One of the most reviled—at least by highly compensated executives and pro-business leaders—demands of the Dodd-Frank Act may be living on borrowed time, with a deregulatory target on its back. Nevertheless, an initial batch of proxy disclosures is trickling in, and they tell an interesting story.

Beginning with fiscal years ending on or after De. 31, 2017, companies are required to disclose the ratio that compares the compensation of the CEO to the compensation of the median employee.

Compensation Advisory Partners (CAP), an executive compensation consultancy, has been tracking early pay ratio disclosures. As of March 9, 2018, it obtained pay ratios from 150 companies with median revenue of $2.1 billion from a cross-section of industries.

The median pay ratio disclosed by these companies is 87:1. The lowest ratio is 1:1 (Apollo Global Management, Dorchester Minerals, and The Carlyle Group) and the highest ratio thus far is 1,465:1 (Fresh Del Monte Produce Inc.).

As expected, the research shows that pay ratio correlates with company size, with larger companies disclosing higher ratios.

“It is definitely a function of the company,” says Lauren Peek, a principal at CAP. Del Monte, for example, is a large multinational company whose median employee is not located in the United States and is paid far less than a domestic workforce when compared to the CEO’s $8.5 million in annual compensation.

“When you look at their ratio, it is going to be very large, versus private equity firms and limited partnership firms where they have very few employees and not all of the compensation they are receiving is part of the calculation,” Peek explains. “At Apollo and Carlyle there are large dividend payments these CEOs receive that’s not included in the calculation for median pay.”

CEO pay also varies greatly depending on the size and complexity of the organization. Employee pay has less variability since it reflects the job function and does not vary significantly based on the size of the organization, CAP says. The median ratio in its sample of 150 companies ranges from 20:1 for companies with revenue less than $500 million to 218:1 for companies with revenue greater than $15 billion.

Only 15 companies thus far have disclosed a supplemental pay ratio, with only three companies disclosing more than one additional ratio. These companies with supplemental ratios are typically adjusting the CEO’s pay, which may exclude anomalies such as a one-time special bonus or equity award, CAP reports. “Interestingly, three companies disclosed a higher supplemental pay ratio likely to provide context for a large year-over-year increase in the 2019 proxy statement,” the firm wrote.

“These companies may have filed a supplemental ratio, which is not required, to show that the ratio is not really as high as it looks as per the SEC rule,” Peek added.

Exactly where investors locate the actual disclosures may also be evolving.

Nearly 70 percent of companies thus far disclosed their pay ratio after the Potential Payments upon Termination or Change in Control section of the proxy statement. Approximately 25 percent of companies disclosed the ratio just before or after the Summary Compensation Table, and a small minority, 5 percent, disclosed it in the Compensation Discussion and Analysis.

“I think that one of the consequences, unintentionally, of the pay ratio rule is to have a conversation on a more global scale about pay in different countries. There is no secret that a U.S. workforce and wages looks very different than a Chinese workforce from a wage perspective.”
John Trentacoste, Partner, Farient Advisors

“We’ve definitely seen the bulk of the companies disclosing it after the end of the compensation tables,” Peek says. “The reason companies are doing that is because they do not want their shareholders to see, or be signaled, that this pay ratio was something they considered when setting CEO pay. ‘This was just a required disclosure, so let’s put it in our proxy, because we have to, but we will put it after our compensation tables.’ ”

The SEC’s final rules give companies the flexibility to use any date within the last quarter of the fiscal year to identify the median employee. In CAP’s early assessment, most companies commonly used the last day of the fiscal year or a date within the last month of Q4. It is also common for companies to use a day within the first month of Q4 to identify the median employee.

CAP found that approximately 25 percent of companies include language in the disclosure that the ratio should not be used to compare pay levels to other companies within the industry, region of the country, or revenue size.

“Companies are very likely to look at what others in their industry are doing, but continue to set their CEO pay based on factors such as the job performance of the CEO, the tenure of the CEO, how well the company is performing, as well as what others in their peer group or industry are paying, versus saying, ‘Oh, our pay ratio is on the high side,’ so let’s make a change,” Peek said. “I don’t think we are going to see much of that.”

CAP found that companies were taking advantage of flexibility the SEC allows. Approximately one-third of companies excluded a portion of their workforce when determining the median employee.

“The most common rationale is the de minimis exemption (approximately 55 percent) whereby a company can exclude up to 5 percent of its non-U.S. employee workforce,” the report says. “Companies also commonly cited an acquisition or corporate not responsible for setting pay independent contractors) as rationales for excluding certain employee groups.

“As more companies continue to file their proxy statements in the coming weeks, we will likely see larger pay ratios, particularly as companies with a significant part-time workforce begin to disclose their ratios,” CAP concluded. “We do not anticipate an increasing trend in the number of companies filing supplemental pay ratios, though it will be interesting to see the rationale for those that do. We expect to continue to see companies placing the pay ratio outside of the CD&A with most disclosing it after the Potential Payments Upon Termination or Change in Control section.”

It adds: “2018 will be the first performance year after the passage of tax reform. We do not expect companies to unwind their use of performance-based pay and good governance practices, yet we foresee greater use of individual and strategic performance measures, along with increased use of discretionary pay decisions, in moderation.”

If the pay ratio rule manages to survive beyond this year, could the light it sheds on workforce pay trigger an international effect?

“I think that one of the consequences, unintentionally, of the pay ratio rule is to have a conversation on a more global scale about pay in different countries,” says John Trentacoste, a partner at Farient Advisors, an independent compensation and corporate governance firm. “There is no secret that a U.S. workforce and wages looks very different than a Chinese workforce from a wage perspective.”

“We’ve been having a debate for many years about whether that is fair on a global basis, but now we have pulled back the curtain a little bit and see the ways these global companies are operating,” Trentacoste adds. “I think there is a danger of misinterpreting the ratio when having that conversation. It may not necessarily provide a basis of evidence upon which one can rest their argument either for or against.”