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Digging into CEO Pay Ratio Disclosures

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When the U.S. Securities and Exchange Commission (SEC) implemented the CEO pay-ratio disclosure last January, it was clear the implications would be far-reaching.

Initially, certain industries were the focal point for consideration. The Wall Street Journal reported in early 2018 that ratios ranged from 72:1 (Energy) at the low end to 669:1 (Retail), with the latter easily outpacing other sectors because of its typically low wages. Consider that Food, Beverage and Tobacco ranked a distant second at 223:1.

However, some of the figures come with a caveat based on another variable, according to research by Pearl Meyer. In its report with data provided by Main Data Group, the consultancy found that, of the first 1,039 companies to file proxies, 99 filed a supplemental pay ratio. Of those 99, 14 filed a supplemental ratio higher than the required ratio. Organizations used a methodology that differed from the required rules outlined by the SEC for a variety of reasons. 

Filing Higher
The 14 organizations that filed a supplemental pay ratio higher than the required ratio most commonly did so to smooth the effect of one-time or multi-year grants to a CEO, according to the Pearl Meyer research. The organizations explained that the sum of the outgoing and incoming CEO pay or annualized summary compensation table (SCT) values for a new CEO would not reflect a consistent ratio year over year given the uniqueness of the first year in the role, explained Deborah Lifshey, managing director at Pearl Meyer.

“If you had two CEOs in one year, the rules allowed you the flexibility to do a couple of things. You could either combine the two CEOs’ pay, or you could take the incoming CEO’s pay and annualize it,” Lifshey said. “The problem is, a lot of times when you take an incoming CEO’s pay and annualize it, it might not be as high as it would otherwise be once you’re in the position. So, some companies made the assumption that if the person was in the position for the full year, what would they have gotten for a full year. It might’ve been a little bit higher, but could also be lower if the value of a sign-on award is not included.”

Some of the ratios also went up when organizations annualized a one-time equity award that had been granted in 2015, 2016 or was scheduled for 2018 and, therefore, didn’t hit the 2017 SCT, Lifshey explained. The thought process of filing a higher ratio, Lifshey said, is because these organizations are anticipating their ratios will spike in 2019 and are strategically providing a higher supplemental ratio now to avoid future negative perceptions about their year-over-year pay. 

On the Low End
Of the 99 organizations that filed additional disclosures, the average of the supplemental ratios was 137:1, which is significantly lower than the average of the required ratios of 329:1. The Pearl Meyer analysis revealed a couple of trends among organizations that disclosed a supplemental pay ratio that was lower than the required ratio — including organizations that have a large overseas presence within their workforce.

“For example, if you had 90% of your workforce in Malaysia and 10% in the United States, you would probably find a median-paid employee who was very low,” Lifshey said. “However, if you said, ‘Well, this exercise is about really looking at U.S. companies and it’s a U.S.-based rule; what happens if I just take my U.S. employees and compare it to my CEO?’ So that would be considered a supplemental ratio, because the rules allow exclusion of all your non-U.S. workforce (unless it’s under 5% of the total population), but a company may think that’s more appropriate.”

Lifshey ascertained that organizations with a significant retail aspect to their business also submitted a supplemental pay ratio. Because a large portion of retail workforces are part-time or seasonal, the disparity between a full-time, year-round median employee and the CEO would, in their mind, be inaccurately reflected. Thus, they established their median pay only based off full-time employees.

The organizations that excluded part-time and temporary workers reduced their ratios the most. On average, the supplemental ratio was only 25% of the required ratio in those cases. Organizations also were able to include supplemental ratios that were 44% of the required ratios by applying a cost of living application.

Less Is More
Organizations that decided against filing a supplemental ratio most likely determined that the less info the better, Lifshey said, because there is a very little clarity for how the pay-ratio information is going to be used this year. Looking ahead, Lifshey said she expects supplemental ratios will become more prevalent next year when the year-over-year company-specific comparisons are under the microscope.

“I think most people took the position that you didn’t have to make an argument this year, because nobody was really going to vote on anything for or against based on the ratio,” she said. “And, you didn’t know how you were going to look compared to your peers. The common theme was ‘Let’s just keep it really streamlined,’ and that’s really what most companies did. They provided the three pieces of data that were required under the rules and then briefly described the underlying methodology.”

About the Author

Brett Christie is a staff writer at WorldatWork.