Beginning with fiscal years ending on or after December 31, 2017, companies are required to disclose the ratio that compares the compensation of the CEO to the compensation of the median employee (pay ratio). This disclosure was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law in 2010.

Compensation Advisory Partners LLC (CAP) researched early pay ratio disclosures. As of March 9, 2018, we obtained pay ratios from 150 companies with a median revenue of $2.1B from a cross-section of industries.

Pay Ratio

The median pay ratio disclosed by these companies is 87x. The lowest ratio is 1x (Apollo Global Management, Dorchester Minerals and The Carlyle Group) and the highest ratio is 1465x (Fresh Del Monte Produce Inc.).

Summary Statistics

Median Employee Pay

Median CEO Pay

Pay Ratio

75th percentile








25th percentile




As expected, the pay ratio correlates with company size, with larger companies disclosing higher ratios. CEO pay varies greatly depending on the size and complexity of the organization. Employee pay has less variability since it reflects the job function and does not vary significantly based on the size of the organization. The median ratio in our sample of 150 companies ranges from 20x for companies with revenue less than $500M to 218x for companies with revenue greater than $15B.

20x 54x 84x 157x 183x 218x <$500M $500M-$1B $1B-$5B $5B-$10B $10B-$15B >$15B Median Pay Ratio by Revenue Size

Few companies, 15, disclose a supplemental pay ratio with only a handful of companies (three) disclosing more than one additional ratio. These companies with supplemental ratios are typically adjusting the CEO’s pay which may exclude anomalies such as a one-time special bonus or equity award. Interestingly, three companies disclosed a higher supplemental pay ratio likely to provide context for a large year over year increase in the 2019 proxy statement.

Location of Disclosure

Nearly 70% of companies disclose the pay ratio after the Potential Payments upon Termination or Change in Control section of the proxy statement. Approximately 25% of companies disclose the pay ratio just before or after the Summary Compensation Table and a small minority, 5%, disclose it in the Compensation Discussion and Analysis (CD&A).

Pay ratio is typically not disclosed in the CD&A, signaling to shareholders that the pay ratio is not used to determine CEO pay levels. Additionally, around 25% of companies include language in the disclosure that the ratio should not be used to compare pay levels to other companies within the industry, region of the country or revenue size.

Measurement Date

The SEC’s final rules give companies the flexibility to use any date within the last quarter of the fiscal year to identify the median employee. Companies most commonly used the last day of the fiscal year or a date within the last month of Q4. It is also common for companies to use a day within the first month of Q4 to identify the median employee.

Measurement Month


Measurement Date


First Month of Q4


Last day of Q4


Second Month of Q4


First day of Q4


Third Month of Q4




Not Disclosed


Not Disclosed


Exclusions from Median Employee Determination

Approximately one-third of companies excluded a portion of their workforce when determining the median employee. The most common rationale is the de minimis exemption (approximately 55%) whereby a company can exclude up to 5% of its non-U.S. employee workforce. Companies also commonly cited an acquisition or corporate not responsible for setting pay (e.g., independent contractors) as rationales for excluding certain employee groups.


As more companies continue to file their proxy statements in the coming weeks, we will likely see larger pay ratios, particularly as companies with a significant part-time workforce begin to disclose their ratios. We do not anticipate an increasing trend in the number of companies filing supplemental pay ratios though it will be interesting to see the rationale for those that do. We expect to continue to see companies placing the pay ratio outside of the CD&A with most disclosing it after the Potential Payments upon Termination or Change in Control section.

Compensation Advisory Partners (CAP) reviewed executive compensation pay levels and trends at 50 companies (Early Filers) that filed their most recent proxy statement between November 2017 and January 2018 (fiscal year ends from July 2017 to October 2017; 35 companies have September 30 fiscal year ends). Industry sectors reviewed include: Consumer Discretionary, Consumer Staples, Financials, Health Care, Industrials, Information Technology and Materials. Among these 50 companies, median Revenue was $7.5B, median Market Capitalization (based on each company’s fiscal year-end) was $13.0B and 1-year Total Shareholder Return, or TSR (based on each company’s fiscal year-end) was 19.3%.

