Finally, some CEO/worker pay ratios; but what are they telling us?

It’s here, the proxy season we’ve all been waiting for since 2010 when the Dodd-Frank Act mandated companies to publish the ratio between their CEO’s pay and that of the median worker. Eight long years coming, but it’s here. Just in the last couple of days… Duke Energy 175:1, US Steel 77:1, chemical company Olin got really precise – 91.68:1, Fifth Third Bancorp 145:1, supermarket chain Publix 62:1, medical company Humana 344:1, and Bank of America 250:1. Nothing spectacular here yet, but also disclosed are the median earnings of their employees. These were, respectively: around $122,000, $73,000, $79,000, $60,000, $40,000, $57,000, $87,000.
The Wall Street Journal had done a quick survey last week and found that the largest ratio so far was at Marathon Petroleum, at 935:1, and that’s because the CEO made $19.7m and the median worker made just over $21,000. Marathon makes its excuses by saying that it is because most of the employees it counts work in convenience stores and gas stations, when it excludes these the ratio is much lower, 156:1. But what does that prove? It proves that it doesn’t pay its employees in those petrol stations and convenience stores anywhere near enough money. Publix also gives two figures. It’s first calculation is based on median employee cash earnings of around $19,500, resulting in a ratio of 127:1. When it included all the elements of compensation for its worker that are included for the CEO, the figure rose to that $40k figure listed above, with the resulting lower ratio. That’s not in the nature of an excuse for a high ratio, more of a switch to an oranges to oranges comparison, flexibility that is written in to the SEC’s rules. The WSJ also found two companies with basically the same ratio (just under 430:1), hedge fund KKR and boiler maker AO Smith. The stories behind these two figures are very different, however. The median employee at KKR earned $265,000, while at AO Smith the median employee was a factory worker in China who made around $17,700. The co-CEOs at KKR earned more than $113m each and the CEO at AO Smith made $7.7m. Ahead of the official announcements of the ratios, Equilar conducted a survey of what companies are going to announce. Based on 356 companies, the median ratio was 140:1. Not as high as might have been expected, but higher than the ratio in the UK calculated in January by the High Pay Centre on Fat Cat Day, of 120:1 – though that is down considerably from last year because of the 16% drop in CEO pay. But clearly there is a big range around that US median, since the average was 241:1.The survey was anonymous, and Equilar only disclosed the maximum ratio it found in a media document it provided to me, not the widely-available summary report. The maximum ratio is 2,993:1, more than three times the ratio at Marathon.
The survey also breaks down the data by size and sector. Given that the consumer discretionary sector, including retail and hospitality, had the highest median ratio with 350:1, it’s possible that the maximum ratio is in that sector.

Equilar will launch a tool in late March that will track the ratios in real-time so we can keep up to date.

It should also be stressed that figure given is the median for the sector, so half of the companies will have even higher ratios. At the other end of the scale, companies in the Energy sector had the lowest median ratio at 72:1. Unsurprisingly, the ratio was positively correlated with various size factors, including company revenue and number of employees. More surprisingly, though probably less so to the people living there, there were some pretty stark geographical differences, with the ratio highest in south east US, and lowest in the Pacific region. On the other hand, of the 12 companies headquartered in Europe that responded to the survey, the ratio was 275:1. Equilar will launch a tool in late March that will track the ratios in real-time so we can keep up to date.
While it did not ask any questions on the issue within the survey, the report notes that companies must also decide whether they want to take any further actions and/or disclosures beyond simple disclosure of the figure, such as those by Marathon and Publix. While these are not mandated by the SEC, clearly a company with an extremely high ratio is likely to want to mitigate the inevitable negative press and stakeholder attention by doing some explaining. Equilar describes these as “general communications with internal or external stakeholders as well as contingency planning for reactive communications should the need arise”. Or, more colloquially: “We’d better do something about this quick, before the press gets their hands on it”. Yes, there are things a company can do to make it better, but a high ratio is going to create a firestorm of bad publicity for a company both internally and externally whether it can make the excuse of sector, size or geography. The company, whoever it is, that has a 2,993:1 ratio, has some explaining to do.