First Look at CEO Pay Ratio

March 22, 2018 Sharon Pistilli and Scott Allen

Although it feels like ages ago, in 2015, the Securities and Exchange Commission adopted the CEO pay disclosure rule mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, effective with the financial year starting on or after January 1, 2017. The first proxies to include CEO Pay Ratio disclosures are now being released. Using Aon's CEO Pay Ratio report we evaluated the initial data in order to provide you with initial insights.

Background

The intent of the Pay Ratio Disclosure rule is to provide shareholders with some sense of the relationship between CEO compensation and employees. Public companies are required to report the ratio of CEO annual total compensation to the annual total compensation of the median employee. While governance organizations have generally said they will not make recommendations based on the pay ratio, it is expected the media will report on the subject, especially in year one. 

Our Preliminary Findings

Among companies in our CG Pro database so far this year, the median CEO pay ratio is 114:1. Not surprisingly, the larger a company’s revenue size, the higher the CEO pay ratio. The level of CEO pay is typically highly correlated with the revenue size of the organization, while factors other than revenue size drive the level of pay for a typical median employee. In addition, larger companies are more likely to have foreign operations and roles in lower cost locations.

                         CEO Pay Ration (CEO Relative to median employee)

While the preliminary sample size is somewhat small to slice by industry, there are some initial findings to note thus far when dividing by the Global Industry Classification Standard code. In the first analysis of companies that have disclosed pay ratio to date, our CG Pro tool was able to determine that the highest ratios are within consumer durables and apparel, pharmaceuticals, and health care industries. As for the industries that have smaller pay ratios, they tend to be ones that have more US-centric workforces and higher median pay. We will provide an updated analysis as more companies’ disclosures become available.

Alternative Pay Ratio

Disclosure rules allow companies to provide an alternative ratio in addition to the required pay ratio. Most often, companies have excluded one-time equity awards from their required pay ratio calculations.Twelve of the companies thus far chose to provide an alternative ratio. The median alternative ratio was 25% lower than the required ratio, and the average was 18% lower than the required ratio. Interestingly, one company’s alternative ratio was higher than the required ratio. 

Calculation Methodology

There are many variations of calculations companies can use to reach their end ratio. The methodology for determining the median employee is determined by each company, either by using the actual median employee, or statistical sampling. In addition, companies decide which employee data set should be reflected. Companies are required to include both U.S. and non-U.S., full-time, part-time, temporary, and seasonal workers. Non-U.S. employees are excluded only if they are from countries where privacy laws may prevent the company from complying with the rules, or in cases where non-U.S. workers make up 5% or less of the total employee population (the de minimus exclusion). Another calculation consideration for companies is the ability to apply a cost-of-living adjustment to the actual total compensation of the median employee.

Among the companies in this analysis, only five reported using statistical sampling and only one reported using a cost of living adjustment. At this point companies do not appear to be seeing a benefit from the extra work required to use these two adjustments.

If you have any questions, or would like to know how Aon and CG Pro can help your organization navigate the complexities of corporate governance issues, please contact us.

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