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CEO Pay Ratio and Investor Perception
July 13, 2016
When the majority of public companies filed their annual proxy statements this spring, only a handful preemptively
addressed the SEC’s upcoming addition to the
Dodd-Frank provisions and disclosed the
ratio of their CEO’s pay
to a median employee. A comparison of
Equilar data on median CEO pay in the S&P 500 and
U.S. Bureau of Labor Statistics data for the median U.S. worker shows that the relationship between those figures
grew 20.0% since 2007, reaching a new high at approximately 250:1 in fiscal 2014.
Recently,AFL-CIO Paywatch found that
S&P 500 CEOs earn 335 times the average nonsupervisory worker. That number, of course, can vary greatly based on the
included parties and certainly on a company-by-company basis.
Though early adopters disclosing the ratio are few, economists and investors are weighing the potential outcomes when
disclosure will be required beginning in 2018. According to a study published in the
American Accounting Association’s (AAA) Journal of Management Accounting Research, a higher-than-industry pay
ratio in conjunction with higher-than-industry CEO compensation significantly reduces the perception of fair CEO pay,
and the attraction to invest. The study suggests that companies seeking a positive public image adhere to industry
norms.
In the study published by the AAA, researchers measured perceived investment value based on financial and compensation
disclosures. Study participants rated CEO pay fairness, workplace climate and ability to attract and retain executive
talent as leading indicators of investment potential. Participants rated companies disclosing high CEO pay (relative to
industry) as more attractive, suggesting high CEO pay increases a company’s perceived investment value because it
increases a company’s ability to attract and retain executive talent while minimally affecting the workplace climate.
That said, the study also identified a dip in investor confidence for companies disclosing a comparatively high ratio
of CEO pay to the median employee. The study suggests companies that allocate a disproportionate slice of the pie to
their CEOs, as compared to employees and peer companies, are likely to face heightened investor scrutiny.
The study anticipates that the additional disclosure will influence shareholders as they evaluate potential investments.
While the SEC acknowledged no specific objective behind the mandate, such an accessible comparison is sure to experience
scrutiny from various parties, including the media and the general public, in addition to those stakeholders discussed
here.
Separately, at the end of June, the SEC proposed a deregulatory measure that would “reduce the information provided to
investors who own shares in small companies,” according to
The Wall Street Journal. The article noted that this proposed measure would
expand the number of firms eligible to provide investors with two, instead of three, years of past financial results,
and “the SEC said the plan would fulfill a new requirement imposed by Congress to reduce reporting requirements on
smaller public companies.” According to the Journal, information relevant to the CEO-median employee pay ratio would be
included.
Equilar’s Insight tools provide compensation and governance professionals customizable keyword search tools to
uncover the latest in regulatory disclosure; as well as access to compensation, incentive and equity plan, and
pay for performance data and models, including a new SEC Pay for Performance calculator.
Learn More.
For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of Content &
Marketing Communications at dmarcec@equilar.com. Ryan Villard, research
analyst, contributed to this post.