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Boards are encouraged to pay close attention to the ratio between CEO compensation and that of other named executives, as experts say this is a more meaningful measurement of good compensation practice than the SEC-mandated pay ratio rule.
Aalap Shah, Managing Director at Pearl Meyer, says the CEO-NEO pay ratio is very important to compensation committees, and is often discussed when setting pay packages. However, Shah says, “comp committees do want some differentiation; not everyone should be paid the same…You are not going to have an organization where everyone is a high performer.”
Pearl Meyer compared CEO and CFO pay, as the CFO is typically the highest-paid executive after the chief executive. It found that for companies with revenues of $500 million to $1 billion, the median ratio was 2.5:1. Meanwhile, for larger companies with revenues between $1 billion and $2.5 billion, the ratio was 2.7:1.
“We found that although some think that may be high, the CEO compensation tends to have a greater emphasis on long-term, performance metrics,” Shah says. “The pay is more at risk.”