Business Intelligence Regulations

CEO Pay Ratio Disclosures Prompt Reaction

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The first of a series of disclosures from public companies comparing CEO pay to that of employees are out as companies work to comply with the CEO pay ratio disclosure rules that are part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The rule requires public companies to disclose the pay ratio between a company’s median employee and the company’s chief executive officer or other principal executive officer. The rule is designed to provide shareholders with information they can use to evaluate a CEO’s compensation. It requires disclosure of the CEO pay ratio in registration statements, proxy and information statements, and annual reports that call for executive compensation disclosure. Companies are required to provide disclosure of their pay ratios for their first fiscal year beginning on or after Jan 1,2017, which means companies have started to provide the information this year.

Companies such as Honeywell, Humana, Whirlpool, and Marathon Petroleum have started rolling out this CEO pay ratio information. An article in The Wall Street Journal reported a sampling of CEO pay ratios compared to that of median employees for some public companies:

  • Marathon Petroleum 935:1; excluding convenience store and gas station workers, the ration would be closer to 126:1
  • Whirlpool 356:1
  • Humana 344:1
  • Honeywell 333:1
  • Kellogg, 183:1
  • Kraft Heinz, 91:1

A survey of 356 public companies in anticipation of CEO pay ratio being reported to the SEC was conducted by Equilar, a provider of intelligence services to Boards of Directors. The survey found that the median CEO pay ratio for all surveyed companies was expected to be 140:1. The median CEO Pay Ratio was positively correlated with company revenue, equaling 47:1 for companies below $1 billion in revenue and 263:1 for companies above $15 billion in revenue.

Other findings:

  • Companies with the greatest number of employees had the largest median ratio (318:1) and the smallest companies, with fewer than 2,310 employees, had the lowest ratio (45:1)
  • “Consumer discretionary” companies, including retail and hospitality, had the highest median ratio with 350:1
  • Energy companies had the lowest median ratio at 72:1

The release of Honeywell’s CEO pay ratio prompted this response in a blog by Sara Anderson, co-editor of Inequality.org and director of the Global Economy Project at the Institute for Policy Studies:

“Corporate pay justice activists around the United States see the new pay ratio data now just starting to emerge as long overdue, and shareholders, workers, consumers, and policymakers interested in narrowing our country’s economic divide are already mobilizing to put the data to good use. They’re advancing efforts, at every level of government, to leverage the power of the public purse against the extreme economic inequality that existing corporate pay practices so routinely generate.”

California, as is typical, has taken the lead in addressing this pay equity issue. State Senator Nancy Skinner in February 2018 introduced a state bill to tax corporate income based on a publicly-traded company’s pay ratio between a CEO and the median employee, consistent with the CEO pay ratio disclosure rules in Dodd-Frank as interpreted by the U.S. Security and Exchange Commission (SEC). Currently, non-financial institutions pay a state tax rate of 8.84%. Under the proposed bill, that rate could increase to as much as 13% if the CEO pay ratio was over 300:1. For financial institutions, the tax rate would range from 10.84% to 15%. The bill, if passed, would be in effect for taxable years beginning on or after January 1, 2019.

Expect the CEO pay issue to gain attention as more public companies provide this information. It will be interesting to see if other states take California’s lead in proposing legislation that links corporate tax rates to executive pay.

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CEO Pay Ratio Disclosures Prompt Reaction
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CEO Pay Ratio Disclosures Prompt Reaction
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Public companies are starting to disclose the pay ratios between CEOs and employees
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First Capitol Consulting.Inc
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