Starting fiscal years beginning in January, companies must disclose CEO pay ratios to the median compensation of their employees. Companies have flexibility with regard to sampling and other methodologies, according to how the SEC has interpreted the Dodd-Frank Act. In preparation, PayScale and Equilar surveyed employee sentiment on CEO pay ratios.
CEO Pay Ratios: Employees Surveyed
Do employees know what their CEO earns? If so, do they think it’s fair? If they believe it’s not fair, does it negatively affect their perception of their employer? And, finally, does CEO pay have any effect on the ability of a company to retain its employees? Additionally, they asked some CEOs to weigh in with their thoughts on the SEC rule and their approach to employee communication as it pertains to executive pay.
Equilar provided pay data for some of the the highest-paid CEOs in the U.S. and PayScale provided median worker pay data for those same companies. They then calculated the CEO pay ratios between the CEO at each company and their employees. Many CEOs do receive substantial stock/option grants and perks as part of their compensation, but the firms don’t currently have similar data available for employees, so they looked solely at cash compensation to calculate ratios for this report. However, they did provide the Equilar data on Total CEO Pay as well, so that it’s clear how much of each CEO’s pay is in the form of cash vs. stock/options/perks.
Respondents to the PayScale Employee Compensation Survey were asked about the appropriateness of their CEO’s compensation, and those who respond unfavorably were asked about whether or not this negatively affects their opinion of the company.
CEO Pay Ratios: Survey Questions
“Do you feel like your CEO (or top executive) is compensated appropriately for their role?”
- Yes, it’s a big job
- No, it feels way out of whack
- I don’t know what my CEO earns
If no, “Does your CEO’s pay negatively impact your view of your employer?”
- Yes, but I’m staying put
- Yes, and I’m leaving
- No, it’s just the way the world works
They examined aggregated responses to both of these questions by gender, generation, industry, job level, and pay range. They then excluded responses to questions with fewer than 40 responses (represented with “N/A”). They used a total of 22,162 responses collected between June 9th, 2016 and July 10th, 2016.
CEO Pay Ratios: Most Employees Don’t Know
More than half of employees don’t know what their CEO is paid. Roughly 27 million businesses in the U.S., less than 1 percent are publicly traded. Private companies don’t have to follow the same disclosure laws as public companies, and executive pay is therefore generally not public knowledge. Many employees at public companies don’t know their CEO’s level of pay either.
Among employees who did have knowledge of their CEO’s salary, only 21 percent thought it was excessive, leaving 79 percent who didn’t see a problem.
- More than half of employees do not know their CEO’s compensation (55%), but a substantial majority of those who do believe that it is appropriate (79%)
- More than half of respondents who feel that their CEO is overcompensated report that it negatively affects their view of the company (57%)
- However, only 26% of respondents with negative opinions of their CEO’s compensation report that they plan to leave their employer
- A larger percentage of Generation Y employees than Generation X or Baby Boomer employees report that their CEO’s perceived excessive compensation negatively affects their view of the company (63% compared to 55% and 48%, respectively)
- Employees at higher levels in their companies have more knowledge about and more readily approve of CEO compensation than employees at lower levels
- The negative impact of perceived excessive CEO compensation on the respondent’s opinion of the company decreases as job level increases
- Knowledge of CEO compensation and approval of compensation increase directly with pay range
- Among disapprovers, as income increases, fewer people’s views of their companies are negatively affected
- The highest CEO-to-worker ratio is held by CVS Health Corp CEO Larry J. Merlo, who received a total cash compensation of $12,105,481 in 2015, in comparison to the median CVS employee salary of $27,900, a ratio of 434:1. Fifty-three percent of Merlo’s compensation is in the form of cash (salary, bonus, profit sharing, etc.)
- The lowest CEO-to-worker ratio is held by ServiceNow, Inc. CEO Frank Slootman, who received a total cash compensation of $642,133 in 2015, in comparison to the median ServiceNow employee salary of $106,000, a ratio of 6:1. However, only 5 percent of Slootman’s compensation is in the form of cash (salary, bonus, profit sharing, etc.)
CEO Pay Ratios: By Industry
CEO Pay Ratios: Companies Should Prepare Employees
PayScale learned in a 2015 study on employee engagement that transparent compensation planning—i.e. explaining to employees why and how pay decisions are being made, and even providing insight into company finances—can result in greater employee engagement and happiness than a raise. In fact, 82 percent of employees we surveyed felt satisfied if they were underpaid but the employer communicated the reason for the smaller paycheck. Clear communication around pay was actually one of the most influential factors when it came to employee sentiment.
So, the short answer is more knowledge is unlikely to drive employees into a frenzy. If you don’t think you can have an impact on your CEO’s pay, you probably don’t want to get worked up about it. You’ll just get sick with anxiety. How many peasants revolted against their kings? However, my sense is that as pay ratios are disclosed and become more widely known, strategies concerning how to deal with the issue will blossom. There will be more options than just voting for Bernie Sanders.
CEO Pay Ratios: About PayScale
PayScale powers compensation solutions in the cloud to provide immediate visibility into the right pay for any position. Creator of the world’s largest database of rich salary profiles, PayScale offers modern compensation software and real-time, data driven insights for employees and employers alike. More than 5,000 customers, from small businesses to Fortune 500 companies, use PayScale Benchmark™, PayScale Insight™ and MarketPay. These companies include Dish Network, Getty Images, Skullcandy, Bloomberg BNA and Time Warner.
CEO Pay Ratios: About Equilar
Equilar is the #1 provider of corporate governance solutions, collecting data on more than 140,000 executives and board members from thousands of public companies. Our cloud-based platforms organize this data into easily digestible formats, delivering executive compensation benchmarking and shareholder engagement tools with accuracy and integrity. These platforms bring together companies, shareholders and advisors to inform better business decisions and drive exceptional results. Founded in 2000, Equilar is trusted by more than 60% of the Fortune 500 and investors with $13 trillion assets under management, and is cited regularly by The New York Times, Bloomberg, Forbes, Fortune, Associated Press, CNN Money, CNBC, The Wall Street Journal and other leading media outlets.