The rise of dumb pay at America’s largest corporations

There’s a school of thought that “the market” sets the salaries for CEOs and low-wage earners alike. But that’s not the case.

FORTUNE — Which two companies have promoted “My Little Pony,” have given back pay due to wage theft accusations, pay some employees less than a living wage, and have the same person on their board compensation committee?
Answer: McDonald’s (MCD) and The Walt Disney Company (DIS).

From 2008 to 2012, the board member in question — Susan Arnold, who chairs the compensation committee at Disney — received fees from Disney that were 70% greater than the average received by Fortune 100 directors, according to an analysis by the Center for Economic Policy and Research (CEPR). The report shows that under her direction, Disney CEO Bob Iger received pay raises that were 96% greater than other Fortune 100 CEOs, putting Iger in the top 3% of Fortune 100 CEO earners in 2012.

There’s a school of thought that “the market” sets the salaries for CEOs and low-wage earners alike. But that’s not the case. Living, breathing people with names and street addresses make such decisions, and usually the three people who sit on a board’s compensation committee are responsible.

Board compensation committees are charged with ensuring that employee pay policies don’t cause unnecessary risk or harm to the business, like the kind of damage caused by wage theft or sub-living wage salaries.

Wage theft “is not only against the law but morally and ethically incomprehensible,” says Susan Steinbrecher, author of Heart-Centered Leadership: Lead Well, Live Well. Not paying a living wage lowers worker productivity and creates stress on employees who should be viewed “as human beings, not just workers,” and the practice, she says, “doesn’t serve the company or its brand.” Yet many board compensation committees fail to address these risks.

To be sure, compensation committee members base their decisions on the beliefs and desires of others, and that leaves a wide range of possible outcomes. Some companies, like Southwest Airlines (LUV), choose on principle not to lay off workers — even during a financial crisis.

When the labor supply shrinks or demand for workers rises, compensation committee members can choose to reward CEOs for giving their staff raises. Two weeks ago, Disney offered a pay contract to a union coalition representing more than 20,000 full-time workers at Disney World that would “raise starting pay from $8.03 an hour to $10 an hour by July 2016” in exchange for no pensions for new hires, according to the Orlando Sentinel.

But Disney could afford to raise hourly wages by $5 for the bottom-earning quartile of its full-time employees, giving even more people a living wage. Assuming that the tax deduction would offset any additional benefit costs, the income statement impact would be $432 million on Disney’s annual earnings of over $6 billion. With potentially lower staff turnover, better customer service, higher productivity, and a better reputation, the raises may even pay for themselves. For comparison, the compensation committee awarded one person, Disney CEO Robert Iger, $108 million in the last three years, according to the company’s 2013 summary compensation table.

Not many compensation committees are moving to pay the rank and file more. Even as U.S. unemployment is decreasing, “wage gains continue to proceed at a historically slow pace in this recovery, with few signs of a broad-based acceleration,” Federal Reserve Chair Janet Yellen said on April 16.

While we may be on the cusp of change, most large company compensation committee members don’t have more than a surface understanding of how their decisions to squeeze worker pay affect the economy, their businesses, and the lives of the people who work at the companies they represent. Yet they have a myopic focus on controlling the labor supply and its costs. Some even seem to approach the process as a blood sport.

Think about the public calls by Facebook (FB) and Google (GOOG) for looser immigration standards — or companies like Apple (AAPL) offshoring jobs and then requesting that the government give them tax breaks to repatriate income.

A recent report from the Institute for Policy Studies (IPS) points out that restaurant company CEOs receive huge tax-subsidized paydays while their companies lobby to prevent an increase in the minimum wage. Meanwhile, their workers “rely on at least one public assistance program — at a cost of nearly $7 billion per year,” according to a University of California study. Restaurant chain Darden joined Disney in Florida to crush efforts to require mandatory sick leave last year. Many companies have worked together to limit the ability of municipalities to address pay issues in their community. Disney did not respond to a request for comment.

Interlocking board relationships contribute to pay woes and economic malaise. Who will take the first step to address these problems? “If McDonald’s changes its practices, that could have a ripple effect across low-wage industries,” Tsedeye Gebreselassie, an attorney with the National Employment Law Project, recently told Fortune.