Overall Findings

Performance: 2017 performance (based on Revenue growth, EBIT growth, EPS growth and 1-year TSR) was strong. Revenue and EBIT grew by approximately 6%, EPS was up 4% and TSR was up nearly 20% vs. prior year.

CEO Pay: Median CEO pay increased slightly by 3.3% mainly driven by actual annual incentive payouts. The grant date value of long-term incentives (LTI) was generally flat.

Annual Incentive Payout: Overall, the median 2017 annual incentive payout was 115% of target, reflective of strong financial performance.

2017 Performance

CAP reviewed Revenue growth, EBIT growth, EPS growth and TSR performance for the Early Filer and the S&P 500 companies. Overall, 2017 median performance for Early Filers was strong. Revenue and EBIT grew approximately 6%, EPS grew around 4% and TSR was up nearly 20%. TSR among the Early Filers showed double-digit growth for the second year in a row; this growth is due to strong financial performance as well as market expectations around tax reform in light of the current political climate.

Financial Metric (1)

2016 Median 1-year Performance

2017 Median 1-year Performance

S&P 500

Early Filers

S&P 500

Early Filers

Revenue Growth





EBIT Growth





EPS Growth










(1) TSR and Financial performance for the S&P 500 is as of September 30, 2016 and September 30, 2017. Financial performance and TSR for Early Filers is as of each company’s fiscal year end.

CEO Total Direct Compensation

Among Early Filers with CEOs in their role for at least two years (n=39), median total direct compensation increased 3.3%. This increase was mainly due to higher actual annual incentive payouts in 2017; the grant-date value of LTI was generally flat year over year. Actual annual incentive payout was up nearly 4% reflective of strong financial performance while LTI, the largest component of CEO pay, was up only 1%. Median base salary for CEOs in our sample was unchanged from 2016.

3.3% 0.6% 6.2% 3.8% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 1-Year Median Change in CEO Compensation Actual Annual Incentive Actual Total Cash Grant-Date LTI Value Total Comp

Annual Incentive Plan Payout

The median actual annual incentive payout in 2017 was 115% of target, higher than the median payout in 2016 of 106% of target. In fact, the 25th percentile bonus payout in 2017 was at target, noticeably higher than last year (86% of target).

Summary Statistics

Annual Incentive Payout as a % of Target




75th Percentile








25th Percentile




Performance for companies with at or above target annual incentive payouts was substantially stronger than that of companies with below target payouts. Companies with payouts at or above target had strong EPS (10.9%) and TSR (23.2%) growth and solid Revenue (6.3%) and EBIT (7.2%) growth. Performance for companies with below target payouts was flat or declining from prior year.

Financial Metric (1)

2016 Median 1-year Performance

2017 Median 1-year Performance

Below target payout (n=21)

At/above target payout (n=29)

Below target payout (n=12)

At/above target payout (n=38)

Revenue Growth





EBIT Growth





EPS Growth










(1) Financial performance and TSR is as of each company’s fiscal year end.

76% of companies in 2017 provided a payout at or above target which is considerably higher than 2016 and 2015 (58% and 62%, respectively). In 2017, significantly more companies provided a payout between 100 – 150% of target than below target. This distribution is more evenly split in prior years. The distribution of payouts in 2017 aligns with stronger overall performance than 2016 and 2015.

8% 10% 8% 30% 32% 16% 42% 38% 54% 20% 20% 22% 2015 2016 2017 Annual Incentive Payout as a Percentage of Target < 50% 50% - 100% 100% - 150% > 150%

Incentive Plan Design

Among Early Filers, 75% of companies use 2 – 3 financial metrics in the annual incentive plan and nearly 83% use 1 – 2 measures in the LTI plan.  Metrics in the annual incentive plan typically focus on growth and profitability, while LTI plans are more likely to reward executives based on profits, return measures or stock price performance. A growing number of companies are beginning to use non-financial strategic goals, primarily diversity and inclusion and creating a more engaged workforce, in the annual incentive plan design. With the recent amendment to 162(m) due to the Tax Cuts and Jobs Act, we anticipate more companies will use strategic measures and individual objectives to reward executives in the future.

