Business Finance Regulations Society

Will CEO Pay Ratio Be 2018’s Most Discussed Business Metric?

Back in 2015 a new provision of the Dodd-Frank law was approved stipulating that U.S. companies had to start disclosing the pay gap between their top boss and regular employees, i.e., the “CEO pay ratio.” This provision wasn’t discussed very much at the time, and there was debate in 2016 about how to actually measure and report this data. However, last last year the SEC issued interpretive guidance on reporting and restated its desire the companies start to report this data in 2018. So we are now at the point where its effects are about to be felt across corporate America, and a new survey by the research firm Equilar points to some interesting outcomes that will surely make for interesting water-cooler talk. Equilar’s main findings are:

  • The median CEO pay ratio across all 356 submitting companies was 140:1, and the average was 241:1
  • Median employee compensation for all companies in the survey was $60,000
  • Zero companies in the Equilar 500 disclosed a CEO pay ratio ahead of the required rule for 2018
  • The median CEO pay ratio increased in direct correlation to company revenue, while median employee compensation decreased in direct correlation to company revenue
  • Ratios by industry sector varied widely, from 350:1 at consumer discretionary companies to 72:1 at energy companies

While these highlights are useful, it’s the sector analyses that are interesting. The Wall Street Journal provided a good breakdown of the data, and their analysis shows how the pay ratio is a function of several factors. First of all, pay ratios vary greatly by industry:

In the energy sector, most CEOs make less than 100 times what their median workers do, partly because the sector generates many high-paying jobs in engineering, on oil rigs and in renewable-energy fields. By contrast, in health care and financial services, where many firms employ large numbers of low-paid workers, CEO pay is typically 150 times that of a company’s median employee.

Of course, as one would imagine, the CEO pay ratio goes up with the value of the company:

Bigger companies tend to have bigger pay gaps, the Equilar data suggest. At firms with market capitalizations of less than $700 million, the median CEO pay ratio was 45. In contrast, at companies with $25 billion-plus market values, the pay ratio was around 250.

That disparity is largely a function of CEO pay: Larger companies tend to reward their chief executives with bigger salary, bonus and stock-award packages than smaller firms. Company size, on the other hand, makes less of a difference in pay for the median worker.

The number of employees also has a strong correlation with a larger ratio:

Companies with larger workforces reported lower median pay for workers—and the highest CEO pay ratios. That is likely because companies with big workforces tend to have more low-wage workers, and their CEOs command bigger paychecks.

Retailers stand out for their low median pay—at just over $13,000, the lowest among the 24 industries in the Equilar survey—and high pay ratio of 669. Chalk it up to the industry’s many part-timers, as well as low hourly wages.

And the larger the workforce, the more likely a company has significant overseas operations, where workers tend to earn less than their U.S. counterparts. For companies with sizable international workforces, that is likely to push up CEO pay ratios.

Equilar’s report is one of the early indicators of what awaits analysts as this data starts to come out in 2018. I have no doubt that most CEOs would have preferred to keep this information out of the public domain. While the pay of some of the most famous CEOs is already widely reported, the pay ratio data of most companies is still and unknown. If the CEO pay ratio becomes a common metric across the U.S., it will be interesting to see how that data drives discussions on Board comp committees and among rank-and-file workers. The latter have always known their CEO makes much, much more than they do. However, knowing that the boss makes “more” is not the same as knowing that he makes 700 times more, and this realization is something that corporate America may not be ready to discuss openly.


Read this post on LinkedIn.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: