United States: Consultant Pay Governance Analyzes Pay Ratio

Last Updated: June 11 2018
Article by Cydney Posner

In this analysis, compensation consultant Pay Governance looks at the factors affecting pay-ratio results and, in light of the feverish media coverage that insists on comparing ratios among companies, offers advice on dealing with that onslaught of comparisons. In their analysis, the authors conclude that pay-ratio results are more affected by median employee pay than by CEO pay. And, because median employee pay can be highly variable depending on the company's industry, geographic location, international operations and business model, pay-ratio comparisons among companies are "fraught with technical and structural issues," and "potentially problematic," especially between the companies with the highest and lowest pay ratios. Of course, it was never the SEC's intent that pay-ratio be used for comparative purposes across companies; as the SEC made plain in the adopting release, "the final pay ratio rule should be designed to allow shareholders to better understand and assess a particular registrant's compensation practices and pay ratio disclosures rather than to facilitate a comparison of this information from one registrant to another." That caution notwithstanding, the issue continues to confront boards and comp committees, and the authors suggest ways that boards can navigate these shoals.

Pay Governance studied pay-ratio data for 389 companies in the S&P 500. Interestingly, among those companies, the median CEO pay level was relatively consistent with that shown in many other studies at $12.1 million; however, the median of the "median employee pay" level—$70,129—was almost $20,000 more the average U.S. private sector salary of $50,620, as determined by the U.S. Bureau of Labor Statistics. (Counterintuitively, the pay-ratio median includes part-time employees and (presumably lower-paid) foreign employees.) The study focused on two questions:

  1. "How much of the pay ratio variation is associated with CEO and/or median employee's pay?
  2. What variables affect the pay ratio, and which drive a ratio to the extremes of the public company distribution?"

Although the pay-ratio disclosure requirement appears to have been rooted in the desire to clamp down on perceived runaway executive pay, the authors conclude that, ironically, "pay ratios are more strongly correlated with median employee pay than with CEO pay due to greater variability in median employee pay across S&P 500 companies." (The correlation coefficients were 57% for CEO pay and -72% for median employee pay (showing an inverse correlation)). The authors attribute the difference in variability to the number of drivers: CEO pay is driven primarily by industry and size, while median employee pay depends on industry, business model (e.g., whether certain functions are outsourced to low-paid non-employees or performed internally in geographically diverse labor markets), geographic employee distribution and skill level. As a result, the differential between the highest- and lowest-paying industries for median CEO pay was 92% but, for median employee pay, the differential was 305%. Note, however, that the situation was reversed for company revenue, with the differential between above- and below-median revenues at 55% for CEO pay and only 18% for median employee pay.

The authors then looked at the attributes of companies with pay ratios in the top 10% (747:1) and bottom 10% (55:1). With regard to revenues and number of employees, high-ratio companies tended to have higher revenues ($13 billion) and more employees (69,000) than low-ratio companies (revenues of $5 billion and 7,700 employees). High revenues are associated with higher CEO pay (median CEO pay of $15.3 million), and high employee headcount is associated with lower employee pay (median employee pay of $19,000), hence the higher pay ratios. By comparison, companies with low pay ratios had median CEO pay of $5.7M and median employee pay of $108,000. Interestingly, the study also found that companies with higher profit per employee also tended to pay their employees more and have lower pay ratios. For example, high pay-ratio companies showed median profit per employee of $13,522 compared to $78,840 for the lowest pay-ratio companies.

The authors conclude, however, that, relative to industry pay data from the Bureau of Labor Statistics, it was not the case that high pay-ratio companies consistently underpaid their employees. Rather, the study found that high-ratio companies were in industries with lower market pay levels according to BLS labor market data ($40,739 compared to the annual mean national wage of $50,620 in 2017). Note also that, in contrast to the BLS data, the pay-ratio data included non-US employees and part-time employees, which, to some extent, may help explain the difference between the median employee pay of $19,170 for highest-ratio companies and the BLS labor market data. In contrast, the lowest-ratio companies were in industries that had higher BLS market pay levels (median of $102,242, compared to the pay-ratio median of $107,771, suggesting that off-shore employees did not have as significant an impact for these companies.)

While low-ratio companies tend to have lower CEO pay (which, the authors suggest, may reflect founders or CEOs with prior large equity holdings or grants), large high-ratio companies may have typical CEO pay but lower median employee pay (potentially reflecting offshore or part-time employees). As a result, the authors conclude that "[t]aken together, these facts illustrate why pay ratio comparisons, particularly between the highest- and lowest-decile pay ratio companies, are potentially problematic."

In an effort to further understand the impact on pay ratios of CEO versus employee pay, the authors conducted additional analyses: their "findings, after adjusting for company size and labor market, supported [the] study's overall findings. While both CEO and median employee pay had major impacts on the ratio, employee pay had a larger impact." For example, "at the median ratio, a 10% increase in CEO pay increased the ratio by 25.6 points (from 171:1 to 197:1), while a 10% decrease in employee pay increased the ratio by 40.6 points (from 171:1 to 212:1)."

Despite the cautions that comparisons are inapt, if raised by the media, by investors or otherwise, companies and boards may still be compelled to address them. In that event, the authors suggest that companies assemble data for a group of five to ten comparative companies that focuses on the competitive labor market (because, as noted above, employee pay has a greater effect on the ratio.) These comparative companies would have "similar broad-based employee demographics: that means similar headcounts, geographic distribution of employees, employee skill level, and staffing models (e.g., part-time versus full-time)." The group is very likely to be different from the peer group used for executive pay benchmarking. The authors caution that "some of the largest S&P 500 companies may have few appropriate companies for comparison, if any, and pay ratio comparisons or benchmarking should not be forced in such cases."

Instead of comparisons, however, the authors advocate that companies take the view that the ratio is only one of many components, adopting a principles-based approach to pay equity that focuses on the appropriate markets, governance and competitiveness of CEO pay and employee pay. To that end, the authors suggest consideration of responses to the following questions:

  1. "Are the compensation practices and levels for both executives and employees consistent with the company's business strategy and philosophy? While some stakeholders may second-guess a company's compensation program (ie, a high level of CEO pay and low level of employee pay), an economically successful company will create productive jobs with competitive pay over the long term.
  2. Are executive compensation setting processes and disclosures exhaustive and consistent with good governance standards? Is say-on-pay support high?
  3. Are broad-based pay levels fair and competitive for the level of skill, experience, and hours of employment? Have these levels been confirmed with market data?
  4. Do broad-based pay structures represent a competitive wage for full-time employees in the local economy?
  5. Have recent company-wide surveys identified pay as a concern? Where did pay stand in relation to other concerns?"

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions