The new requirement for companies to report how much more their CEOs made than the typical employee may have produced some “oohs” and “aahs,” but that’s about it.
If there is anything to glean from all the pay ratio disclosures, it’s that there needs to be more consistency in how they are calculated and reported before they can be useful to investors.
When the Securities and Exchange Commission adopted the pay ratio rule nearly three years ago, in which companies were required to report how the annual total compensation of the chief executive officer compares with the median of the annual total compensation of their employees, the idea was to provide more insight into income inequality.
But after scouring the proxy statements of hundreds of companies, Dan Marcec, director of content at executive pay data firm Equilar, said the disclosures have been “relatively unhelpful,” because companies are able to choose how they evaluate pay.
“Bottom line, it’s not telling us anymore about income inequality that we didn’t already know,” Marcec said.
One problem that arises is that companies only count what each employee is paid during the year, while CEO compensation could include estimates of market value of unvested stock options and other benefits, such as security measures for a CEO’s residence.
Since wages don’t have to be annualized, companies that have relatively high numbers of temporary or seasonal employees could have higher CEO pay ratios.
Marcec said while lack of standardization makes comparisons difficult, after looking at how some companies explained the way the median employee pay was calculated, “I understand their business model a little better.”
Some ‘oohs’ and ‘aahs’
One example of a difficult comparison is Mattel Inc.’s CEO pay ratio of 4,987 to 1, which appears stunningly high when compared with rival toymaker Hasbro Inc.’s ratio of 160 to 1.
First, consider that Mattel’s CEO Margo Georgiadis total compensation was $31.28 million in 2017, which included a salary of $1.34 million and stock and option awards totaling $28.05 million. The awards represented the fair value of options and restricted stock units at grant date, which might appear very high, but that’s because she was named CEO effective Feb. 8, 2017, and the company indicated that the actual realized value of the awards is contingent upon certain vesting conditions.
Second, the median employee pay of $6,271 may seem strikingly low, but consider that a large number of Mattel employees were not paid for the entire year--they were temporary and seasonal--and that 78% of its workforce was located outside the U.S., where the company acknowledged that “market levels of pay and wage rates are dramatically lower” than in the U.S.
Meanwhile, Hasbro CEO Brian Goldner, who has been in the rose since 2008, made $11.85 million last year, including $1.50 million in salary and $6.67 million in stock and option awards, while the median employee pay was $74,207. Hasbro acknowledged that pay ratios by other companies “may not be comparable,” given that the SEC’s rules allow for companies to adopt a “wide range of methodologies” in calculating median pay.
Mattel’s stock has tumbled 48% over the past 12 months, while Hasbro shares have shed 13% and the S&P 500 index has gained 13%.
Some other companies with relatively high CEO pay ratios included Weight Watchers International Inc. at 5,908 to 1, Gap Inc. at 2,900 to 1 and Yum Brands Inc. at 1,358 to 1.
Bezos, Zuckerberg’s personal security
Another “ooh” for investors might be Amazon.com Inc.’s CEO pay ratio of 59-to-1, which might appear unusually low, considering CEO Jeff Bezos is widely considered to be the world’s richest person.
But while the value of Bezos’s Amazon’s stock holding bulged by well over $33 billion in 2017–recent filings show he owned 78.9 million Amazon shares–his compensation from the company was just $1.68 million. That included a salary of $81,840 and $1.6 million in aggregate costs for security arrangements, in addition to the security arrangements provided at business facilities and for business travel.
“Due to Mr. Bezos’s substantial ownership in Amazon, Mr. Bezos again requested not to receive additional compensation in 2017 and has never received annual cash compensation in excess of his current amount,” according to Amazon’s proxy statement.
While the spending on security for Bezos might seem high at first glance, Facebook Inc. Chief Executive Mark Zuckerberg’s total compensation of $8.85 million in 2017 included $7.33 million in costs related to “personal security,” $1.52 million for the “personal usage of private aircraft” and a base salary of $1. Facebook’s CEO pay ratios was 37 to 1.
A key difference between the ratios of the two companies is that Amazon’s median employee pay was just $28,446, which didn’t include the annualization of pay for seasonal or temporary workers, while Facebook’s median employee compensation was $240,430, which included the value of equity awards. Facebook didn’t disclose if it had any temporary or seasonal workers.
Marcec said until there is a move toward standardization, the pay ratio rule isn’t likely to provide material information to investors, but it is pushing companies to be more transparent, so it’s not completely useless.
“We are learning a little more about median employee pay, which is one of the intended benefits [of the pay ratio rule],” Marcec said.
