehler Publishers, October 2014). Click here to read the rest of the excerpts.

B CorpBy Ryan Honeyman

Certified B Corporations are leading a global movement to redefine success in business.

As a community of thought-leading businesses, one of the best ways that the B Corp movement can continue to drive positive change is to address the controversial issue of executive pay.

For example, in 2013 the average pay ratio of a Fortune 500 CEO compared to the average salary of their employees was 331:1. Some employers have started to implement a cap on the ratio between the highest and lowest earners in their company.

Namaste Solar, a B Corp based in Boulder, Colorado, caps the ratio of its highest salary to its lowest salary at 3:1. Whole Foods Market, a publicly-traded member of the Fortune 500, caps its highest salary at 19 times the average employee pay. Certified B Corps that implement this practice typically cap their pay ratio between 5:1 and 10:1.

“Restructuring the payment and perks offered to our employees, so that production workers could reap the same benefits as upper management, was an important step toward equality for every team member,” said Merlin Clarke, owner of the B Corp Dogeared Jewels & Gifts.

For many companies, the cost of adjusting base compensation to meet a specific highest-to-lowest-wage ratio will be marginal, as the changes would affect only a small number of entry-level employees. Matching benefits for both executive and non-executive employees, on the other hand, is probably a larger financial commitment and could instead be a long-term goal.

“At Whole Foods Market, everyone from the CEO to entry-level team members has the same benefits. The only differences are based on tenure with the company—the longer someone has been with the company, the greater his or her paid time off and the larger the company contribution toward health-care premiums and company-funded health-care reimbursement accounts.

“A cashier who has worked for the company for several years enjoys the same benefits enjoyed by the two co-CEOs of the company. It’s very powerful to be able to tell people about this practice. It creates a sense of solidarity throughout the organization,” said John Mackey, co-CEO of Whole Foods Market.

Another reasons to consider capping executive pay is that more money doesn’t necessarily make you any happier. For example, recent research suggests that a salary between $75,000 and $100,000 (depending on your location and cost of living) is the magic number. The study found that as people earn money from zero to $75,000, their happiness rises. Any more money after that, however, and it’s just more stuff — with no gain in happiness.

Image credit: B Lab

Ryan Honeyman is a sustainability consultant and author of The B Corp Handbook (Berrett-Koehler Publishers, October 2014). Ryan helps organizations like Ben & Jerry’s, Klean Kanteen, and McEvoy Ranch become B Corporations and maximize the value of their B Corp certification. To learn more, visit www.honeymanconsulting.com or follow Ryan on Twitter @honeymanconsult

Ryan Honeyman is a sustainability consultant, executive coach, keynote speaker, and author of "The B Corp Handbook: How to Use Business as a Force for Good" (Berrett-Koehler Publishers, October 2014), the world’s first book on B Corporations.Ryan helps businesses save money, improve employee satisfaction, and increase brand value by helping them maximize the value of their sustainability efforts, including helping companies certify and thrive as a B Corp. His clients include Ben & Jerry’s, Klean Kanteen, Nutiva, CleanWell, Exygy, and the Filene Research Institute.Honeyman Sustainability Consulting, a Certified B Corporation, was recently honored—alongside Patagonia, Seventh Generation, New Belgium Brewery, GoLite, and Method—on the 2014 B Corp “Best for the Environment List,” which recognizes businesses that have scored in the top 10% of all B Corps worldwide for positive environmental impact.Ryan has written articles for Utne Reader, TriplePundit, Sustainable Industries, and the Credit Union Times. He has also been a featured speaker at the Wharton School of Business at the University of Pennsylvania, the Hass School of Business at the University of California, Berkeley, San Francisco State University, Mills College, the California College of the Arts, the Sustainable Enterprise Conference, the Marin Renaissance Entrepreneurship Center, the New Sector Alliance, Nextspace, the Impact Hub Oakland, and the Impact Hub SoMa in San Francisco.Ryan holds a B.A. from the University of California, Santa Cruz and a M.Sc. from the London School of Economics and Political Science.

