Despite expert warnings that individual company disclosures mandated by the newly-effective pay ratio disclosure rule can be “meaningless” or “misleading,” overall data patterns can help benchmarking. To be sure, the rule itself cites exposure of “income inequality” as a benefit and may have been motivated in part by a desire to “name and shame” highly paid CEOs, as stated by SEC Commissioner Michael Piwowar in his dissenting comments at the time of the rule’s adoption in August 2015. Predictably, the rule did surface apparent excesses, e.g., a pay ratio (calculated by dividing the CEO’s compensation by the pay of the median employee) of 4,987-to-1 setting a new high among the Russell 1000 as of April 11, according to Bloomberg’s online tracker.
But the rule’s value, if any, lies in patterns. According to studies by Equilar and CFO, ratios are directly correlated to company size, both in terms of revenues and number of employees. The Equilar study showed a range of 47-to-1 to 263-to-1 when looking at industry clusters by revenue size, with an even greater spread by number of employees. In one extreme example, a private equity firm with a low number of employees reported a 1-to-1 ratio. There are also correlations by industry, with notably low ratios in the energy sector.
Two recent articles in The Wall Street Journal highlight another value of the pay ratio disclosures: enabling employees to see if they are underpaid, whether compared to their co-workers or their peers at other firms (though comparisons can be “tricky”).