The CEO pay to median employee pay ratio introduced in 2017 by the U.S. Securities & Exchange Commission (SEC) has largely failed to provide a common point of comparison between companies, or to grab as many headlines as initial enthusiasm suggested. However, in certain situations, it may be indirectly useful in gauging the relationship between a company’s executive pay and human capital management strategies amid unfavorable macro-economic pressures.
What the CEO Pay Ratio Requires
The SEC’s CEO pay ratio rule requires each public company “to disclose the ratio of its compensation of its chief executive officer (CEO) to the median of its employees.” This new disclosure requirement was set into effect by the Dodd-Frank Act for all publicly listed companies other than those ascribed to the following classifications: small reporting companies, foreign private issuers, MJDS filers, emerging growth companies and registered investment companies.
Stumbling Blocks
Critics of the CEO pay ratio disclosure often point to the SEC’s relatively loose direction in identifying the median employee of a company, which largely relies on the company to develop its own methodology. The SEC stated that “the rule would allow companies to select a methodology based on their own facts and circumstances.” It is this variability that creates some uncertainty with the data point, since the methodologies used by different companies are not always compatible.
An Indirect Risk Indicator?
Though the usefulness of the CEO pay ratio itself is questionable, Glass Lewis has found on occasion that some of the data that is required to be disclosed can help in assessing the rationale for some executive pay decisions, particularly as companies tackle macroeconomic headwinds and shareholders gauge the risk of poor human capital management amid such headwinds.
By way of example, Glass Lewis reviewed the median employees’ pay disclosure included with Raymond James Financial, Inc.’s 2022 and 2023 proxy statements and found a year-over-year pay increase of 6% for rank-and-file employees, compared to a 50% increase in base salaries for most of the named executive officers. The dramatic increase in fixed pay for the executives was provided under the guise of a challenging recruiting environment and the impact of inflationary pressures. In this way, data disclosed in connection with the CEO pay ratio can help to provide context for the company’s broader approach to human capital management and workforce issues.
That’s particularly salient in the current environment. Executive compensation has always been a lightning rod, but recent years have seen growing investor interest in broader workforce pay. Corporate responses to the COVID-19 pandemic and the subsequent Great Resignation dominated shareholder voting in 2021 and 2022, and concerns regarding the impacts of inflation and other macro-economic challenges have the potential to define the 2023 proxy season.
Looking for More?
This post is an excerpt from a new Glass Lewis special report, Revisiting the CEO Pay Ratio. The report presents exclusive data on the evolution and correlation of pay ratios to company performance and say on pay voting, analysis of the rule structure and implementation, a review of academic literature on the topic, and case studies illustrating the pay ratio’s limitations — and limited, indirect potential uses.
Revisiting the CEO Pay Ratio is available to Glass Lewis clients on Viewpoint and Governance Hub. Not a Glass Lewis client? Get in touch.