United States: As Proxy Season Ends, Equilar Dives Into Pay-Ratio Data

Last Updated: May 25 2018
Article by Cydney Posner

With over 2,000 companies now having reported pay-ratio information for the 2018 proxy season (through May 10), consultant Equilar says it's time to take a deep dive into the data to see what trends are discernible. Of course, until we have information for several proxy seasons, we really won't have a very good handle on best practices or even which standards will ultimately take hold. In the meantime, however, Equilar's analysis of the first year of reporting is a welcome beginning.

First, Equilar reports that the median pay ratio was 70:1 for all Russell 3000 companies and 166:1 for all Equilar 500 companies (i.e., the largest companies by revenue trading on one of the major U.S. stock exchanges—NYSE, Nasdaq or NYSE American (formerly AMEX)—adjusted to approximate the industry sector mix of similar large-cap indices). There were several companies that reported "0," because the CEO had declined to accept any compensation, while the lowest actual ratio reported was 0.000005:1, reflecting CEO pay of $1 compared with median employee pay of almost $200,000. The highest reported ratio was 5,908:1, reflecting—predictably—new-hire grants and other comp paid to a new CEO, while the median employee was a part-time office staffer who made around $6,000. (Of course, the "median" means that half the employees made less than that.)


I've been puzzling about why these median ratios don't even come close to those in general circulation outside of the SEC's pay-ratio mandate? For example, the AFL-CIO reported a CEO-to-worker pay ratio of 361:1 for the S&P 500 in 2017 and 347:1 for 2016. Similarly, according to a study from the Economic Policy Institute, for the largest U.S. public companies, CEO pay in 2014 was 303 times an average worker's pay, compared to just 20 times in 1965. (See this PubCo post.) Of course, it's hard to pin down the precise reasons for the differences—and there are probably several—but one factor appears to be the use of different employee pools and methodologies. For example, to determine employee pay, the AFL-CIO uses the average annual pay of only U.S. production and nonsupervisory workers. Similarly, the ratio from the Economic Policy Institute took into account annual compensation (wages and benefits of a full-time, full-year worker) of a production/nonsupervisory worker (which the Institute says comprises a group covering more than 80% of payroll employment). By comparison, the SEC's pay-ratio rules require determination of compensation for a median employee and inclusion in the employee pool (from which the median is selected) of part-time and overseas employees (except to the extent the de minimis exemption is used), but also includes in the pool potentially higher paid supervisory and non-production employees. However, how these differences affected the ratios is tough to decipher since, presumably, some of them would cut the other way in terms of their impact on the calculations. Puzzle not solved.

Pay Ratios

In examining relative pay-ratio data, Equilar found that market cap, employee count and industry appear to be significant determining factors. Equilar reported median ratios that varied directly with market cap: for companies with a market cap above $25 billion, the median ratio was 213:1, while companies with a market cap below $1 billion reported a median ratio of just 32:1. In between, companies with market caps between $10 billion and $25 billion showed a median ratio of 128:1, between $5 billion and $10 billion, the ratio was 110:1 and between $1 billion and $5 billion, the ratio was 64:1. Interestingly, however, Equilar reported that the highest individual ratios were not at the highest-cap companies; rather, the highest ratios were reported at companies in the $1 billion to $10 billion range.

Similarly, the more employees, the higher the ratio, reflecting generally both lower median wages for employees and, largely, higher CEO comp for bigger companies. For the Russell 3000, Equilar reported that the median pay ratio for companies with fewer than 1,000 employees was only 28:1, but where the employee count was between 10,000 and 25,000, the median ratio was 155:1 and, for companies with more than 50,000 employees, the median was 290:1.

Industry was also generally determinative, with the highest ratios, as widely predicted, reported for the consumer goods (142:1) and services (127:1) sectors and the lowest for conglomerates (43:1), healthcare (46:1), financial (46:1) and utilities (47:1). In between were the industrial goods (88:1), basic materials (76:1) and technology (69:1) sectors.