As performance-based compensation continues to be championed by both shareholders and proxy advisory firms, the use of performance-based LTI continues to be very prevalent. Performance plan usage remains high, at 90% of Early Filers. Option use declined among the Early Filers (54% down from 62%) and shifted to use of restricted stock.

86% 66% 62% 54% 30% 16% 90% 76% 54% 52% 34% 14% Perf Awards Time-basedRS/RSU Stock Options 2 Vehicles 3 Vehicles 1 Vehicle LTI Prevalence 2016 2017 Vehicle Prevalence Vehicle Mix

TSR continues to be the most prevalent LTI metric, with approximately 60% of companies using a performance-based plan with this metric. Of the companies that use TSR, 25% use it as a modifier, 50% use it as a stand-alone metric in conjunction with a financial measure and 25% use it as the sole measure. The prevalence of TSR as the sole measure has decreased somewhat over the last several years as companies use a balanced approach to reward executives for long-term financial and stock price results. We anticipate its usage as a sole measure to plateau or continue to decline particularly given ISS’ recent shift towards the use of other financial measures in its quantitative pay for performance assessment (ISS and Glass Lewis Policy for the 2018 Proxy Season).

Governance Practices

Over the last decade, many companies adopted good governance practices. Increased scrutiny from shareholders and proxy advisory firms has quickened the pace with which companies incorporated clawback, or recoupment, policies as well as hedging and pledging policies. It is no surprise that more than 90% of companies in our sample have a clawback policy in place. 85% of companies also have implemented hedging and pledging policies for their executives.

Nearly all companies (96%) in our sample have stock ownership guidelines in place; these guidelines encourage executives to hold a meaningful equity stake and align with shareholder interests. The guideline is most commonly expressed as a multiple of salary, with a median CEO multiple of 5x base salary and other NEOs with a multiple of 3x base salary. About one-third of companies also require executives to hold stock (typically 50 – 100% of net shares received) until stock ownership guidelines are met. It is less common for companies to require executives to hold shares for a period of time (e.g., 1 year) in lieu of stock ownership guidelines. Good governance practices continue to be a focus of shareholders, and companies are routinely implementing and updating policies as appropriate in the current regulatory environment.


2017 was a year of strong financial performance for the Early Filers, which resulted in above target annual incentive payouts for approximately 75% of companies. CEO actual total cash compensation increased by 6%, and when combined with generally flat LTI award values, total pay increased by 3%.

2018 will be the first performance year after the passage of tax reform. We do not expect companies to unwind their use of performance-based pay and good governance practices, yet we foresee greater use of individual and strategic performance measures, along with increased use of discretionary pay decisions, in moderation.

For questions or more information, please contact:

Lauren Peek Principal 212-921-9374

Joanna Czyzewski Associate 646-486-9746

Melissa Burek Partner 212-921-9354


Requirements of the SEC’s Final Rules:

Disclosure of

  1. the median of the annual total compensation of all employees, excluding the Principal Executive Officer (“PEO”), defined as A;
  2. the annual total compensation of the PEO, defined as B;
  3. the ratio of the amount in B to the amount in A, where A equals one, or alternatively, expressed narratively as a multiple


If A equals $50,000 and B equals $2,500,000, the pay ratio may be described as either “50 to 1” or “50:1” or the company may disclose that “the PEO’s annual total compensation is 50 times that of the median annual total compensation of all employees.”


  • Reporting required for the first full fiscal year beginning on or after January 1 2017.
  • For calendar year companies, this means the proxy statement for the 2018 Annual Meeting

Exclusions: Smaller reporting companies, foreign private issuers, MJDS filers, and emerging growth companies

Assessing the Size and Scope of the Task:

The size and complexity of the task of preparing pay ratio disclosure will vary greatly from company to company. Factors such as the number of employees, their location and the integration of payroll and HRIS systems will determine the amount of work involved.

