Pay Governance Shows Median Employee Pay, Other Factors Beyond CEO Pay, Impact ‘Pay Ratios’ in 2018 Company Filings
NEW YORK–(BUSINESS WIRE)–The newly disclosed ratios of CEO pay to employee pay at U.S. public companies are driven more heavily by employee pay at a company and a variety of related business factors than by CEO pay at that company, according to a new statistical study from consulting firm Pay Governance (paygovernance.com). The study addresses company size and employee talent market differences that make cross-company comparisons technically challenging, if not impossible.
The Pay Governance researchers used a sample of 389 S&P 500 companies to examine the relationship between the ratio, CEO pay, median employee pay, industry pay, company size and company employee productivity.
“Our research found that companies with higher pay ratios often had lower median employee pay, which was typically and significantly impacted by industry labor market differentials, large offshore employee populations, large numbers of retail/part-time employees and other differences in employment strategies. Given the broad range of pay ratios resulting from these business model differences, we believe it may not be appropriate to compare pay ratios across industries, and sometimes even across companies in the same industry,” said Pay Governance Managing Partner Ira Kay. “This is consistent with the SEC’s original guidance that pay ratios were not intended for cross-company comparison.”
Pay Governance used statistical techniques to isolate the impact that CEO and median employee pay each had on the ratio. The researchers’ statistical model showed that a 10 percent reduction in median employee pay resulted in a 40-point increase in the disclosed ratio—increasing CEO pay by 10 percent did not have as significant of an effect.
“There are many technical challenges to comparing pay ratios between companies,” said Blaine Martin, consultant and researcher at Pay Governance. “Many companies will not have any business comparators with similar scale or talent strategy, which are key forces shaping the single pay ratio figure disclosed in a company’s proxy statement.”
Pay Governance advises public company Compensation Committees to use caution and avoid comparing their pay ratios to those of companies with significantly different employee population profiles. The consulting firm recommends that Compensation Committees and management teams continue to focus on monitoring and delivering competitive levels of pay for company employees based on the specific markets for talent of each role.
Pay Governance LLC is an independent consulting firm focused on delivering advisory services to Compensation Committees. The consultancy also advises company management in situations in which the firm does not serve as the independent committee advisor. Pay Governance has locations throughout the United States in New York, Boston, Detroit, Philadelphia, Pittsburgh, Chicago, St. Louis, Dallas, Cleveland, Charlotte, St. Petersburg, San Francisco and Los Angeles. The firm also has strategic affiliate relationships with Pay Governance Japan and Pay Governance Korea. For more information, visit www.paygovernance.com.
Don Rountree, 770-645-4545