What are the early trends in pay-ratio disclosure? Surveys conducted by compensation consultants provide some insights.
A survey conducted by Compensation Advisory Partners LLC of pay-ratio disclosures from 150 companies with a median revenue of $2.1 billion showed that, as of March 9, 2018, the median pay ratio was 87:1 (with median employee pay at approximately $58,000 and median CEO pay at $5.6 million). At the 25th percentile, the ratio was 36:1, while, at the 75th percentile, the ratio was 172:1. According to the survey, the lowest ratio was 1:1 (more about that in a later post) and the highest was 1465:1, for a company with an international workforce. CAP also reported that the ratio generally correlates with the size of the company, primarily reflecting variations in CEO pay rather than employee pay. The median ratio ranged from 20:1 for companies with revenue under $500 million to 218:1 for companies with revenue over $15 billion.
By comparison, in an article on a survey of 144 companies from comp consultant Mercer regarding expected pay-ratio disclosure, Bloomberg BNA reported that, for the majority of companies, the pay ratio was anticipated to be 200-to-1 or less. Those results seem to be in line with results of a survey of 356 public companies released in early February by Equilar. In that survey, the expected median 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. In this survey, pay ratio was also 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. (See this PubCo post.)
The CAP survey found that only 15 companies included a supplemental pay ratio and only three provided more than one supplemental ratio. According to CAP, the additional ratios typically reflected adjustments to CEO pay to reflect anomalous payments such as bonuses or equity awards. CAP observed that the supplemental pay ratio provided by three companies was actually higher, which CAP attributed to a probable desire to “provide context for a large year over year increase in the 2019 proxy statement.”
The Mercer survey also showed that most companies were taking a minimalist approach; a Mercer representative told Bloomberg that “companies’ ‘inherent conservatism’ seems to have taken over.” Of respondents in the Mercer survey, 87% indicated that they did not expect to add much additional information to their disclosures beyond the requirements. Only a few companies said they would report a second ratio that covers U.S. employees only or other executives only. For the remaining 13% of companies in the Mercer survey, the most common additional information expected to be included was the median employee’s position or location (although not the identity or other information that could violate applicable employee data privacy laws), followed by more information about the company’s workforce, such as the proportion of part-time or seasonal employees or geographic location.
The CAP survey showed that about one-third of companies excluded a portion of the workforce when determining the median employee, relying most often (approximately 55%) on the de minimis exemption, as well as the exemption for recent acquisitions. Individuals deemed to be independent contractors were also typically excluded.
In terms of location in the proxy statement of the new pay-ratio disclosure, CAP found that almost 70% of companies disclosed the pay-ratio information after the section disclosing Potential Payments upon Termination or Change in Control, while about 25% located it just before or after the Summary Comp Table. Only 5% disclosed it in CD&A as it was not typically considered in determining executive comp levels. About 25% also recommended that shareholders not use the pay-ratio information to compare against pay at other companies.
Companies are required to disclose the date selected to identify its median employee. Under the SEC rules, that date must be within the last three months of the last completed fiscal year. According to the CAP survey, 44% used the last day of the 4th quarter, 57% selected a day in the third month of the 4th quarter, and 29% selected a day in the first month of the 4th quarter.