9 responses

  1. While this idea has a lot of populist appeal there are many flaws. The purported CEO pay ratio of 300:1 or 400:1 is completely misleading, distorts the issue and is an apples and oranges comparison. Statements like “more money doesn’t necessarily make you any happier” are irrelevant detract from the real issues. Yes, WFM has a “salary cap” of 19x, which was around $757,000 for 2014. Total compensation for their top executives ranged from $2 million to $2.7 million last year, 69x using the methodology of the 300:1 statisticians. The “matching benefits” and “salary cap” are completely different issues and much more complex that presented in this article. – Fred Whittlesey, Compensation Venture Group SPC, Certified B Corp, http://www.consciouscompensation.com

    1. Fred–thanks for the note. I’m interested in what you recommend to your clients. Do you recommend any salary caps–or is that always a bad idea in your opinion?

      I found it fascinating that even Peter Drucker recommended anywhere from 15:1 to 25:1. Check out his WSJ article here: http://ow.ly/HIQly

      However, I’m open to your thoughts.

      1. Ryan – It’s always a bad idea, and few ideas are so universal with respect to their utility. The notion that a single ratio such as Wagemark’s 8x could be appropriate for every company regardless of size, organization structure, industry, and location is illogical. Peter Drucker’s proposal, from 38 years ago, was in a time of completely different executive compensation structures, employee compensation structures, and corporate governance. and he concedes that a “star” should receive “income without limitation” i.e. no cap.

        If a CEO earning more than 8x is earning too much, then what about a regional sales manager, or the VP of Sales, or the CFO? Do we cap everybody? What about a software engineer earning 10x the receptionist? Cap them too? Or is it just the apparently evil CEO that we need to cap?

        There is ample opportunity for improvement in executive pay practices and processes and Dodd-Frank and other legislation has done more harm than good. The 300:1 data comes from the AFL-CIO and others that compare the pay of the largest public companies in the US with government wage statistics. Soon every public company will be computing and publishing their CEO Pay Ratio (CEO vs. median worker pay in that company). More here: http://compensationventuregroup.com/whatever-happened-to-the-ceo-pay-ratio/

  2. Bob–the information Aaron sent about Wagemark is fascinating. Wagemark even quotes a Peter Drucker article in the Wall Street Journal where Drucker advocates for tying executive pay to the lowest paid FTE.

    Aaron–thanks again for sending this over! I think B Lab should add a question about Wagemark certification to the next iteration of the B Impact Assessment.

  3. Great article and conversation! Brad Edmondson found in his research about Ben & Jerry’s that the ice cream company’s salary cap contributed to the demise that led the company to need to seek acquisition. The story goes that as the company grew and the layers of management increased, the salary caps at the top made it difficult for B&J to attract the top talent it needed to compete with Haagen Dazs and Dreyers. And the folks at the bottom of the pack — the ice cream makers and shop employees already had great packages above and beyond the comps for their positions.

    I completely agree that executive compensation has gone loco, but I worry that hard caps can hurt companies as they grow — they effectively require the company to stay small in order to reduce the layers of management.

  4. Jen, Ryan, and others,
    This is a great topic. Remember that unlike most B Corps today, Ben & Jerry’s was a publicly-traded company with annual revenues of about $160 million in 1995. The founders and other board members were facing operational challenges they could not handle, and the stock price was in the tank. They decided to scrap their 7 to 1 salary ratio as part of a bigger decision to seek a “professional” CEO and get the price of the stock back up.

    Looking back on it, board chair Jeff Furman now says that the salary ratio itself was not the problem that lead to the company’s forced sale. Instead, it was the policy that replaced it. Top managers were given lots of stock options, so they would reap huge financial benefits if the stock price went back up, no matter what the reason. A “professional” CEO was recruited in this way, and he recruited top managers with the same incentive. They didn’t share the company’s commitment to the triple bottom line. They were focused on the stock price.

    I think a salary ratio could work just fine as long as a company is privately owned and/or offers meaningful non-cash incentives to its executives. The takeaway from the Ben & Jerry’s story is not about the salary ratio. The board made a mistake when it encouraged top managers to focus on the price of the stock.

    1. Great clarification Brad. It seems like a salary cap can be an appealing option, but a one size fits all, widespread application may present challenges in practice. I’m open to learning more.

      I’ll admit that I’m most excited about Bob Willard commenting on my article :)

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