Equilar has just released the results of an anonymous survey of public companies, with 356 respondents, which asked these companies to indicate the CEO-employee pay ratios they anticipated reporting in their 2018 proxy statements. As you would expect, there was a lot of variation among companies based on industry, market cap, revenue, workforce size and geography. In addition, because the rule provided significant flexibility in how companies could identify the median employee and in how they calculate his or her total annual compensation, variations in company methodology likely had a significant impact on the results. These variations in the data underscore the soundness of the SEC’s view, expressed at the time it adopted the pay-ratio rule, that the rule was “designed to allow shareholders to better understand and assess a particular [company’s] compensation practices and pay ratio disclosures rather than to facilitate a comparison of this information from one [company] to another”; “the primary benefit” of the pay-ratio disclosure, according to the SEC, was to provide shareholders with a “company-specific metric” that can be used to evaluate CEO compensation within the context of that company.
As you probably recall, the Dodd-Frank pay-ratio provision and related SEC rule require disclosure, in a wide range of SEC filings, of the ratio of the median of the annual total compensation of all employees of the company to the annual total compensation of the CEO (see this Cooley Alert). Adoption by the SEC of the final rule to implement the provision took more than five years from the date of enactment of Dodd-Frank in 2010, and the first pay-ratio disclosure in compliance with the rule will not appear in proxy statements until the 2018 proxy season; Equilar reported that no respondents to the survey provided pay-ratio disclosure in advance of that requirement. (The first filed pay-ratio disclosure was actually in a registration statement. See this PubCo post.)
Some of the key findings from Equilar’s survey include:
- The median CEO pay ratio was 140:1 and the average was 241:1. At the 25th percentile, the ratio was 72:1, while, at the 75th percentile, the ratio was 246:1. Median employee compensation for all companies in the survey was $60,000.
- Unsurprisingly, pay ratio was highly correlated with company revenues, with the median pay ratio at 47:1 for companies with revenues below $1 billion, 103:1 for companies with revenues in the $1 billion to $5 billion range, 160:1 for companies with revenues in the $5 billion to $10 billion range and 263:1 for companies with revenues above $15 billion.
- Number of employees was also a determining factor. Companies with the over 43,000 employees had the highest median ratio of 318:1, while companies with fewer than 2,310 employees had a median ratio of 45:1. One possible explanation for the correlation between large workforces and higher ratios may be that those large workforces include larger components of low-paid overseas workers or perhaps larger numbers of part-time or seasonal workers (whose pay must be included, but may not be adjusted to provide full-time equivalents). In between, companies with employees in the range of 2,310 to 7,070 had a median ratio of 90:1, companies with 7,070 to 15,700 employees had a median ratio of 143:1, and companies with 15,700 to 43,000 employees had a median ratio of 200:1.
- Industry sector was a crucial driver, given the enormous swings in worker pay levels across industries. For example, “consumer discretionary” companies, including retail and hospitality, which often employ many low-wage hourly workers, reported the highest median ratio at 350:1. Within that category, the WSJ reports, retailers, which reported the lowest median pay (just over $13,000 ) had the highest high pay ratio at 669:1, reflecting the prevalence in the industry of part-time and seasonal employees and low hourly wages. The lowest median ratio was in the energy sector at 72:1, where there are many high-paying jobs for engineers and workers on oil rigs. Respondents in the IT industry reported a median pay ratio of 110:1 and, as reported by the WSJ, the median pay ratio for tech hardware and equipment was 125:1 and for software and services was 115:1. Utilities (78:1) and telecom (92:1) also had relatively low median ratios, while consumer staples (236:1), healthcare (150:1) and financials (150:1) were at the higher end. Materials (141:1), industrials (140:1) and real estate (115:1) held the middle.
- Market cap also played a fundamental role. According to the WSJ, companies with market caps of less than $700 million had a median pay ratio of 45:1, while companies with market caps in the range of $25 billion to $85 billion reported a median pay ratio of 258:1, presumably reflecting much higher CEO pay. (Interestingly, the ratio declined to 243:1 for companies with market caps over $85 billion.)
- Headquarters geography likewise played a part, with the lowest median ratio in the Pacific U.S. (113:1), perhaps reflecting the concentration of high-tech companies and high cost of living (I can vouch for that). The highest median ratio was reported for the Southeastern U.S. at 153:1. The median pay ratio for the Northeast U.S. was 145:1, the Midwest was 149:1, and the Southwest was 120:1. Outside the U.S., the median ratios were lowest for Canada (74:1) and higher in Europe (275:1) and the Caribbean (214:1).
- In terms of selection of the consistently applied compensation measure (CACM) used to determine the median employee, 46.4% respondents said that they used a component of employee cash compensation to determine the median employee, 21.4% used W-2 income, 19.7% used “total rewards,” including total direct compensation (cash, stock and options). One in eight respondents used “other” methodologies.