Closer CEO pay ratios may generate higher profit per worker

When U.S. companies disclosed the CEO pay ratio for the first time, many had a message to investors: Pay no attention.

Firms have warned that the CEO pay ratio — a requirement that was born out of the Dodd-Frank Act — shouldn’t be used to compare different companies.

The ratios can vary depending on factors like the company’s size, geographic distribution and percentage of part-time or seasonal workers. Companies also make decisions in how they calculate the ratio that affect the final outcome.

Experts also urge caution around reading too much into the ratio. “As an investor, I’d be hesitant to draw any conclusions from the raw number,” Rouen says.

A report by advisory firm Willis Towers Watson found that companies take a range of approaches toward measuring compensation, making direct comparisons difficult. And a third of companies exclude some foreign workers from the calculation using what’s known as the de minimis exemption.

Large discrepancies in pay crop up in some industries more than others — for example, retailers with many part-time workers have higher ratios than financial firms. Company size can also have a distortionary effect since CEOs at very large firms command outsize compensation, says Rouen.

In issuing the rule, the SEC explicitly stated that the purpose of the ratio was not “to facilitate comparisons.” Given that, investors may well wonder what to do with it.

Brian Blackwood, an executive compensation consultant at Willis Towers Watson, says that investors are still “most keenly interested in what the pay for performance structure looks like,” rather than how that CEO compensation relates to worker pay.

“The investors who will find the most value are those who have concerns about inequality,” says Ric Marshall, executive director of ESG research at MSCI.

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