Complexity of Pay Ratio Disclosure and Information Gathering

Less Complex

More Complex

Smaller number of employees

Larger number of employees

Full-time employees only

Mix of full-time, part-time, temporary or seasonal workers

US only

Multiple international locations

Single corporate registrant with no consolidated subsidiaries

One or more consolidated subsidiaries in addition to corporate registrant

Single HRIS/payroll system

Multiple HRIS/payroll systems

Compensation plans limited to salary, cash bonus and equity

Additional compensation plans, such as commissions or multiple incentive plans and “spot” bonuses housed in different systems

Retirement plans limited to defined contribution plans

Defined benefit pension plan and/or company contributions to non-qualified deferred compensation plans

Limited perks

Extensive perks

Advance Planning

We strongly advise companies to begin the process early, particularly if your company’s situation is “more complex.” In these cases, we advise that you calculate the pay ratio during the last three months of 2016 – a full year in advance. This will give you an opportunity to clearly identify where the data will come from, how the data will be obtained and what type of assumptions must be made.

It will also allow plenty of time to craft the required disclosure language, evaluate any repercussions and communicate it to interested parties – including HR leadership, senior management and the Compensation Committee.

Pay Ratio Disclosure Flow Chart Project Planning Identifying the Median Employee: Take a First Pass Assess Flexibility Permitted Under the Rules • Exclusions Data PrivacyDe Minimus • Adjustments COLAAnnualization • Statistical Sampling Prepare Final Calculations Draft the Disclosure • Methodology • Assumptions • Supplemental Information Communicate Internally and Externally • Management • Board of Directors • Shareholders • Employees 1 2 3 4 5 6

Overview of the Implementation Process

CAP recommends that companies adopt an implementation process that encompasses six phases:

Phase I: Project Planning

  1. Confirm that your company is required to provide pay ratio disclosure. Make sure your company is not in one of the excluded categories where pay ratio disclosure is not required.
  2. Determine who “owns” the project. In most companies, we expect either HR, Legal or Finance staff to be responsible for preparing pay ratio disclosure.
  3. Identify internal resources. We expect most companies to establish a cross-functional team to complete this work. HR and Finance staff will benefit from assistance from Technology staff, particularly if multiple HRIS and payroll systems exist. A member of the Legal staff can help the team draft the text of the disclosure and coordinate with overall proxy preparation.
  4. Identify external resources. Decide whether the internal team charged with preparation of the pay ratio disclosure would benefit from partnering with outside resources. An outside consultant could provide the team with learnings gleaned from client situations and other experience. If multiple non-US locations are involved, the team will require expertise in data privacy laws, and a legal opinion will be required in certain circumstances.
  5. Create an inventory of data sources. Tally up the number of HRIS or payroll systems. Can you access a single integrated system or will you be forced to tap into multiple systems? Overlay the countries in which your company operates to ensure data source(s) for each country are identified. Obtain samples of the data fields that may be retrieved to begin the process of defining a methodology for identifying the median employee. The answer to these questions will be critical in determining whether to use statistical sampling, as well as identifying the pay elements that determine the median employee.
  6. Create a preliminary time line for the project. Coordinate with the schedule for overall proxy statement preparation. Allow sufficient time for communication to the various stakeholders.

Phase II: Identifying the Median Employee: Take a First Pass

  1. Chart the number and types of employees – full-time, part-time, temporary and seasonal — by country. Approximate as necessary to get a rough headcount. Reach out to your HR network as needed to fill in the blanks.
  2. Identify consolidated subsidiaries and include your best estimate of these employees in the preliminary headcount.
  3. Overlay basic compensation data on the preliminary headcount. Use what is most readily available from the payroll and HRIS systems – for example, the average amount, or the median, of annual cash compensation by location.
  4. Assuming your company’s PEO is paid in US dollars and international employees are part of the picture, convert the international compensation data into US dollars.
  5. Step back and analyze the data. Depending on degree to which employees are concentrated, either by category or by location, it may be obvious where the median employee resides.

