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CEO Median Pay Ratio: Standard Deviation in Standards

April 8, 2015

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One of the measures proposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) is mandatory disclosure of the ratio between the CEO’s compensation and the compensation of the average worker. Though this rule has not yet been finalized, several companies have made a concerted effort to adhere to the potential ratio. One such company, Noble Energy (NYSE: NBL), included disclosure about its CEO Median Pay Ratio in this year’s proxy statement.

Noble Energy’s Disclosure

“Our Compensation Committee recognizes that executive compensation is an evolving area. We are still awaiting final rules to be adopted to implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 relating to compensation clawbacks, hedging transactions, pay ratio and pay for performance disclosures. In the absence of final rules, our Board has adopted a compensation clawback policy and a policy with respect to the hedging and pledging of our stock, which are discussed elsewhere in this Proxy Statement. We have also elected to disclose an estimate of the ratio between the pay of our CEO and the median for all of our other employees.

Mr. Davidson, who was both Chairman and CEO until Mr. Stover was appointed CEO on October 21, 2014, had 2014 annual total direct compensation of $8,479,814, while Mr. Stover’s was $4,901,031, as reflected in the Summary Compensation Table included in this Proxy Statement. We estimate that the median of the annual total direct compensation for all of our employees, excluding our CEO, was $103,500 for 2014. As a result, we estimate that Mr. Davidson’s 2014 annual total direct compensation was approximately 82 times that of the median annual total direct compensation for all of our other employees and Mr. Stover’s 2014 annual total direct compensation was approximately 47 times that of the median annual total direct compensation for all of our other employees.

The foregoing estimate may not be reflective of the pay ratio information required under rules, if any, that ultimately are adopted by the SEC.”

CEO Median Pay Ratio Difficult to Calculate

At first glance, it seems like a simple calculation. “Direct compensation” encapsulates the base salary, the grant date fair value of stock and option awards, and the earned portion of the executive’s non-equity incentive plan (NEIP). All these figures can be taken directly from the summary compensation table.

It should be noted that the “Change in Pension Value and Non-Qualified Deferred Compensation Earnings” is not actually paid by the company and was excluded from this calculation. Another excluded section is “All Other Compensation,” which includes items like perquisites, severance pay, and other miscellaneous compensation items. For Mr. Davidson, “All Other Compensation” hit a peak percentage of direct compensation in 2014 of 3.31%.

High-ranking executives, including the CEO, often have large amounts of their total compensation “at-risk.” While base salary has scarcely changed for the CEO of Noble Energy, his NEIP award has seen significant fluctuations over time, as indicated in the chart below.

Since 2007, his direct compensation has ranged between $7.35 million and $11.46 million, with a standard deviation of $1.26 million. Much of this is captured in the NEIP, which has a standard deviation of $1.14 million. While other elements of direct compensation are set by the board, NEIP is unique in that the reported value is what is actually earned. This factor is what distinguishes target pay from realized pay, and it leaves the NEIP more prone to large swings in value. With so much variation, it will likely fall to forerunners like Noble Energy to set the standard for how CEO median pay ratios are calculated.