One of the big unknowns for the first year of mandatory pay ratio was whether companies would include supplemental ratios using a different methodology from the required rules. What situations would justify that extra effort? This Pearl Meyer blog notes that of the first 1039 companies to file proxies this year, only 99 have included a supplemental ratio. That’s less than 10%. Here’s what else they found:
– Most of the supplemental ratios were significantly lower than the required pay ratio.
– The desire to smooth out the impact of one-time or multi-year grants to a CEO was the most commonly occurring reason to provide a supplemental ratio.
– The most profound decrease from the required ratio occurred when companies provided a supplemental ratio that excluded part-time and seasonal employees.
– 14 companies provided a supplemental ratio that was greater than the required ratio, mostly likely to avoid a drastic increased ratio in 2019.
It’s possible that supplemental ratios will become more common in the future, as companies try to explain year-over-year pay ratio changes…
A lot of ink has been spilled (or keyboards clacked?) on how to avoid pay structures that encourage excessive risk-taking. But we can probably all agree with that old sage Mark Zuckerberg – “the biggest risk is not taking any risk.” And that’s what makes this research interesting. Here’s an excerpt:
When options packages shrink, managers reduce their companies’ operating leverage, a form of risk, the findings suggest. The change effectively turns these organizations into more conservative investments.
Operating leverage, a ratio of a company’s fixed versus variable costs, falls as the firm’s income becomes more predictable, or less risky. Corporations in the study experienced lower earnings variability, lower stock return volatility and a marginal decline in profitability growth when they significantly reduced option-based compensation.
Things like this make it harder to explain why ISS won’t count standard options as “performance-conditioned”…
Although pay ratio didn’t seem to initially capture the imagination of journalists, there has been a wave of local reporting about the pay ratios at specific companies over the past week. Here’s some of the articles about how pay levels – particularly pay ratios – look this year, based on this season’s proxy statements (Mark, Barbara & I are quoted in the first piece):
If you ask most people about Keith Hernandez, some might recall his career as a professional baseball player – while more still would remember him from his recurring role on the immensely popular sitcom Seinfeld. But did you know he also holds the major league record for most game-winning RBIs in a season and all-time?
If you’re shaking your head, you’re not alone. Even major league baseball has discarded the stat because it’s virtually meaningless: it didn’t distinguish between a 1st-inning single in a lopsided game & a decisive home run in the bottom of the 9th.
Baseball – a sport driven by statistics and numerical analytics – got rid of a stat because it failed to provide meaningful information. Public companies now have their own version of the game-winning RBI statistic – it’s known as “pay ratio.”
This new report from Semler Brossy about the latest say-on-pay and pay ratio results & disclosures is chock full of useful charts & graphics. Check it out!
Since the SEC provided companies with some flexibility, there has been a debate as to where a pay ratio should be disclosed within a proxy statement – we cover this starting on page 72 of our “Pay Ratio” chapter in our Treatise. But where within the proxy pales in comparison to whether a company highlights its pay ratio on its online proxy or “Investor Relations” page.
That’s why I found what United Techologies did to be so notable – they broke out the disclosure of its pay ratio onto a separate page on its site. If you scroll down on the home page of the company’s interactive proxy, you’ll see a tab for “CEO Pay Ratio” in the 3rd row, two spots in from the left. Kudos…
By the way, here are the pay ratio extremes so far: Kinder Morgan – 3.7; Mattel – 4987 (supplemental ratio excluding one time awards of $22 million lowers it to 1527).
Efforts to conserve an equity plan’s share reserve should begin the day the issuer’s stockholders approve the plan (or share increase), and should continue going forward. Issuers that do not make such efforts tend to face problems relating to dwindling share reserves, including moving to cash-based programs, hiring proxy solicitation firms to garner stockholder support for share increases, and overcoming possible negative reactions from ISS.
We have found that most companies are arming their managers with FAQs rather than delivering a set of FAQs to employees directly. Obviously, you’ll need to modify our sample FAQs to best fit your circumstances…
By the way, this pay ratio article about Wal-Mart was trending #1 on my Facebook feed yesterday…
I have a toddler at home. I’ve noticed that when I “motivate performance” by taking away toys, I may get the result that I want in the moment. But in the long-term, I’m just teaching him to do the bare minimum to regain his prize – not the result I’m going for. This “Harvard Law” blog suggests that the same logic might apply to CEOs. Here’s an excerpt:
Boards often cut CEO pay following poor performance. These pay cuts can go beyond the general pay-for-performance relation. Agency theory suggests that such pay cuts can act as a disciplining mechanism against the CEO and, therefore, can lead to better performance in subsequent periods. Consistent with this line of reasoning, there is some empirical evidence that firm performance improves following a CEO pay cut.
The article – “Accounting & Economic Consequences of CEO Paycuts” – examines the possibility that cutting the pay of an incumbent CEO might also induce an adverse response. Specifically, whether – in response to pay cuts – CEOs actually increase their efforts to improve the underlying economic performance of the firm, or simply resort to managing measured performance through activities such as accruals manipulation and real activities management. These latter activities may be designed to boost reported earnings in the short-run at the expense of long-term shareholder value. Since CEO pay is often linked to reported earnings performance, CEOs have incentives to engage in earnings management after a pay cut because such activities can lead to faster improvement in reported performance – and hence to speedier restoration of their pay to prior levels. Thus, the efficacy of a CEO pay cut as a disciplining mechanism is unclear.
As reflected in this deck, Deloitte Consulting just completed a review of 293 “S&P 500” companies that have filed their proxies as of April 10th. Here are the highlights:
– Median pay ratio is 153:1
– Median employee’s total annual compensation $70,867
– 21% of companies disclose information about the median employee’s employment status, geographic location and/or role
– Pay ratio and median employee’s total annual compensation varied significantly across industries. As expected, consumer discretionary (i.e., “retail”) had the highest median ratio of 396x and lowest median employee compensation at $32k while utilities had the lowest median ratio of 96x and second highest median employee compensation at $122k)
– Larger companies (in terms of revenue) had higher median ratios than smaller companies; however, the median employee’s pay did not correlate with revenue size
– 51% of companies chose a date other than the fiscal year end as the measurement date
– CACM used to identify the median employee varied significantly, with total cash compensation used by 32%, base pay and wages 23%, W-2 wages 20% and total direct compensation at 18%
– Only 8% used statistical sampling
– Only one company adjusted pay for the cost-of-living (CEO lives in Switzerland)
– 16% of companies added health benefits to total annual compensation
– 81% of companies placed the pay ratio disclosure immediately following the termination tables, while only 4% included it in the CD&A