Design and Methodology

With regard to the use of exemptions allowed under the rule, Equilar reported that, among the Russell 3000, 24.5% reported that they took advantage of the de minimis exemption, which allows the company, subject to certain limitations, to exclude from the calculation of the median employee non-US employees that account for 5% or less of its total employees. But among the Equilar 500, 43.3% reported using the de minimis exemption. Fewer than 1% of companies made cost-of-living adjustments, an accommodation provided by the SEC that allows companies to adjust employee total comp to reflect the cost of living in the CEO's jurisdiction. With regard to disclosure of supplemental pay ratios, which the SEC permits so long as they are not misleading or presented with more prominence than the required ratio, Equilar reported that 9.4% of the Russell 3000 and 11.5% of the Equilar 500 disclosed an alternative ratio to help explain or put in context the mandated pay ratio. For example, a supplemental ratio might exclude special one-time payments to the CEO or certain portions of the workforce. Equilar observes that companies that most commonly took advantage of the flexibility offered by the rules were, not surprisingly in the consumer goods and services sectors, which, as noted above, reported the highest median ratios. According to Equilar, "a combined 36.7% of all companies that used a de minimis exception, 57.1% of all companies that used a cost-of-living adjustment and 31.8% of all companies that included a supplemental ratio came from...the consumer goods and services sectors."

For purposes of identifying the median employee, the most frequently selected "consistently applied compensation measure" was cash compensation: 40.1% of the Russell 3000 and 48.5% of the Equilar 500 used this CACM. The next choices were total annual comp (which includes equity), selected by 26% of the Russell 3000 and 21.5% of the Equilar 500, and W-2 income, selected by 21% of the Russell 3000 and 17.2 % of the Equilar 500. Much smaller percentages selected taxable income, gross income or total rewards as the CACM. With regard to methodologies used, only 2.9% of Russell 3000 companies and 6.8% of Equilar 500 companies utilized statistical sampling to determine the median employee.


Statistical sampling was originally advocated by the AFL-CIO as a way to provide companies with flexibility in collecting the necessary data, but companies seem to be reluctant to use it, perhaps as a result of concerns over accuracy or other criticisms. In this opinion piece from CFO.com, the author questioned a company's use of statistical sampling to identify its median employee, given the sample size of slightly over 200 out of almost 40,000 employees. (See this PubCo post.) Time will tell whether sampling catches on as a methodology in future years.

The question remains: how much will pay-ratio information matter? Two studies have shown that disclosure of a high pay ratio could very well affect consumer behavior, assuming that consumers become aware of these pay ratios—a big assumption perhaps. This study from the Harvard Business School, "Paying Up for Fair Pay: Consumers Prefer Firms with Lower CEO-to-Worker Pay Ratios," published in 2015, demonstrated "that the disclosure of a firm's pay ratio can influence consumer purchase intention" and that a "firm with a high ratio must offer a 50% price discount to garner as favorable consumer impressions as a firm that charges full price but features a lower ratio." The study concluded that the

"disclosure of a high pay ratio versus a low pay ratio leads to decreased willingness to buy and willingness to pay for a good..... These effects hold across different product categories and price ranges.... Relative to a high pay ratio, the disclosure of a low pay ratio positively increases consumer perceptions of firm warmth without sacrificing perceptions of firm competence..... Moreover, the disclosure of a low pay ratio versus a high pay ratio improves perceptions of most consumers without alienating any customer subgroups by political affiliation..... The negative effect of a high pay ratio persists in the presence of a price discount of up to 25%, and only diminishes (but does not reverse) at a 50% price discount..... Across our studies, we find that perceptions of wage fairness mediate the effect of revealing pay ratio consumer purchase decisions."

(See this PubCo post.) A subsequent study from the same group (with additions), discussed in this article from the WSJ, also concluded that "companies blowing past what people see as reasonable ratios of CEO pay to worker pay could take a hit to their business if the pay gaps are publicized."

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