September 12, 2018
Employee Headcount Drives Pay Ratio?
– Liz Dunshee
This recent Exequity analysis finds that, other than for companies in the “industrials” sector, pay ratio figures are significantly driven by employee headcount – even more than they’re driven by CEO pay, which is an input in the calculation. Here’s an excerpt:
– Employee count is strongly and positively correlated with the CEO Pay Ratio, 0.58, meaning the more employees a company employs, the higher the CEO Pay Ratio.
– Median employee pay is strongly and inversely correlated with the CEO Pay Ratio, -0.74, meaning the lower the median pay, the higher the CEO Pay Ratio; (though we would note, median employee pay is also an input to the CEO Pay Ratio, so this finding is less meaningful than the relationship between employee count and the CEO Pay Ratio).
– CEO pay correlates well with the CEO Pay Ratio, 0.53, but ranks below median employee pay and also ranks below employee count (again noting that CEO pay is an input to the CEO Pay Ratio).
– Revenues correlate well with CEO pay, 0.46, but bear little relation to median employee pay, -0.07.
– Employee count is inversely correlated with median employee pay, -0.46, and positively correlated with CEO pay, 0.28; this is notable because it means higher employee counts are associated with both lower median employee pay and higher CEO pay.
– Employee count is strongly correlated with revenues, 0.79.
– Market cap is weakly correlated with both median employee pay, 0.15, and the CEO Pay Ratio, 0.19.
As you can see, profit measures are absent from the list of things impacting pay ratio. That’s not too surprising since the intent for this disclosure was to draw attention to “average worker” pay, not to illustrate annual profitability. But the memo highlights that – statistically – pay ratios don’t bear any consistent relationship to shareholder returns:
Correlations between median employee pay, the CEO Pay Ratio and 1-, 3-, and 5-year performance show no meaningful relationship between median employee pay and performance or the CEO Pay Ratio and TSR. Segmenting the data into quartiles by each measure reinforces the fact that there appears to be no relationship between the CEO Pay Ratio and TSR performance. Therefore, drawing any affirmative conclusions about the “impact” of CEO Pay Ratios or median employee pay on performance is grossly misleading.