When Peter MacLeod thought about who might serve as the patron saint of Wagemark, the campaign that he launched this month to spur companies to narrow the pay gap between their highest and lowest earners, it didn’t take him long to choose.
“If you’re looking for someone credible on this issue,” says MacLeod, whose group has begun certifying organizations whose compensation systems meet Wagemark’s guidelines, a la Fair Trade coffee or Energy Star light bulbs, “you can have no better person to fight in your corner than Peter Drucker.”
That’s for sure. As I’ve written, Drucker had a deep conviction that runaway executive pay was bad for companies and bad for communities. “It is not professional to pay oneself salaries and bonuses that are so far above the social norm as to create social tension, envy and resentment,” Drucker wrote in his 1986 book The Frontiers of Management. “Indeed, there is no economic justification for very large executive incomes.”
Yet although Drucker was much admired—beloved even—by many of America’s leading chief executives, this was one piece of advice that most of them flat-out ignored. The result: Top executive pay has surged over the past 25 years, and the gulf between the CEOs of the largest U.S. companies and the average rank-and-file worker now stands more than 350 to 1 (or $12.3 million compared with about $35,000).
So why should anyone believe that MacLeod, who once worked at Fast Company magazine and now runs a small Toronto-based public-policy consultancy, can break through?
The answer: Wagemark may well constitute a genuine innovation.
If companies were to adopt a published policy “that fixes the maximum compensation of all corporate executives as a multiple of the lowest paid regular full-time employee,” Drucker wrote in a 1977 Wall Street Journal essay, given prominent play on the Wagemark website, it would stand as “the most radical but also the most necessary innovation” that could be realized in this area.
Drucker wasn’t one to use the I-word lightly, and he knew that for an innovation to take hold, conditions had to be auspicious. In fact, he taught that there are very specific sources of innovative opportunity—a swing in demographics, for example, or an upheaval in industry structure.
With Wagemark, MacLeod seems be deftly seizing on another of the sources Drucker identified: a change in perception. “When a change in perception takes place,” Drucker explained, “the facts do not change. Their meaning does. The meaning changes from ‘The glass is half full’ to ‘The glass is half empty.’”
In this case, Wagemark is banking that more and more people have come to view sky-high compensation not as a badge of success among celebrity CEOs, as they might have seen it in the 1980s and ’90s, or as a well-justified byproduct of “maximizing shareholder value.” Instead, huge pay packages are increasingly being linked —especially in light of the long-stagnant incomes of most working folks—to mounting concerns about income inequality.
In this sense, Wagemark is trying to plug into, and play off of, the same zeitgeist that has fueled the Occupy Wall Street protests, as well as the growth of groups such as Conscious Capitalism, which is calling for companies to “focus on their purpose beyond profit.”
“I like to believe that the time is right,” MacLeod says.
At this point, Wagemark will let organizations carry its seal if the ratio between the total earnings (including benefits) of their highest paid employee and that of the average of the lowest-paid fulltime employees is no greater than 8 to 1. To qualify, you also need a chartered accountant to vouch that your figures are accurate and to pay a $200 annual fee, which Wagemark intends to direct to future research. So far, about 20 organizations have joined—all of them pretty tiny (a brewer, a graphic-design house, and so on) and none, notably, based in the United States.
Although 8 to 1 is certain to strike many observers as incredibly tight, MacLeod insists that giant swaths of the economy—including small and mid-size companies, professional services firms, co-ops, educational institutions, hospitals, other nonprofits and government agencies—operate well within this context. “We wanted to point out that this is the norm,” MacLeod says.
The next phase of the campaign, to be unveiled in the fall, is what will truly count. That’s when Wagemark will try to appeal to larger corporations, where the pay gap far outstrips this norm—in some places at more than 1,000 to 1. For them, Wagemark is likely to roll out a sliding scale, pegged to revenue, with a cap of 30 to 1 (which is in the ballpark of what Drucker himself recommended).
Getting major companies to move in this direction won’t happen overnight; many are fighting the prospect of even having to disclose their pay ratios. But it is not beyond the realm of imagination to think that Wagemark may eventually find itself tapping into the same kind of pressure from customers and the culture at large that has sent all manner of companies racing for LEED environmental certification—one of many models that MacLeod and his team have studied.
“Whether sociologists or economists can explain the perceptional phenomenon is irrelevant,” Drucker wrote. “Very often it cannot be quantified. . . But it is not exotic or intangible. It is concrete: It can be defined, tested and above all exploited.”
Wagemark will be a great test to see whether we really are entering a more responsible corporate age.