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Article | Executive Pay Memo North America

Comparing CEO pay ratios: what the first 200 filings show

Governance Advisory Services |Executive Compensation

By Jamie Teo and Tricia Burton | March 26, 2018

Long anticipated, companies are now disclosing CEO pay ratios mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Quite naturally, many are very curious to compare their ratios with those reported by others. Before giving in to the temptation of benchmarking this ratio as is done when setting executive pay, consider the variables that go into calculating the CEO pay ratio.

Context counts

Our advice is to proceed with caution. When you review peer and market CEO pay ratios, make sure to put those disclosures in context so that differences are framed by labor demographics, company size, CEO compensation and calculation methodology. This may be less important for companies with ratios that are comparable with their peers, but when a significant disparity exists, it is time to focus on the reasons why.

Our data analysis focused on the outliers we reviewed in initial Securities and Exchange Commission (SEC) filings, to help illustrate the importance companies place in explaining ratios they anticipated to be substantially different from their peers. We also identified companies with lower paid workers as their median employee, and noted how their ratios would compare to industry peers. Then, we looked at the details of how companies performed their calculations, which provides helpful data as companies reflect on whether their methodologies significantly altered their results. 

All data presented reflect 200 disclosures representing S&P 1500 companies from 24 industry groups under the Global Industry Classification Standard (GICS), with revenue size ranging from $100 million to greater than $50 billion. Our research suggests several findings that merit discussion.

1. Median pay differences will fluctuate based on company labor models

Two major factors influence median pay fluctuations, as our work with over 200 clients finds: the geographic location of employees and their employment status.  In general, companies with:

  • A greater portion of their workforces in lower paying countries report lower median pay and higher ratios
  • A significant portion of their workforces employed on a part-time or temporary basis report lower median pay and higher ratios

Companies are not required to disclose this level of detail (e.g., the distribution of full-time versus part-time employees, or the full breakdown of headcount by country). This makes it somewhat challenging to compare ratios - even within an industry where similar workforce demographics might be expected. However, our first look at the data did give us some clues about the impacts of these two factors, and it is worth examining the direction of this trend, even this early in the game. 

Of our sample, 21 companies (10.5%) disclosed an alternative ratio, six of whom disclosed changes that meaningfully increased their median employee pay levels and thus lowered their ratios. Three of those excluded non-U.S. workers to disclose a different ratio, and the other three excluded a population that predominantly consisted of part-time/temporary employees. 

We anticipate more companies will disclose alternative ratios to better depict their pay ratios, particularly those in the retail industry that are very likely to have a part-time worker as their median employee.

We also reviewed six disclosures where the median employee was either part-time or foreign-based, and pay was below $15,000.  Two disclosed an alternative ratio, as discussed above.  At the median, the remaining four companies disclosed ratios that were significantly higher than the median reported ratio in their respective industry groups. 

An organization that has most, or even a significant proportion, of their employees in lower paid markets or in part-time positions, or both, can have a significantly lower paid median employee and a significantly higher reported ratio.

2. Variations in CEO compensation due to special circumstances and transitions

It is self-evident that CEO compensation skewed heavily toward performance-based pay will vary year-to-year based on the short- and long-term performance of the company. However, because the proxy disclosure rules have embraced the disclosure of the full grant date value for equity that may vest over future performance years, companies that have special circumstances may have anomalous grant values during those years. Such circumstances may include a merger, spinoff or other reorganization, or bringing on a new CEO.

This is a concern for companies in this situation. Of the 21 companies mentioned above that disclosed an alternative pay ratio, 13 companies disclosed different CEO pay levels in their alternative ratios. In nine instances, CEO pay was reduced by subtracting out one-time equity awards, which reduced their pay ratios from an average of 205:1 down to an average of 127:1. In three instances, the companies increased their CEO pay levels in the alternative ratio, mostly in circumstances involving a CEO transition where current year Summary Compensation Table (SCT) total compensation did not accurately reflect future CEO pay. In one instance, the alternative ratio excluded the change in pension value from its pay ratio calculation.

3. Flexibility in methodology predictably yielded a wide variety of approaches

Companies took full advantage of the flexibility afforded them by the regulations, with none more illustrative than the range of Consistently Applied Compensation Measures (CACM) used to rank and identify the median employee. Total cash compensation (32.5%) was the most common CACM, closely followed by W-2 pay (30.0%), as evidenced in the figure below.

Total Cash Compensation  32.5%
W-2 Pay  30.0%
Base Pay  19.5%
Total Cash Compensation + Equity 10.5%
Total compensation (with benefits) 3.5%
Summary Compensation Table total pay 3.0%
Other/not disclosed  1.0%


Nine companies (4.5%) disclosed using reasonable estimates to help determine the CACM for individual employees. Commonly cited reasonable estimates include estimating the number of hours worked for hourly workers and estimating overtime earnings. Eighty-five companies (42.5%) disclosed annualizing pay when estimating CACM.

Leveraging the exclusions allowed, 68 companies (34.0%) excluded employees on a by-country basis under the 5% de Minimis rule, and 28 companies (14.0%) disclosed excluding employees from newly acquired operations. 

Thirteen companies (6.5%) disclosed using a valid statistical sampling methodology to identify their median employees, the majority of which selected their median employees from a sample around their estimated median CACM. To the extent that more companies with more global workforces continue to file their proxy statements, we may see the category of companies that use statistical sampling to fill data gaps increase due to the challenges of collecting accurate data for employees at more remote overseas locations. 

Companies also have flexibility over whether to include health and welfare benefits to calculate the CEO pay ratio. Thirty companies (15.0%) opted to include estimated health and welfare benefits. The median value applied to the SCT total compensation calculation for the median employee is approximately $10,400, and the median increase to median employee compensation is 16%.

Twelve companies (6.0%) were impacted by a CEO transition in 2017. In nearly all cases, companies annualized the pay of the CEO as of the determination date. 

4. Other Disclosure Observations

  1. 95% included the CEO pay ratio disclosure outside the CD&A (e.g., after the SCT)
  2. 20% included visuals (i.e., charts or tables)
  3. 16% described their median employee (e.g., employee status, where employee is located)
  4. Average length: 377 words

For all the reasons discussed, we suggest companies focus on their own CEO pay ratios with internal and external communication support to ensure the appropriate context, rather than focus on challenging market comparisons.

Be on the lookout

We will continue to monitor these disclosures and will provide updated blog posts periodically examining how current trends continue or change.

Willis Towers Watson will also add the following language every time we show CEO Pay Ratios in our client reports and correspondence, highlighting the importance of context and analysis:

“As requested, Willis Towers Watson has provided to you the CEO pay ratio data for the following peers. However, Willis Towers Watson, in accordance with the SEC’s own guidance, does not recommend drawing any specific conclusions to peer comparisons on the CEO pay ratio on a standalone basis. The SEC has provided all companies significant flexibility in the estimates and assumptions used in their CEO pay ratio calculations. Therefore, each company’s unique methodological choices and demographic compositions render CEO pay ratio comparisons meaningless without a similarly rigorous analysis on the underlying assumptions and choices used to derive these ratios. Willis Towers Watson can assist you in the additional research, data and context required to render any meaningful conclusions from a CEO pay ratio deconstruction analysis to uncover and explain potential relative differences between your company’s CEO pay ratio and peers.”

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