Lessons Learned From First Wave of CEO Pay Ratio Disclosures: Directors shouldn't become complacent on pay.

Author:Sirras, Todd

The first wave of CEO pay ratio disclosure has come and gone with much less attention than anticipated.

Was the pre-proxy hubbub and handwringing more than was needed to address employee and shareholder questions, comparison to competitors and local companies, and the potential ire of the proxy advisory services?

Here are three baseline learnings from the first wave of pay ratio disclosure and why boards and management need to pay attention to it going forward.

  1. Pay ratio disclosure 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. Comparing median pay at seemingly similar companies (Coke/ Pepsi, Target/Walmart, Google/Facebook) tells you nothing about talent management and compensation systems. It's simply the middle of the employee list.

  2. Scale and labor intensity drive pay ratios.

    The relationship between CEO pay and revenue is well-documented and strongly positive. Higher CEO pay=higher CEO pay ratio.

    Labor intensity, the ratio between labor and capital costs, 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.

    (It's important to acknowledge under the topic of labor intensity that geo The CEO pay ratio looks like a red herring today, but it will attract attention over time. graphic differences in competitive pay levels, especially in China/Southeast Asia, have a big impact on median pay.)

  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.

    The CEO pay ratio looks like a red herring today, but it will attract attention over time.

    Simplicity makes the CEO pay ratio likely to become more prominent...

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