Here is an example of employee counts for a major retailer with operations in the U.S., Europe and Canada. Keep in mind that the median employee will be the employee whose pay is higher than one-half of the pay of all employees and lower than the pay of the other half. With a total of 47,000 employees, the median employee at this company will be the employee whose pay is higher than 23,500 employees out of the total. The company in our example has a very large group of part-time employees who are store associate, including more than 27,000 such employees in the US. We know that the typical part-time employee in the US works 20 hours per week at an average rate of $12 per hour and annual compensation of about $12,000. Given the high concentration, of U.S. part-timers, we can conclude that in this company the median employee will almost certainly be found in the U.S. part-time category. While additional work is necessary, a picture begins to emerge.

Full Time Employees

Part-Time Employees

U. S.












Estimate: 14,900 full-time employees + 8,600 U.S. part-time employees = Median (ranked 23,500 out of 47,000 total employees)

Naturally, each company will have a unique profile. Many companies may not have an obvious concentration of employees, so the preliminary estimates may not be predictive of the final result. But even in that case, the team will know that more work – and more precise data – will be necessary to complete the picture.

Phase III: Assess Flexibility under the Rules

  1. Determine if the Foreign Data Privacy Law exemption applies. Under this exemption companies are allowed to exclude employees residing in locations where data privacy laws or regulations prevent companies from complying without violating such data privacy laws or regulations.

    But the bar is high, since companies must make “reasonable efforts” to obtain the necessary data. Reasonable efforts include listing the excluded jurisdiction, identifying the specific law or regulation that prevents compliance, explaining how compliance violates the law or regulation, seeking an exemption or other relief and even obtaining a legal opinion from counsel. If you can create a list of the pay for each employee and not include any personally identifiable information (e.g., just number the employees without using their regular employee number), then you likely will have to include them in the calculation.

    We strongly urge clients to bring their privacy officer or legal counsel into the picture early to make this determination up front.

  2. Determine if the De Minimus exemption applies. This exemption allows companies to exclude non-U.S. employees if they account for 5% or less of total employees. If non-U.S. employees exceed 5% of the total U.S. and non-U.S. employees, up to 5% may be excluded. However if any non-U.S. employees are excluded from a particular jurisdiction, all non-U.S. employees in that jurisdiction must be excluded. Both the jurisdiction and the approximate number of employees excluded must be disclosed.
  3. If both exemptions are used, coordinate the two exemptions as required under the rules. When calculating the number of non-U.S. employees that may be excluded under the de minimis exemption, companies much count any non-U.S. employees excluded under the data privacy exemption. This number may exceed 5%, but if it does, the de minimis exemption may not be used to exclude additional non-U.S. employees. On the other hand, if the number of non-U.S. employees excluded under data privacy exemption is less than 5%, additional non-U.S. employees may be excluded under the de minimis exemption provided the total equals 5% or less and all employees in a given jurisdiction are excluded.
  4. Assess efficacy of using COLA adjustments. The final rules allow companies to adjust actual compensation amounts of non-U.S. employees to reflect COLA, or cost of living allowance adjustments. Assuming that the U.S. tends to be a relatively high cost jurisdiction, unadjusted wages in non-U.S. jurisdictions will trend lower, increasing the final pay ratio. Upward adjustments to non-U.S. wage rates will decrease the reported pay ratio – a desirable outcome for most companies

    But once again, meeting the requirements to take advantage of the allowed flexibility will be challenging. Before embarking on this path, companies need to determine if it is indeed worthwhile. Discuss pros and cons and whether additional disclosure is required.

