Proctor & Gamble – Pay Grades & CEO Compensation (2019)
Outcome: Successfully withdrawn following a commitment from the company to add language to the proxy indicating that the CEO-to-worker pay ratio is one of the factors considered in determining executive compensation.
RESOLVED: Shareholders of Procter & Gamble (the “Company”) request that the Compensation Committee of the Board of Directors take into consideration the pay grades and/or salary ranges of all classifications of Company employees when setting target amounts for CEO compensation. The Compensation Committee should describe in the Company’s proxy statements for annual shareholder meetings how it complies with this requested policy.Compliance with this policy is excused if it will result in the violation of any existing contractual obligation or the terms of any existing compensation plan.
This proposal encourages the Compensation Committee to consider whether the CEO’s compensation is internally aligned with the Company’s pay practices for its other employees.Under this proposal, the Compensation Committee will have discretion to determine how other employees’ pay should influence CEO compensation. This proposal does not require the Compensation Committee to use employee pay data in a specific way to set CEO compensation.The Compensation Committee also will retain authority to use peer group benchmarks.
Like at many companies, our Company’s Compensation Committee has used peer group benchmarks of what other companies pay their CEOs to set its target CEO compensation. These target pay amounts are then subject to performance adjustments. To ensure that our Company’s CEO compensation is reasonable relative to our Company’s overall employee pay philosophy and structure, we believe that the Compensation Committee should also consider the pay grades and/or salary ranges of Company employees when setting CEO compensation target amounts.
Over time, using peer group benchmarks as the primary measure to set CEO compensation targets can lead to pay inflation. Although many companies target CEO compensation at the median of their peer group, certain companies have targeted their CEO’s pay above median. In addition, peer groups can be cherry-picked to include larger or more successful companies where CEO compensation is higher. (Charles Elson and Craig Ferrere, “Executive Superstars, Peer Groups and Overcompensation,” Journal of Corporation Law, Spring 2013).
High levels of CEO pay relative to other employees may hurt organizational performance. High pay disparities between CEOs and other senior executives can undermine collaboration and teamwork. High levels of CEO pay can also negatively affect the morale and productivity of employees who are not senior executives. According to a recent MSCI study, labor productivity as measured by sales per employee was lower for companies with higher pay gaps. (Samuel Block, “Income Inequality and the Intracorporate Pay Gap,” MSCI, April 2016).
Our Company’s CEO David S. Taylor received $16.6 million in total compensation in 2018. In contrast, the Company’s median employee received $60,412 in total compensation in 2018 resulting in a pay ratio of 287:1. 2018 research from executive compensation firm Equilar has found that consumer goods companies typically have a ratio of 142:1.
For those reasons, we urge you to vote in favor of this proposal.