The Problem with CEO Pay Ratios

This week, we’re delving into the completely benign issue of CEO pay ratios (pause for chuckle). Our dive into this topic was spurred in part by footnoted founder Michelle Leder’s recent Bloomberg opinion piece, where she argued that pay ratio disclosures have been “manipulated into meaninglessness,” and called on the SEC to scrap the disclosure requirement in favor of more meaningful ones. We’ve been tracking CEO pay data for quite a while now, and our take is the data is relatively easy to collect, but extremely complicated to unpack. Why is that?

  • CEO pay ratio transparency is a highly charged subject, which is almost inseparable from the popular belief that large public company CEOs are paid way too much, and “average” workers are paid way too little (see polls by Just Capital and Stanford University). While this argument is subjective, there’s a mountain of data that proves a widening gap between the top and bottom. 
  • The SEC gives companies “broad flexibility” in data collection. Briefly, that includes the ability for companies to use a statistical sampling of their workforce (instead of their total workforce), the ability to determine their median employee given what their workforce looks like on any day in the three months before the end of their fiscal year, and the ability to exclude independent contractors and certain non-U.S. workers from their calculations. 
  • Compensation can also include things like the value of health insurance, and accrued pension benefits. For a CEO, these items typically add a trivial amount of money to their total compensation, but for a median worker earning $75,000 in total compensation, a $15,000 health benefit and a $5,000 bump in their pension plan means their net salary is actually $55,000 a year. This makes it even harder to draw meaningful conclusions.
  • CEO compensation is frequently tied to stock-based bonuses, which are reported when they’re granted, not over the multiple years in which they often vest. This grossly skews pay ratios, as you’ll see below. 

Now, onto the data. We analyzed 497 companies in the S&P 500 (three were the product of recent spinoffs and did not have to disclose the data in 2021). 

  • Median CEO pay hovered right around $14.5 million, while median employee compensation was $72,572, for an average CEO to employee pay ratio of 192.

We also thought it would help to review the companies with the highest, and lowest CEO pay ratios in 2021. 

Ten highest CEO pay ratios:

The company with the highest CEO pay ratio, Amazon, paid CEO Andy Jassy more than 6,400 times what it pays its median worker. But the lion’s share of Jassy’s compensation is tied to a restricted stock award of 61,000 shares, which vest between 2023 and 2031. Next year, his compensation will come back to earth, and Amazon’s ratio will be closer to 5 to 1 (Jassy’s base salary is $175,000). 

Ten lowest CEO pay ratios:

The biggest outlier of course is Tesla, and Elon Musk, who receives no salary. Instead, Musk’s pay package is tied to a series of escalating targets for financial performance and market capitalization that were set in 2018. Tesla recently surpassed two of those targets, which triggered the vesting of two tranches of stock options in 2022, worth approximately $23 billion. But the value of this compensation will not appear on Tesla’s 2022 CEO pay ratio disclosure, because the options were counted at the time they were granted. Adding to the wonkiness of Tesla’s disclosures – the value of these options were reported as $2.5 billion in 2018, when Tesla’s stock was ten times cheaper than it is now.  
All of this points to a broken system that forces analysts, journalists, and investors to work overtime to make sense of it. But how broken is it? Are there quick fixes, such as a change to way options are reported, which would bring more clarity to pay ratios? We’ll delve into some of these ideas later this month.  

Need human capital data for your planning?