By Catherine Ruetschlin
Report published by Demos.
The link between income inequality and economic instability has drawn renewed attention from economists, policy makers, global financial institutions, media, and investors. From Davos to Wall Street to Main Street, there is a growing consensus that inequality slows economic recovery and dampens consumer demand.
Yet the gap between the highest and lowest earners in the US economy continues to grow, with consequences for the economy and firm performance. New analysis of the CEO-to-worker compensation ratio across industries shows that Accommodation and Food Services is the most unequal sector in the economy, and that this extreme pay disparity is primarily driven by one of the sector’s component industries: fast food. The fast food industry is also one of the highest growth employers in the nation.
Over the past year, frustrated front-line fast food workers, striking for higher pay and union representation, have increased public scrutiny of low wages and poor conditions. Workers’ nationwide protests, among other factors, spurred industry-leader McDonald’s to identify several consequences of inequality as a threat to its long-term performance.
Fast food income inequality has serious repercussions for the entire industry—not just McDonald’s—and across the economy as a whole. Fast food companies and other firms will need to address their imbalanced pay practices in order to mitigate the damaging effects of income inequality.
Analysis of US company-level pay disparity shows that Accommodation and Food Services is the most unequal sector in the American economy, driven by extreme inequality within the fast food industry.
- Accommodation and Food Services had a CEO-to-worker pay ratio of 543-to-1 in 2012. Over the period from 2000 to 2012 the average ratio was 332-to-1, 44 percent higher than the sector with the next-highest compensation ratio.
- In 2012, the compensation of fast food CEOs was more than 1,200 times the earnings of the average fast food worker. Proxy disclosures recently released by fast food companies reveal that the ratio remained above 1,000-to-1 in 2013.
Pay disparity in the fast food industry is a result of two factors: escalating payments to corporate CEOs and stagnant poverty-level wages received by typical workers in the industry.
- Fast food CEOs are some of the highest paid workers in America. The average CEO at fast food companies earned $23.8 million in 2013, more than quadruple the average from 2000 in real terms.
- Fast food workers are the lowest paid in the economy. The average hourly wage of fast food employees is $9.09, or less than $19,000 per year for a full-time worker, though most fast food workers do not get full-time hours. Their wages have increased just 0.3 percent in real dollars since 2000.
Growing income inequality within fast food has troublesome implications for the economy and for companies in the industry.
- The most unequal sectors are among those providing the greatest numbers of new jobs in the economy, replacing jobs in sectors with lower income inequality.
- Income inequality is increasing legal, regulatory, and operating risks for fast food firms. Millions of dollars in legal fees, increasing customer wait times, and labor unrest are evidence of the systemic problems of income inequality in fast food.
Shareholders interested in the continued success of the fast food industry should be particularly attuned to these issues, since according to the industry leader inequality is already threatening the bottom line. Reducing the proportion of CEO-to-worker compensation by addressing bad practices on both halves of the ratio is one step toward realigning the interests of stakeholders in the firm, including shareholders, executives, and the workforce overall.
Download the report in its entirety here.