PayScale, the leader in modern compensation, and Equilar, a leader in executive compensation and corporate governance data solutions, have partnered to look at CEO-to-worker pay ratios in light of the recent adoption of a final rule, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, that requires a public company to disclose the ratio of its CEO's compensation to the median compensation of its employees. Companies will be required to provide disclosure of their CEO pay ratios for their first fiscal year beginning on or after Jan. 1, 2017. There is some flexibility in the SEC rule that allows a company to select its methodology for identifying its median employee and that employee's compensation, including through statistical sampling of its employee population or other reasonable methods. The rule is primarily to provide transparency to shareholders around CEO pay, but PayScale and Equilar also wanted to examine employee sentiment on the topic. 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, we 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 highest-paid CEOs in the U.S. and PayScale provided median worker pay data for those same companies. The Equilar data is for U.S.-based or listed companies with more than $1 billion in revenue that filed proxy statements by April 30, 2016. The worker pay data was collected between May 2015 and May 2016 and represents more than 80,000 workers across the 167 companies in the report.
We then calculated the pay ratio 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 we don't currently have similar data available for employees, so we looked solely at cash compensation to calculate ratios for this report. However, we 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 are asked about whether or not this negatively affects their opinion of the company. The questions are phrased as follows:
"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
We examined aggregated responses to both of these questions by gender, generation, industry, job level, and pay range. We excluded responses to questions with fewer than 40 responses (represented with “N/A”). We used 22,162 responses collected between June 9th, 2016 and July 10th, 2016.
Gender: respondent's self-identified gender:
- Male: respondents who identify as male
- Female: respondents who identify as female
Generation: generation to which the respondent belongs, defined as follows:
- Baby Boomer: born between 1946 and 1964
- Generation X: born between 1965 and 1981
- Generation Y: born between 1982 and 2002
Job Level: respondent's rank within company, defined as follows:
- Individual Contributor Level: workers who do not supervise people and do not have a higher level title
- Manager Level: workers who supervise people and do not have a higher level title
- Director Level: workers with a Director title or a title with a comparable level or responsibility, years of experience, and management scope
- Executive Level: workers with a Chief Executive title (CEO, CFO, etc.), a Vice Presidential title, or a title with a comparable level or responsibility, years of experience, and management scope
Pay Range: Total Cash Compensation (TCC) in increments of approximately 25K USD
Total Cash Compensation: combines base annual salary or hourly wage, bonuses, profit sharing, tips, commissions, and other forms of cash earnings, as applicable. Excludes equity (stock) compensation, cash value of retirement benefits (e.g. 401k), and value of other non-cash benefits (e.g., healthcare).
TOTAL CEO Pay: combines base annual salary or hourly wage, bonuses, profit sharing, tips, commissions, and other forms of cash earnings, as well as stock and options valued at grant date, and other compensation (including benefits and perks).
% of TOTAL CEO Pay That Is Cash Compensation: the percent of the CEO's total compensation that is in the form of cash (TCC).
Percent disapproval: the percent of respondents who know their CEO's compensation who report that it is too high. We calculate this by dividing the share of people who answered "No" to the first question by the share of people who answered "Yes" or "No".
Percent approval: the percent of respondents who know their CEO's compensation who report that it is appropriate. We calculate this by subtracting percent disapproval from 100%.