For over five years, until his death, former Apple CEO Steve Jobs sat on Disney’s board. The month following Jobs’ death, Disney’s Iger joined Apple’s board. When we think of Jobs and compensation, we remember his place at the center of the Silicon Valley stock options backdating scandals. But the deceased tech CEO and many tech executives who serve on each other’s boards (including Apple’s, Google’s, Intel’s and Intuit’s) were the focus of a recently settled class-action lawsuit.

The suit was related to a 2010 antitrust settlement with the Justice Department over whether board member efforts to decrease worker mobility represented collusion to “price fix” worker pay. Facebook is not a party to the litigation. But an Aug. 10, 2008 email written by Facebook COO Sheryl Sandberg (who is a former Google executive and current Disney board member) states, “I think what really happens is that companies who have relationships agree in limited ways not to solcit [sic] from each other. To my knowledge, google has never agreed not to hire from any company. Google did agree not to solicit from intel, apple and maybe a few others due to board relationships.”

The accusations raise antitrust concerns and potential conflicts of interest. From 2005 through part of 2009, Google’s compensation committee included members of Apple’s board (Art Levinson) and Intel’s (INTC) board (Paul Ottelini). According to court documents, in their roles on the Google compensation committee, they discussed adjustments to compensation for Google’s employees.

(And according to his deposition, Ottelini provided Intel salary data to Google.) But whose interests were they representing in those conversations? How, given the competing interests, were these board members able to exercise the duty of loyalty required of them? One email to Google’s then-CEO indicates that for Ottelini, Intel came first: “Can you please reinforce the no-recruiting agreement. I would appreciate it. Thanks, Paul.”

The inside information and special relationships directors obtain by sitting on each other’s boards is also a competitive concern. In his 2013 deposition, Ottelini was asked, “Upon your joining the Google board, did you immediately suggest collaborations between the two companies?” His response: “Probably.” This represents a conflict of interest. And Google’s proxy statements do not discuss its breadth of collaboration and related party business arrangements with Intel or Apple. Google did not respond to a request for comment.

Levinson left Google’s board in 2009 amid Apple antitrust concerns. He now chairs the Apple board while running a company called Calico, which is funded by Google. In his deposition for the wage fixing case, Eric Schmidt — the executive chair of Google and a former Apple board member (who resigned from Apple’s board amid antitrust and conflict of interest concerns in 2009) — discussed the product collaborations between Apple and Google.

When asked, “What is the executive chairman position?” Schmidt responded, “Whatever I’d like it to be.” Regarding soliciting employees, he said, “I remember at some point discussing to have some of the board members not be — you know, their companies not be — not be targeted” for poaching. Based on the emails in the court records, Schmidt came across as hyper-vigilant in making sure Google recruiters followed such “do not call” rules. And a Google recruiter who was discovered to have not followed the currently banned recruiting rules was “terminated within the hour.”

Bill Campbell, former CEO of Intuit (INTU) and a member of Apple’s board, appears on a number of the case’s emails as a go-between between Apple and Google. In his 2013 deposition, he explained that he was the only non-management, non-board member who regularly attended Google board meetings in his role as advisor to Schmidt.

Today, many boards want “industry expertise,” but at what point does the concentration of power and information negatively affect competition, compensation, and innovation? Companies today rapidly change their business models and enter new industry segments and markets. As technology changes, a company that is not a competitor can easily become one.

University of Houston law professor Darren Bush says that when companies offer a bundle of goods, like media, technology, and entertainment, antitrust enforcement can get complicated. “You see a lot of merger investigation, but it doesn’t amount to anything. You don’t see strong merger challenges,” he says. Rather, you see regulators and enforcers “settling on the cheap,” where a company gives away a small portion of their business. “At some point, these companies are massive — there’s not a way to challenge it and unscrambling the eggs is not possible,” he says, in part because of the “political power you can wield once you are larger.”

If small companies get together to fight the large ones, as for example in the case of the publishers against Amazon, the antitrust enforcement goes against them, Bush told me. Because merger enforcement has been lax, it’s “okay today if you are the biggest kid on the block, the 300-pound mayor in munchkin land. But if all the munchkins in munchkin land come together to fight the mayor, that’s likely illegal,” Bush says.

Our way out of the quandary rests with the ethics and awareness of a handful of people at each company. What are the chances?

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board education and advisory firm. –Eleanor Bloxham, CEO of The Value Alliance