A controversial regulation under the Dodd-Frank Act requires that beginning in 2018, publicly held companies must disclose the ratio between CEO compensation and that of the company’s median-compensated employee.
While a number of reports have pegged the typical current ratio as greater than 300:1, in Mercer’s survey of 117 companies the average ratio for a majority of respondents was less than 200:1.
A key finding of the survey, and a perhaps-surprising one to some observers, was that CEO pay ratios at financial services firms were actually low, compared with other industries. The retail/wholesale and consumer goods sectors showed the highest ratios, with the technology sector joining banking/financial services at the other end of the spectrum, according to Mercer.
“Supporters of pay ratio disclosure that hope it will pressure companies to reduce CEO pay may be disappointed to learn that banking and financial services companies, often criticized for excessive pay, have lower ratios than most other industries,” says Gregg Passin, North America leader of Mercer’s executive rewards business.
Industries with low ratios tend to have more professional staff, while those with high ratios have more part-time, temporary, and less-skilled employees, according to Mercer.
Mercer’s survey, conducted in August, included respondents across 12 industries with average revenue of $12 billion. The consulting firm did not release precise average ratios on an industry-by-industry basis, as respondents were asked to identify their company’s CEO pay ratio within bands (100:1 or less, 101:200, 201:300, etc.).
It did, though, conduct separate research focused strictly on 81 companies in the technology sector and found the average CEO pay ratio to be 95:1. Not surprisingly, Mercer says, the ratio tended to increase with company size due to a combination of higher CEO pay and lower median-employee pay.
Mercer says it conducted the broader survey to gauge companies’ level of readiness for the 2018 effective date of the CEO pay ratio rule. According to the survey, three-fourths of companies have already selected or are considering one or more calculation methods for determining the median-paid employee.
“Compliance requires advance planning and can be challenging, particularly for companies lacking robust payroll or [human resources information] systems, or that operate in many countries,” says Passin. “Companies will also need to assess the disclosure’s impact on various stakeholders — especially employees, half of whom will learn that their pay falls in the bottom half at their company.”
In addition, companies seeking to take advantage of the flexibility the rule affords for identifying the median-paid employee may want to test multiple calculation methods. For example, to select the median employee companies can use any consistently applied compensation measure. They can also use statistical sampling, and can take advantage of the rule’s limited provisions for excluding certain non-U.S. employees from the calculation.
For companies wanting to know how their ratio stacks up against other companies, key findings from the survey show:
- A majority (60%) of survey respondents have estimated their ratio, with more than half reporting ratios under 200:1 and only 20% reporting ratios of more than 400:1.
- Approximately one-third (32%) are considering statistical sampling as a method to identify the median employee.
- More than 80% of companies report their data systems are ready or, with some manual effort, adequate to identify the median employee.
“Companies that have not yet started to consider methodologies should not delay,” says Passin. “The regulatory flexibility for identifying the median employee provides both challenges and opportunities that can take time to explore.”