  5. Determine whether to annualize cash compensation of permanent employees. Companies are allowed to correct for mid-year hires of permanent employees by annualizing compensation, but if the number of mid-year hires is small, this adjustment may not be worthwhile.
  6. Evaluate the pros and cons of using statistical sampling to identify the median employee. Remember that to perform valid statistical sampling, the underlying data must be reasonably comprehensive and accurate. In addition, statistical sampling complicates your disclosure, since disclosure of the methodology and your assumptions is required. Best use may be for companies with defined benefit pension plans, since total compensation will be impacted by age and years of service.
  7. Identify how you will measure compensation in a consistent fashion for purposes of identifying the median employee. The rules allow companies considerable flexibility to choose an appropriate methodology for identifying the median employee. Employers can select a methodology that makes sense for them. Reasonable estimates are allowed. In addition, the median employee can be selected by using any compensation measure, provided it is consistently applied. Furthermore, companies may use their actual population to select the median employee or use statistical sampling or any other reasonable method.
    While some companies will take advantage of these flexibilities, others will focus on their actual population and compensation levels. Since statistical sampling depends on valid data, it may not reduce the workload associated with preparing the calculations.
  8. Consider the pros and cons of using various dates within the last three months of the fiscal year. The rules allow employers to identify the median employee on any date within the last three months of the fiscal year. We expect that this decision will most often align with payroll dates when payroll data is used to measure compensation of the median employee.

Phase IV: Prepare Final Calculations

  1. Select a final date during last three months of the year for the calculation based on preliminary analysis.
  2. Obtain updated roster of employees by location as well as final compensation data. Make sure compensation data is consistently applied.
  3. Apply the various exemptions, adjustments and other methodologies reviewed and agreed on during Phases I – III. Review and confirm your methodology and document any assumptions.
  4. Identify the median employee and determine a set of other comparable employees in case of a change in status of the median employee. The rules allow companies to identify the median employee only once every three years. Over time, this will significantly reduce the cost of compliance. Interestingly, the rules require the identification of an actual employee as the median employee, rather than a range of employees or a hypothetical profile employee.

    The exception to the three-year rule involves instances where a change in the employee population or a change in employee compensation arrangements could reasonably result in a significant change in pay ratio disclosure. Assuming no significant changes, the company must calculate annual compensation of the median employee using the methodology for proxy disclosure, subject to reasonable estimates, for years one, two and three. If the median employee leaves the company or has anomalies in his or her compensation, the company may substitute a comparably situated employee.

  5. Evaluate any anomalies related to the PEO’s compensation. Two methodologies are available if turnover resulting in two incumbents during a single year occurs. Under the first approach, a company may add the total compensation reported in the Summary Compensation Table for the two incumbents. As an alternative, companies may annualize the compensation of the PEO in the position on the date selected to identify the median employee.
  6. Determine the final pay ratio. Test and retest. Get a final level of comfort with the data and the methodology.

Phase V: Draft the Disclosure

  1. Prepare a draft of pay ratio disclosure. For disclosure purposes, companies must describe the methodology used to identify the median employee and to determine total compensation and any material assumptions, adjustments (including any cost of living adjustments) or estimates.
  2. Consider whether disclosure of supplemental information would be beneficial. Final rules allow companies to disclose additional ratios or other information to supplement the final ratio. While this is not required, companies may find it beneficial. For example, a company with a large number of part-time or seasonal workers may want to disclose the ratio applicable to full-time employees.

Phase VI: Communicate Internally and Externally

  1. Communication of pay ratio disclosure will be important. The project team has a number of critical stakeholders in the communications process. Plan to communicate progress early and often. Schedule periodic check-ins with HR leaders and senior leadership during the analysis and review process. In addition, brief the board of directors, particularly the Compensation Committee. There is a high potential for negative publicity associated with pay ratio disclosure. Get in front of it and anticipate employee reactions to the disclosure. Provide talking points to the leadership team so that they can respond to employee concerns in a consistent manner.
  2. Talk to peers and outside advisors about trends in disclosure. As companies actually prepare disclosure, trends and best practices will crystallize. Tap into the knowledge and experience that other companies and your advisors can provide.

Interpretive Guidance from SEC

On September 21, 2017 the US Securities and Exchange Commission (SEC) issued interpretive guidance designed to assist registrants prepare their pay ratio disclosures. The interpretive release was designed to respond to concerns raised by registrants about how to identify the median employee and calculate the pay ratio.

