Farient CEO Pay Ratio Tracker Update – April 3, 2020

April 3, 2020

An Outsourced Workforce and the High Pay of Commercial Real Estate: CEO Pay Ratios of Philip Morris and PS Business Parks

Welcome to another installment of Farient’s Pay Ratio TrackerTM update. Each week, we focus on the companies with the highest and lowest CEO-to-median-employee pay ratios. This week, we explore the highs and lows of the last two weeks of March’s pay ratio disclosure with Philip Morris International and PS Business Parks. As a reminder, the CEO-to-median-employee pay ratio is one of the provisions from the 2010 Dodd Frank Wall Street Reform and Consumer Protection Act implemented in 2018.

PHILIP MORRIS: Where There’s Smoke There’s Fire

Philip Morris (PM) is a $30 billion, multinational cigarette and tobacco manufacturing company, best known for its Marlboro brand. Of the companies that released their pay ratios in the last two weeks, PM’s was the highest, registering 1,156: 1.

Why So High?

Like many other multi-nationals, PM has a large portion of their employees outside of the US. In PM’s case, 99.8% of their workforce is based in other parts of the world. The median PM employee resides in Indonesia and is paid $19,134 annually. That median employee pay level, combined with the CEO’s $22.1MM package, yields the 1,156: 1 ratio. Like many high ratio companies, PM also reports an alternative pay ratio to ease investor concerns. Using a purchasing power parity index (PPP), essentially a cost of living adjustment, PM advertises an alternative ratio of 396: 1.

In an effort to further mitigate investor concern, PM follows its pay ratio proxy disclosure with a discussion of the Company’s reputation as an employer and includes reminders that the Top Employer Institute recognizes PM as a Global Top Employer. Additionally, PM is recognized with a global EQUAL-SALARY certification from the EQUAL-SALARY foundation.

PS Business Parks: Just the facts ma’am – PSB’s Low Ratio Merits Minimal Disclosure

PS Business Parks (PSB) is a $430 million real estate trust with over $2 billion in assets. PSB’s low pay ratio (11:1) is attributable in part to high median employee pay of $90,319 but was also reduced this year because CEO Maria Hawthorne received no equity in 2019. PSB’s pay ratio would be expected to rise next year when the Company’s New Equity Program, which was approved in January 2020, goes into effect. PSB’s pay ratio disclosure is brief and provides no explanations or alternative calculations.

Farient’s Takeaway:

Companies with low pay ratios rarely explain themselves with protracted disclosures or supplementary figures. On the other hand, a lengthy pay ratio disclosure does not necessarily indicate unfair treatment of employees, an ineffective board or a greedy CEO. As Farient noted in last week’s update, CEO pay ratios are often influenced by company-specific situations such as geography. These types of discrepancies can make “apples-to-apples” comparisons across companies and even company-specific year-over-year evaluations difficult. Investors should read the disclosures in full and be aware of all the factors influencing the pay ratio.

Say-On-Pay Bulletin

In addition to disclosed pay ratios, Farient is also focused on early AGM season results. To date, only two companies in the S&P500 have received less than 80% support for their SOP vote, Qualcomm (18%) and Disney (54%). In Qualcomm’s case, investors consistently noted concern over the grant of large special awards in the last two years, the more recent of which was without performance or service-vesting criteria. For Disney, investor dissent is largely over pay level; the CEO’s annual incentive award alone exceeded the Disney’s total pay median for their disclosed peer group.

Farient‘s CEO Pay Ratio Tracker™ provides updates on CEO to median employee pay ratio throughout the proxy season. In addition, for real-time information on Say on Pay votes, please visit our Say on Pay Tracker™ at Farient.com.

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