April 22, 2019
Pay Ratio – Year 2: Most Companies Found New “Median Employee”
– Liz Dunshee
In the “Pay Ratio” Chapter of our “Executive Compensation Disclosure Treatise,” we note that although Item 402(u) allows companies to use the same “median employee” for three years, some companies are either required to identify a new median due to significant changes in the workforce or the prior-year individual, or voluntarily calculate a new median because they want to keep the pay ratio as precise as possible and don’t want to risk a big triennial change. What we haven’t known – until now – is how this would play out in practice.
According to this Compensation Advisory Partners memo, which takes a close look at pay ratio’s second year trends, using a new median employee is actually more common than not. For the 201 companies they analyzed, only 36% used the same median year-over-year. Here are all the key takeaways:
1. CEO Pay Ratio: While CEO pay ratio summary statistics (e.g., 25th percentile, median, and 75th percentile) were flat across the sample, two-thirds of the sample companies had pay ratios that fluctuated up or down by more than 10 percent. The significant volatility in individual company pay ratios is masked in the overall sample, so proxy readers should not be surprised if a company’s pay ratio moved year-over-year.
2. CEO Pay: CEO compensation increased 7 percent at median with two-thirds of CEO pay fluctuating by more than 10 percent. This may be driven by incentive compensation changing year to year, by CEO transitions and by changes in pension value calculations where applicable.
3. Median Employee: Only 36 percent of companies used the same median employee year-over-year – and about 80% of those re-ran the selection analysis versus selecting an employee who was substantially similar to the prior-year median. For the companies that use the same median employee, the pay of that employee went up 7 percent at median. Where companies selected a new median employee, the year-over-year change in pay was 4 percent at median. This indicates that companies that want to maintain a lower CEO pay ratio (for a couple of years) may be better off keeping the same median employee from year to year if possible.
4. Additional Disclosures: Despite interest expressed by some institutional shareholders in greater disclosure about the workforce, only 16 percent of companies disclosed additional information about the median employee (e.g., geographic location, role with the company, full-time vs. part-time, etc.). This is up from 12 percent of companies providing additional disclosures last year.