Importantly, the SEC confirmed that rules are intentionally crafted to give flexibility to registrants since they allow for reasonable estimates, assumptions and methodologies, including statistical sampling; and reasonable effort to prepare the disclosure. The SEC acknowledged that the ratio may include a degree of imprecision. Further, the SEC clarified that the pay ratio disclosure would not trigger an enforcement action unless the disclosure was made “without a reasonable basis or was provided other than in good faith.” Given that many clients have been intensely debating the pros and cons of various methodologies, this is a very important clarification from the SEC.

The SEC reaffirmed that existing internal records, such as tax or payroll records, may be used to identify the median employee. These records may be used even if they do not include every element of compensation. Use of existing records are certainly in line with the concept of using reasonable estimates.

The SEC also reaffirmed that if the compensation of the selected median employee, as calculated using the Summary Compensation Table methodology, proved to be anomalous, a registrant could select another similarly-situated employee based on the consistently applied compensation measure used in its selection process.

All of this interpretative guidance confirms that the pay ratio calculation is complex. While it is very helpful for the SEC to address concerns about potential liability and reaffirm that registrants have flexibility, one must question whether the pay ratio disclosure actually serves a legitimate business purpose.

The final issue addressed by the SEC involved the definition of independent contractors. In cases where workers are employed by, and whose compensation is determined by an unaffiliated third party, they may be classified as independent contractors and excluded from the calculation. The SEC affirmed that independent contractors defined by widely recognized tests applicable in other legal or regulatory contexts could also be excluded.

Division of Corporation Finance Guidance

In addition to the SEC’s interpretive release, the Division of Corporation Finance released additional guidance and hypothetical examples of the use of statistical sampling and other reasonable methodologies.

This included the following:

  1. Registrants are allowed to combine the use of reasonable estimates with the use of statistical sampling. For example a registrant with multi-national operations or multiple lines of business may use sampling in some areas/businesses and other methodologies or reasonable estimates elsewhere.
  2. Examples of sampling methods that may be used are below. Additionally a combination of methods is acceptable.
  3. Simple random sampling by selecting random number or percentage of employees from the entire population;
  4. Stratified sampling by dividing employees into strata, based on factors like location, business unit, type of employee, etc., and sampling within each strata;
  5. Cluster sampling by dividing employees into clusters, drawing a subset of clusters and sampling within clusters; and
  6. Systematic sampling where every nth employee is included in the sample.
  7. Examples of where registrants may use reasonable estimates include but are not limited to:
  8. Analysis of the workforce;
  9. Characterizing the statistical distribution of the company’s employees;
  10. Calculating a consistent measure of compensation and annual total compensation or its elements;
  11. Determining the likelihood of significant changes from year to year;
  12. Identifying the median employee;
  13. Identifying multiple employees who fall around the middle of the compensation spectrum; and
  14. Using the midpoint of a compensation range to estimate compensation.
  15. Examples of other reasonable methodologies, include:
  16. Making one or more distributional assumptions, provided that the company has determined that the assumption is appropriate given its own distributions;
  17. Reasonable methods of imputing or correcting missing values; and
  18. Reasonable methods of addressing outliers or other extreme observations.

Finally the Guidance provides three hypothetical examples of various approaches that may be applied. While all of the Guidance is helpful, we believe that the extra detail on reasonable assumptions and reasonable methodologies is particularly helpful.

In contrast, complex methods of sampling are less helpful. Our sense at this point in time is that most companies will not employ extensive statistical sampling. Basically the thinking is that if a registrant has the data necessary to perform robust statistical sampling, the registrant will have the data to array employee compensation levels and calculate a median. But we shall see how this plays out next year when the new disclosure is actually implemented.


Pay ratio disclosure represents a significant effort for most companies. It is important to develop an airtight process to support the company’s analysis. The rules are complex and companies will be working through the rules for the first time. The results will undoubtedly get a great deal of scrutiny from senior leadership, the Board, employees and the business press. Recent interpretive guidance gives companies more leeway to employ reasonable estimates and methodologies, but nevertheless companies must be comfortable that their disclosure is accurate. This practical guide to implementation can serve as a guide to achieving a successful result for all.

