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Learning From CEO Pay Ratio Disclosures

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April 05, 2018 | Jennifer Namazi

Learning From CEO Pay Ratio Disclosures

Perhaps one of the longest talked about topics in equity and executive compensation circles has been the anticipated CEO Pay Ratio disclosure. Eight years in the making (the disclosure was mandated by Congress in legislation post aftermath of the financial crisis of 2010), there has been much anticipation around the disclosure – largely because companies would be disclosing the pay of their median employee (and establishing the ratio for how that relates to the CEO’s pay) for the first time.

I’ve blogged about this previously, particularly the possibility for significant employee morale issues once workers have the ability to see how their own pay stacks up to that of the “median” employee in their organization. So, with over 1,000 companies having filed their pay ratio disclosures to date, what are we learning from the disclosures?

The median pay for employees overall is higher than many compensation experts expected (about 75k, but this varies significantly among industries and company sizes). I think that leading up to the disclosures, there was concern that if median pay was low and pay ratio high, there would be large scale morale issues once employees came to realize how little their pay is relative to the CEO. With the median pay coming in higher than expected in most cases, does that mean employee morale is no longer a concern? Actually, as Deb Lifshey of Pearl Meyer points out in her blog “Median Employee Pay Not Quite the Spectacle Anticipated” (March, 2018), “The flip side of what appears to be a relatively high average median employee pay figure is the fact that half of a company’s population will now perceive themselves as being paid less than their peers. If they believe they are paid less than median, it may impact productivity and job satisfaction and even lead to retention issues. The problem is compounded this year if these workers understand that corporate tax cuts led to a windfall for their employer, which may not have been shared among employees.”

Evaluating the median pay at peer companies is going to need a “devil is in the details” approach. The disclosures are showing that the median employee pay for companies that appear to be peers is often not similar. The Wall Street Journal highlighted one such comparison – that of AT&T and Verizon (“Does Verizon Really Pay the Typical Worker 60% More Than AT&T?” – March 28, 2018). Verizon’s reported median employee pay is about 60% higher than that of AT&T. While at a glance the companies may appear to be industry peers, offering similar services, it’s not until one dives into the details that differences are seen. I won’t get into all the details in this blog – but the article dissects the disclosures and identifies many factors that would lead to differences in employee pay between the two companies (including things like the portion of the overall workforece working in retail, the number of contractors, etc.).    

From what I’m hearing, it seems that employees are less interested in the ratio of pay to that of the CEO than they are to learn what the median employee is paid. I am wondering – are your employees asking questions about the disclosures? Did you communicate in advance about median pay? I'd love to hear feedback on how your employees are reacting to the disclosures. 

We’ll keep monitoring pay ratio disclosure trends and keep you informed about new developments as they arise.
-Jenn

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