See what Seven Months of the CEO Pay Ratio Looks Like

August 15, 2018

After the initial rush of proxy season, CEO pay ratio disclosures continue to trickle in. We highlighted the fact that sector and staffing strategy, and the associated employee pay, significantly influence the reported ratio. We also suggested that comparisons across companies would continue to be difficult given latitude in acceptable calculations. In this week’s Farient Brief, we revisit the pay ratio for new discoveries since May.

Since Farient’s last CEO pay ratio brief in May, 93 companies in the S&P 500 have reported their ratio, bringing the total to 418 companies reporting. The overall median in the S&P 500 is 157.5:1, which is an increase of 5 since our last report. This new collection of disclosures was dominated by Consumer Discretionary companies with 25 and Information Technology companies, with 21 reporting. For proof points that sectors matter when evaluating extremes in pay ratio, one needs to look no further than companies releasing their pay ratio since April 15, which include The TJX Companies (ratio of 1,501:1), Electronic Arts (371:1) and Wal-Mart (1,188:1).

The previous seven months of the CEO Pay Ratio disclosures have been uneventful. Depending on industry/sector and median employee pay, we expect the ratio to be higher in Hospitality, Consumer Discretionary and other sectors that employ more part-time workers. It’s still impossible to do a comparison across companies since there is no standardization of the methodologies and calculations used to determine the ratio. I do think that time will tell how valuable this disclosure is in the world of executive pay.

– Zanvi Patel, Partner, Farient Advisors LLC

Although early concern was voiced regarding companies becoming front page news for their extraordinary CEO pay ratio, more focus has been placed on median employee pay than the ratio itself. As we mentioned in our previous brief, business model has a significant impact on the magnitude of the ratio. Not surprisingly, sectors with the lowest median pay have the highest ratios. In the S&P 500, the Consumer Discretionary sector has the highest median ratio at 453.5:1 and the lowest median employee pay at $26,095. The Consumer Discretionary sector includes McDonald’s, Mattel and Target, among others. This sector often represents companies with part-time and seasonal staff, which lowers their employee median pay. Consumer Staples ranks number 2 in median pay ratio and includes the second lowest employee pay group among sectors. This inverse relationship appears in the interactive graphic below.

Median Employee Pay vs. CEO Pay Ratio

There is no standard requirement for disclosing the CEO pay ratio, and companies have varied widely in their explanations. Where some have simply disclosed the ratio along with little to no explanation, others, particularly those with special circumstances, have chosen to explain their pay ratio in much more detail. Contingent, part-time and offshore employees which drive down median employee pay are often highlighted, as are one-time awards to the CEO. One example, Ralph Lauren Corporation, explained their 1,111:1 ratio referencing a one-time equity grant for their new CEO, who recently joined the company. The explanation stated that “without the one-time awards” their ratio would be 595:1, which they “expect to be more in-line with the estimated pay ratio in future years.”

Finally, with over 80% of the S&P 500 reporting, we don’t expect overall median ratios to change over the remainder of the year. But that doesn’t mean that these disclosures should receive less attention or be ignored. With six more months to go and blue-chip companies including Apple, Walt Disney, Nike and Oracle waiting in the wings to disclose their CEO Pay ratios, we think there may be some surprises on the horizon. Stay tuned.

Explore the Farient Pay Ratio Tracker

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