The CEO Pay Ratio: A Big Fat Dud
If you blinked, you may have missed the press coverage on the CEO Pay Ratio. All the usual news outlets ran the obligatory stories. Many data houses and consultants maintained databases on their websites where you could look up a company’s ratio. (And Pearl Meyer kept track, as well.) But as we leave proxy season behind, have we really learned anything?
- CEOs make a lot of money. It’s more than and a multiple of what other employees make.
- CEOs in manufacturing have lower pay ratios than CEOs in retail businesses.
- Companies with operations in low cost countries have higher CEO pay ratios than companies operating in higher cost countries.
I could go on, but the point is this isn’t anything we didn’t already know.
What isn’t disclosed is the cost of doing the calculation. In theory this should be a simple calculation. Identify the median employee, look at their pay, and calculate the ratio. That may work for a small domestic employer with a single payroll system, but it doesn’t work for most large employers who often have multiple payroll systems that don’t talk to each other. The sophisticated Human Resource Information Systems many larger employers have installed have a tremendous amount of information critical to operating the business, but identifying the median employee for most of our clients was not one of them. Time spent by company staff to do these calculations was significant—the SEC estimates the cost to be more than $1B.
Some have suggested the calculation is invaluable for investors. Really? Investors who are concerned with executive pay already express their concern through say-on-pay where companies ask shareholders to vote for or against their pay programs. Shareholders who are not satisfied with the say-on-pay outcome can sell their shares. Discussions with institutional investors don’t include pay ratio—it’s not on their radar.
Others have suggested pay ratio disclosure sheds a light on income inequality. Yes, but existing disclosure of executive pay already shows how much executives are paid. If the goal is to highlight income inequality, couldn’t we do it in a less costly way? For example, we could disclose the ratio of a CEO’s pay to the median salary of a worker in the company’s industry. The Bureau of Labor Statistics provides plenty of industry data for comparison.
Still more commentators say comparing pay ratios over time will reveal how companies are addressing the gap between median employee pay and CEO pay. We know that companies don’t think about the CEO Pay Ratio for this purpose. In fact, the only reason companies seem to think about the pay ratio at all is with respect to how much work it will take to comply next year. There are no discussions in the boardroom about what to do about the pay ratio.
So as a compensation professional, what is my takeaway? The CEO Pay Ratio is a waste of time and money. The important information—CEO pay—is already disclosed. It’s high compared to everybody else. Tell me something I don’t know.
