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Human Capital in the Twenty-First Century

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Something doesn't taste right when it comes to how American retail and restaurant companies are paying their executives and workers.

The average starting salary for a new worker at the fast food chain Chipotle is approximately $21,000 per year. Last week, shareowners resoundingly voted against the nearly $60 million cash and stock compensation given to Chipotle's co-CEOs in 2013.

Tomorrow, at the McDonald's annual meeting, the New York City pension funds will vote their 2.6 million shares against the $9 million executive pay package of CEO Donald Thompson. While Thompson's compensation may seem reasonable compared to that of Chipotle's CEOs, it's higher than it would have been had the board not increased his salary by 14 percent and made other upward adjustments, despite the company's lagging performance. Far more troubling, the board moved the goal posts to make it easier for Thompson to receive incentive pay for perpetuating company performance that is mediocre at best.

What's not sitting well at both of those companies, and the industry in general, is a fundamental imbalance in the way that they manage human capital.

We see it in the disappointingly slow economic recovery and in the widening gap between stagnant real wages and ever-rising CEO pay. And now we see it in the streets as thousands of fast-food workers fight for wages that can support individuals and their families.

The mounting backlash against pay disparity in the fast food industry is understandable. A recent report by the public policy organization Demos found that fast food has the highest ratio of CEO-to-worker pay: over 1,000-to-1 in 2013. This shocking gap is twice the ratio of the next most unequal industry.

The backlash isn't just about economic justice, it's about economic growth. Expanding inequality puts our entire economy at risk. As long-term investors, we are concerned that inequality also has consequences for fast food companies themselves, as well as for other low-wage employers. After all, many fast food customers work low-wage jobs, whether as cashiers, janitors, security guards, shelf-stockers, or food servers.

In addition to its toll on customer spending, the extraordinary level of inequality within fast food creates a variety of legal, regulatory, and operational risks, as mounting strikes, wage theft lawsuits, and increasing customer wait times clearly demonstrate. McDonalds admitted as much in its annual report, in which the company acknowledged that growing public concern over inequality and the company's low wages may negatively affect the company's operations and reputation.

In 2006, the New York City pension funds adopted a policy in support of the disclosure of the CEO-to-worker pay ratio. As the policy states, wide disparities in pay can "affect employee morale, quality of work, productivity, with potentially negative impact on firm value and shareowner interests." Although the Dodd-Frank Act of 2010 made pay ratio disclosure the law of the land, the Securities and Exchange Commission has yet to finalize the sensible rule it proposed to implement the law.

Pay ratio disclosure and analysis are more important today than ever, as shareowners hone in on how companies manage their human capital in order to create sustainable, long-term value. To date, the focus has mainly been on pay at the top, not the bottom of the wage scale.

It's true that investors as a group haven't succeeded in reining in excessive CEO pay. In part, it's because we don't always agree on how much is too much. But as the Chipotle vote demonstrates, even the most passive investors recognize when CEO pay crosses a threshold from the rational to the absurd.

Shareowners may not be in agreement about how little is too little when it comes to pay. But earning about $15,000 a year, full-time pay at the federal minimum wage, is simply not enough.

To reverse the trend toward widening inequality, executives and boards of directors must commit to a balanced approach to human capital management so that all employees -- from cashiers to CEOs -- receive fair compensation for their contribution to their company's success.

We've seen this work at a number of retailers such as Costco and Trader Joe's. These companies treat their employees as assets rather than simply a cost that must be minimized. They invest in their employees and deliver solid shareowner value, which shows that low wages are a choice rather than a necessity.

The fast-food industry must take responsibility for the risks that its unbalanced approach to human capital management have created for shareowners, workers, communities and the economy as a whole.

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Scott M. Stringer is the comptroller of the City of New York and investment adviser and a trustee of the New York City Pension Funds, which have $150 billion in assets.