The Advisors' Blog

– Liz Dunshee

Was pay ratio “much ado about nothing?” This Semler Brossy blog joins the chorus that predicts that the ratio will garner more attention over time because people can easily track changes to the number. The blog recaps what we learned this year – and what to watch for going forward:

1. Pay ratio gives no new insight into pay practices. This is the easy one, and the current headline. Median employee pay is the one new data point. It also is useless for understanding differences among companies.

2. Scale & labor intensity drive pay ratios. Higher revenue = higher CEO pay = higher pay ratio. Labor intensity is more complex and a combination of items: number of employees, number of locations, use of part-time/seasonal employees, global span of employee population, insourced operations/manufacturing, and customer touchpoints. Median employee pay goes down when you increase any of them. Lower median employee pay = higher CEO pay ratio.

3. Median employee pay is not related to scale. This is why the CEO pay ratio doesn’t tell us anything new about the relationship between CEO pay and overall pay. Labor intensity is not a function of a company’s size. The result when you combine these two is that similarly sized companies may wind up with very different CEO pay ratios, making comparability difficult.

Median employee pay will be relatively stable over time in the absence of M&A or major strategic initiatives. But gradual pay ratio increases will occur over time if CEO pay grows at a faster rate than overall pay – and that trend could garner public attention. For that reason, compensation committees & others should monitor the impact of underlying pay ratio components and continue to be vigilant about communications.