Now that the
majority of companies have filed their first proxy statement containing the
infamous CEO pay ratio disclosure, what have we learned? The answer may be best
summed up by Equilar’s Dan Marcec, who said that the disclosures are “not
telling us any more about income inequality that we didn’t already know.” Given
that proponents of the pay ratio disclosure intended for it to shine a light on
CEO pay practices and possibly lead to executive compensation reform, the rule
may have missed the mark.
The SEC stated
that the rule was “designed to allow shareholders to better understand and
assess a particular registrant’s compensation practices and pay ratio
disclosures rather than to facilitate a comparison of this information from one
registrant to another.” The rule may have failed in this regard as well, since
very little can be learned about compensation practices at a given company
based on its disclosure, which often consists of just a few sentences. In
addition, the lack of standardization in how the ratio is actually calculated
makes it difficult to determine what is actually revealed in the disclosure.
The SEC gave broad latitude in its final ruling on the important pay
calculation for the median employee. Furthermore, the nature of a particular organization’s
workforce can influence the ratio significantly, especially if it employs a
significant number of part-time, seasonal, or non-U.S. workers. Finally, the
most common application of this year’s first round of disclosures was to
compare companies to their industry or geographic peers – an outcome that was
unintended by the SEC.
The main outcome
from the first round of CEO pay ratio disclosures may have been a few somewhat
interesting news stories related to companies that had surprisingly high ratios.
For example, the toymaker Mattel’s proxy disclosed that the company’s CEO was
paid 4,987 times the compensation of its median employee. Margo Georgiadis was
named Mattel’s CEO in February 2017, and the majority of her $31.28 million in
2017 compensation was composed of one-time equity grants related to her hire.
In reality, she didn’t actually receive anywhere near $31.28 million in
compensation for 2017, as the equity grants were subject to both time- and
performance-based vesting conditions. In fact, these equity grants were largely
forfeited, as she resigned from Mattel in April 2018 to “pursue a new
opportunity.”
Another effect
of the recent CEO pay ratios has been the introduction of yet more tax
proposals. For example, California Senate Bill 1398, introduced by State
Senator Nancy Skinner (D-Berkeley), would create an upward-scaling state
corporate income tax rate. The proposal would increase corporate taxes from the
current rate of 8.84 percent up to 13 percent for public companies with pay ratios
exceeding 300:1. Interestingly, this proposed bill would result in increased
taxes for companies with any ratio exceeding 50:1, which would be a significant
portion of all public companies. The proposed schedule is as follows:
Pay Ratio
|
State Tax Rate
|
Zero to 50
|
8.84%
|
50 to 100
|
10%
|
100 to 200
|
11%
|
200 to 300
|
12%
|
Over 300
|
13%
|
So far, the only
location that has actually passed legislation to increase taxes for companies
with high pay ratios is Portland, Oregon. Other states have proposals pending,
but like the one in California, they are unlikely to pass.
It will be
interesting to see if the CEO pay ratio is here to stay, and if so, how it may
evolve over time. We would suggest a few changes to the calculation approach:
1. Exclude Non-U.S. Employees from the Median
Employee Calculation. The
difference in pay practices in other countries can be significant. If the idea
is to understand pay practices in U.S. companies, this could help reduce the
noise in the calculation. In their proxies this year, many firms with
significant employee populations outside the U.S. provided a supplemental
calculation that excluded non-U.S. workers.
2. Employ Realized Pay Rather than Summary
Compensation Table (SCT) Pay in the Calculation. Realized pay is similar to W-2 reported
compensation and is a better comparison. SCT pay for executives accounts for
equity compensation through accounting rules at the time of grant and has
little relationship to pay actually received.
3. Standardize the Compensation Calculation
for the Median Employee. The
discretion that the SEC provided to companies in calculating the pay of the
median employee led to difficulty in making even common-sense comparisons among
companies within the same industry.
It certainly
seems like there could be modifications regarding how to calculate the pay
ratio. This would help to standardize the process and make the ratio more
meaningful for comparison purposes.
Dan
Steele and Joe Kager of the POE Group.
Interesting to read your post. I can't wait to see your next post. Good luck for upcoming updates. This article is very interesting and effective. Thanks for sharing such a blog. Executive Compensation Consulting in California
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