May 29, 2020

Farient CEO Pay Ratio Tracker Update – May 29, 2020

The Year in Numbers

Welcome to the tenth and final installment of Farient’s Pay Ratio TrackerTM update for 2020. For the past several weeks, we have focused our research on companies with the highest and lowest CEO-to-median-employee pay ratios. As summer looms and proxy season winds down, we take a trip down “memory lane” to review overall trends in pay ratio over the first five months of the year. 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.

Pay Ratio Tracker: 2020 Recap

Where We Are: The Highs and Lows of 2020

With 82% of companies in the S&P 500 and MidCap 400 reporting pay ratios so far this year, the overall story is emerging. Of the S&P 500 companies reporting to date, the highest pay ratios belong to companies in the Consumer Discretionary sector, which boasts a median ratio of 395:1. The Utilities sector has the lowest median ratio, at 92:1. Notably, these findings are consistent with last year’s data.

Who’s on the Move?

As noted above, Consumer Discretionary remains the industry sector with the highest median ratio this year at 395:1, despite an 18% drop from 480:1 last year (calculated using only companies who have reported a pay ratio for both years). The drop was driven by a 6% decrease in median CEO pay, the biggest drop among all sectors, while median employee pay increased only 1%. In contrast, the largest year-over-year increase comes from the Communication Services sector, with a 14% increase in median pay ratio from 284:1 to 322:1. For this sector, the increase is the result of a 6% decrease in median employee pay while CEO pay remained similar to 2019.

As we look towards 2021 disclosures, we would expect the pay ratio in the Consumer Discretionary sector to increase significantly. Despite CEOs in this sector being the most likely to see their pay reduced (The Optics of Executive Pay in the Time of COVID -19), employees will be hit even harder with reduced earnings. Since many companies were forced to shutter stores during the pandemic, front line workers experienced reduced hours, and a corresponding reduction in earnings, from 2019 levels.

A Sampling of What We’ve Learned from this Year’s Pay Ratio Disclosures

Intel: Tech Giant Makes Quantum Leap

In terms of individual companies, Intel (INTC) had the highest year-over-year increase in pay ratio of all companies reporting so far, jumping 346% from 156:1 to 695:1. After a brief period serving as Intel’s interim CEO, Bob Swan assumed the position permanently in January of 2019, and accordingly received a promotional grant worth nearly $47 million. While the award was entirely performance-based, it brought Intel’s reported CEO compensation to $66,935,100 last year, up from $16,706,700 in the previous year. Unsurprisingly, the Company reported a supplemental pay ratio excluding one-time special awards, which comes to a much more modest 208:1.

Advanced Micro Devices: CEO Cashes in … Well You Get It

The second largest year-over-year jump in pay ratio was reported by Advanced Micro Devices (AMD), a semiconductor company that develops computer processers and, interestingly, competes directly with Intel. The increase from 165:1 last year to 604:1 this year is largely attributable to a one-time “value creation equity award” given to the CEO, Lisa Su, in August of 2019, to be earned over a five-year performance period. The award was given in recognition of her “unique and significant contributions” to the Company’s success over the past five years and to increase retention, and has a target value of $25MM, bringing Dr. Su’s total compensation to $58,534,288 (up from $13,356,392 the year before). AMD also reported a supplementary pay ratio, excluding the one-time equity award, of 172:1.

High on Energy, Low on Discretion: Median Employee Pay by Sector

As illustrated by INTC and AMD, large changes in a company’s pay ratio year over year tend to come down to the volatility in CEO pay. However, median employee pay is the primary driver of differences in pay ratios across sectors. Within the S&P 500, median employee pay varies by a factor of 5.6x across sectors from $27K for Consumer Discretionary companies to over $150K for Energy companies. CEO pay, on the other hand, varies only from just over $10MM (Real Estate) to $26MM (Communication Services), a factor of 2.6x. In other words, a company’s industry sector is far more indicative of that company’s median employee pay than of its CEO compensation. Presumably, the skillsets required of a median employee vary significantly by sector, while a CEO’s job tends to require a similar arsenal of strengths and talents irrespective of the industry.

Farient’s Takeaway:

For the past ten weeks, Farient has drawn attention to the many, often unexpected, factors that can drive an extremely high or extremely low pay ratio. This week, we identified one factor that contributes some predictability to the pay ratio – sector—and one factor that significantly reduces that predictability – volatility in CEO pay. The industry sector a company competes in is a consistent and relatively predictable indicator of how high or low its pay ratio may be. On the other hand, while industry classifications help us to identify consistent patterns in the pay ratio company-by-company, we cannot assume a company’s pay ratio in one year to be indicative of its ratio the next year. One-time special awards, non-annual grant cycles, and varying degrees of company ownership all ensure that a company’s pay ratio can change dramatically from year to year. Investors should be aware of all components of a CEO’s pay, especially anomalies such as large one-time grants, when assessing and comparing companies’ pay ratios.

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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