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CEO pay ratio of limited value — for now

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CEO pay ratio of limited value — for now

In 2018, U.S. companies began disclosing the compensation of what they identify as a "median" employee and telling investors how that stacks up to the top executive's pay. This CEO pay ratio varies wildly from company to company, making initial comparisons difficult even within similar industries. However, as data points accumulate over time, observers say the disclosures will become increasingly valuable.

Some activist shareholders are looking at the CEO pay ratio as a metric for how companies are managed. But differing employee demographics, such as the location of the workforce and the role a company chooses for its median employee, make like-for-like comparisons difficult. And how companies perform, in such metrics as earnings growth and total return, can result in starkly different CEO pay.

S&P Global Market Intelligence analyzed the 64 companies in the S&P 500 Financials Index that disclosed CEO pay ratios in the year through Oct. 22. The results were wide-ranging. Coming at the bottom of these disclosures was the median annual compensation of $24,714 at S&P Global Inc., a financial media and data company with about 20,000 employees around the world. A large percentage of S&P Global's workforce is in lower-cost centers. A company report shows that 61% of S&P's global workforce is in the Asia-Pacific region; 26% is in North America; 10% is in Europe, the Middle East and Africa; and 3% is in Latin America. S&P Global Market Intelligence is a division of S&P Global.

On the high end, the median employee compensation was $183,050 at Everest Re Group Ltd., a Bermuda-based reinsurer with about 1,300 employees.

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CEO pay ratios in the analysis of S&P 500 financial companies ranged from less than 2 at the low end, where Berkshire Hathaway Inc. Chairman, President and CEO Warren Buffett's annual compensation has been $100,000 for more than 25 years. That compares with the $53,510 annual total compensation the company determined for its median employee.

Jefferies Financial Group Inc. was at the high end of the analysis, with a CEO pay ratio of 489. The company was formerly called Leucadia National Corp., a conglomerate that had investments in various sectors and companies, including National Beef. In 2018, Leucadia announced a plan to slim down its non-financial investments and change its name, a move that came about five years after it became sole owner of the New York-based investment bank Jefferies. Jefferies identified its median employee as an assembly line worker at National Beef in rural Kansas making about $44,000 per year.

Some observers say the CEO pay ratio's usefulness for investors as a stand-alone figure is limited.

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"Data points are only valuable as they collect and time passes. Then you can start to infer trends," said Timothy Stark, director of client engagement and corporate governance at Equilar, a firm that provides data for board recruiting and executive compensation, among other areas.

Cross-company comparisons are not very meaningful either, according to Stark, given the wide variations in how firms calculate the CEO pay ratio. What's more, he said, the median employee can look completely different from one company to another, citing the case of Weight Watchers International Inc., whose CEO pay ratio is 5,908.

"There's a very good reason that Weight Watchers came out so astronomically high with their ratio, and that's because their definition of a median employee is a part-time administrative assistant who works about 10 hours per week," Stark said in an interview.

At S&P Global, about a quarter of employees are based in the U.S., according to the company's 2018 proxy statement. S&P determined that its median employee was a full-time, salaried junior professional working outside the U.S.

Capital One Financial Corp., on the other hand, examined global payroll data for its 50,429 employees, identified a cohort of employees to determine its median compensation, then removed the employees with non-U.S. compensation, according to the company's 2018 proxy.

"If the companies aren't very similar with comparably calculated denominators, it's always going to be an apples-to-some other fruit" comparison, Stark said.

Despite the potentially significant differences in approach, some activist shareholders are homing in on CEO pay ratios.

"This gives us another dimension to look at ... how does this company look at dividing the compensation pie," said Cheryl Smith, managing partner at Trillium Asset Management, a socially responsible investment management firm with more than $2.5 billion in assets under management. Trillium sponsored dozens of shareholder proposals in 2018 alone, on environmental, social and governance topics ranging from workplace diversity to board accountability to climate disclosures.

The CEO pay ratio "certainly helps us understand how the company is being managed and guided," Smith said.

Under its current policy, Trillium generally votes against executive compensation proposals if a CEO's pay is more than 150x the median household income. Now that companies are disclosing median employee compensation figures, Trillium is reassessing these guidelines.

"We're watching this with a lot of interest," Smith said of the CEO pay ratio. "We need to do a little bit of analysis on what those numbers look like to give ourselves guidance on how we're going to vote the proxies based on that ratio in the future."

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