CEO Pay Ratio Disclosure Rule to Vex Boards

Survey offers glimpse of the huge gap between CEO & employee pay; lower worker wages at larger companies

By Eve Tahmincioglu

Corporations across the country will soon disclose how top executive paychecks compare to employees. Given some initial data, the revelations may be the next big business disruption boards need to address.

CEOs make 140 times the majority of their employees, according to a recently released survey from Equilar Inc., a board intelligence solutions firm that surveyed more than 350 corporations.

The data also unearthed another major imbalance - the difference in pay for those employees who work at large companies, compared to smaller ones. Turns out, workers at smaller companies make more money than those at larger companies.

“The difference in median pay, particularly between small and large companies, is quite striking,” said Shelly Carlin, executive vice president at Center On Executive Compensation, during an Equilar webinar on the survey findings last week.

While this survey was anonymous, the public will soon know these ratios and overall pay at specific major companies due to a requirement that kicked in this year, a rule that was part of the Dodd-Frank financial law.

The ratios will be included in the proxy statements of public companies during this fast-approaching proxy season.

Boards have prepared for the disclosure and most have been “vigilant” about figuring out how to implement it, maintains Steve Odland, CEO of the public policy organization Committee for Economic Development who sits on the board of directors for General Mills, Inc. and Analogic Corporation.

“Boards need to be sensitive to it; and there needs to be a communication plan,” advises Odland, a former CEO of Office Depot and AutoZone. “Sophisticated investors already understand it, so the issue is going to be employees of companies.”

The burden, he continues, is going to be on human resources departments. Boards should help HR think through how to handle pay disclosure and they need to make it clear, he adds, that compensation is market based.

“Boards need to think mostly about communications, mostly internal,” he notes. “I think it’s going to be especially more difficult for companies above median ratios within peer sets, or with the widest gap. They’re going to have to try and explain that in context.”

Equilar’s report offers a glimpse of the sizable gaps between executive and employee pay, especially at companies with more than $15 billion in sales; and also the disparities in overall pay for workers at large companies, compared to their smaller counterparts.

“It’s not just the ratio but the median pay,” pointed out Matthew Goforth, Equilar’s senior governance advisor during the webinar.

Here’s an overview of the key findings:

• The median CEO pay ratio was larger in direct correlation to company revenue, totaling 47:1 for companies below $1 billion in revenue and 263:1 for companies above $15 billion in revenue.

• Similarly, companies with the greatest number of employees had the largest ratio (318:1) and the smallest median employee compensation ($46,000). The smallest companies, with fewer than 2,310 employees, had the lowest ratio (45:1) and highest median pay ($85,580). Equilar split companies by employee size into five equal quintiles for this particular analysis.

Ratios by industry sector varied much more widely:

• “Consumer discretionary” companies, which include retail and hospitality, had the highest ratio with a median 350:1.

• Energy companies had the lowest ratio at 72:1.

• Median employee pay at the 48 consumer discretionary companies that responded to the survey was $21,840 vs. $107,887 for the 30 energy companies that responded.

The survey also looked at regional differences and found the highest gap at companies headquartered in the Southeastern United States, 153 to 1, and the lowest in the Pacific region, 113 to 1.

As far as the overall ratio, the difference "is to be expected,” says Stan Silverman, Vice Chairman, Drexel University and Founder & CEO of Silverman Leadership.

“Energy companies, which have a high percentage of engineers compared with consumer discretionary companies, which have a high percentage of people educated in less technically trained disciplines.

“As far as the magnitude of the ratios,” he adds, “that reflects market realities.”