May 7, 2018
Initial Readings of the CEO Pay Ratio
Nearly eight years after it was mandated by Dodd-Frank, the CEO Pay Ratio is making its debut. To date, about half of the S&P 500 and a third of the Russell 3000 have reported their figures. In this Farient Brief, we review pay ratios reported through April 15, diving deeper to see what they are telling us so far, and get a first glimpse at where they are likely to end up by the close of proxy season.
Check out the Farient Pay Ratio Tracker. See the big picture and drill down to specific companies to see how they compare to others in their industry.
Whose ratio is this anyway? CEO pay, not employee pay, drives ratio
It’s not surprising there are significant differences in median CEO pay across the S&P 500, S&P MIdCap 400 and S&P SmallCap 600 indices; $12.1MM, $5.8MM and $3.6MM, respectively, since company revenue is strongly correlated to executive pay. Here’s what is surprising: median employee pay is relatively consistent across all three of those indices, ranging between $58.6k and $68.9k. As Farient partner Marc Hodak explains, “The job of a typical clerk, engineer, or sales manager is not very dependent on company size. But being a CEO of a $10B company is a very different job than being CEO of a $1B one.” As a result, median ratios are much higher at larger companies than smaller ones. S&P 500 companies have a median ratio of 163:1, the MidCap 400 has a median ratio of 91:1, and the SmallCap 600 has a median ratio of 54:1. In the MIdCap 400 and SmallCap 600, 56 percent and 81 percent, respectively, of ratios are less than 100:1.
Where the CEO pay ratio outliers begin, business models make all the difference
While apples-to-apples comparisons between companies are impossible given the latitude, companies have in calculating their ratios, we can make observations on the impact of business models, including geographical location of CEOs versus most employees on the pay ratio.
Companies with large numbers of part-time or seasonal employees are reporting the highest CEO pay ratios, especially if those workers are located in developing countries. For example, Yum! China Holdings has, so far, the highest reported CEO pay ratio at 2818:1. The company has a U.S.-based CEO running a global operation staffed primarily by restaurant workers who are almost exclusively in China. The second highest ratio belongs to Aptiv PLC at 2526:1, driven by the median employee pay of $5,464 of its global workforce. Manpower Group and Six Flags Entertainment are other companies with eye-popping ratios at 2483:1 and 1804:1, respectively; their CEOs oversee large numbers of part-time and contingent workforces. For example, if Six Flags Entertainment’s seasonal employees were omitted from the calculation, its CEO pay ratio would be reduced to 264:1.
Special compensation awards for CEOs can also create large ratios. First Data Group reported a CEO pay ratio of 2,028:1. Its CEO received a $93MM equity retention grant, which ballooned his total compensation to $102MM in 2017. Without this one-time payment, First Data’s CEO pay ratio would have been 189:1.
On the flip side, Warren Buffet, CEO of Berkshire Hathaway, has the lowest reported CEO pay ratio to date at 1.9:1. His total 2017 compensation was $100,000 in salary. However, the value of his Berkshire holdings fluctuates an average of $900MM each day, illustrating a glaring example of what the ratio misses in making pay comparisons, especially with founder CEOs.
The CEO Pay Ratio may yield interesting information at an aggregate level
Among sectors, there appears to be a strong relationship between lower median employee pay and a higher CEO pay ratio. Within the S&P 500, median CEO pay ratios range from a low of 102:1 (Utilities) to a high of 396:1 (Consumer Discretionary). Consumer Discretionary and Consumer Staples (third highest ratio), include retailers, restaurants and hospitality organizations that have lower paid service employees, which brings down median worker pay. On the other hand, Utilities and Energy, the sectors with the two lowest ratios, have highly paid workers with special technical skills being applied in relatively difficult work environments.
And…Still more to come
The first year of the CEO Pay Ratio isn’t over yet, and Farient anticipates some additional surprises along the way. Because each company may choose from a variety of methodologies in determining the “median employee,” company vs. company comparisons are of limited value relative to the intended use of the ratio as a data point in evaluating executive compensation. Surprisingly, differences across sectors and other aggregate groupings of companies are providing interesting information about the impact of business models on relative pay.