On September 21, 2017 the US Securities and Exchange Commission (SEC) issued interpretive guidance on the CEO pay ratio calculation and disclosure.  The pay ratio rule was adopted by the SEC on August 5, 2015 under the Dodd-Frank Wall Street Reform and Consumer Protection Act. It requires companies to disclose their CEO’s annual total compensation as a multiple of the annual total compensation of the median employee for the first fiscal year beginning in 2017.

The guidance came in the following three areas:

SEC Guidance

  • As long as the company uses reasonable estimates, assumptions, or methodologies (to identify the median employee or calculating any elements of annual total compensation for employees), the pay ratio itself and related disclosure would not provide the basis for an enforcement action from the SEC
  • A company may use internal records (such as tax or payroll records) to identify its median employee
  • For determining whether independent contractors are “employees”, companies may apply a widely recognized test under another area of law (e.g., tax or employment laws) that they would otherwise use to determine whether their workers are employees

Staff Guidance

  • Provides guidance and detailed examples on the use of statistical sampling

Revised Compliance and Disclosure Interpretations (C&DIs)

  • Adds a new C&DI that issuers can state the ratio is an “estimate”
  • Withdraws C&DI that primarily addressed the treatment of independent contractors and leased workers

The latest guidance now provides more flexibility for companies in determining the median employee, specifically as it relates to the use of statistical sampling and clarification of independent contractors. We will track pay ratio disclosure over the coming year and keep you informed of new developments as they occur.

On February 6, 2017 the Acting Chairman of the US Securities and Exchange Commission (SEC) issued a Public Statement on Reconsideration of Pay Ratio Rule Implementation. The pay ratio rule was adopted by the SEC on August 5, 2015 under the Dodd-Frank Wall Street Reform and Consumer Protection Act. It requires companies to disclose their CEO’s annual total compensation as a multiple of the annual total compensation of the median employee for the first fiscal year beginning in 2017.

The statement indicated that “some issuers have begun to encounter unanticipated compliance difficulties that may hinder them in meeting the reporting deadline.” The SEC began a 45-day comment period for issuers to submit detailed comments on challenges they have experienced in preparing for compliance with the rule. Additionally, the staff was directed to determine whether additional guidance or relief is necessary.

Click on this link to see the full text of the Public Statement.

We believe pay ratio disclosure is an example of regulation that will be costly to implement and serves no clear purpose to benefit investors or American companies. We expect that a number of issuers will provide their comments on the challenges, cost and effort related to the preparation of compliance with the rule. This may be a first step in a major overhaul, delay or reversal of the rule.

In addition to the SEC’s Public Statement, it was reported by Bloomberg BNA that House Republicans “plan to introduce legislation to roll back the Dodd-Frank Act in mid-February”. Depending on the timing of any changes to the Dodd-Frank Act or the results of the comment review process, issuers may not have definitive direction before the summer.

We will track these issues over the coming year and keep you informed of new developments as they occur.



The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) directed the SEC to enact rules that require disclosure in the annual proxy statement of the ratio of Chief Executive Officer (CEO) compensation to that of the median employee, including the absolute value for each input that goes into the ratio calculation. More than five years later, final pay ratio rules have been released by the SEC. These rules will go into effect requiring companies to provide disclosure of their pay ratios for their first fiscal year beginning on or after Jan. 1, 2017.

While many companies are preparing for the new pay ratio disclosure requirements from the SEC, ratios of CEO pay to other NEOs are also something companies should pay close attention to. Committees can use these ratios as a starting point to assess issues such as retention, talent development, and succession planning. A high ratio can be an indicator that the CEO is potentially carrying too much of the company, a disconnect exists between the pay practices for the CEO vs. other senior leaders, or that there is no succession plan in place. Having healthy internal equity with appropriate ratios of pay for leadership, and an eye on general market norms, is an important factor in talent acquisition and retention.

This CAPflash focuses on three NEO pay ratio calculations:

  • CEO versus Chief Operating Officer (COO);
  • CEO versus Chief Financial Officer (CFO); and
  • CEO versus General Counsel (GC).

In this study, we provide market practice among S&P 500 companies, as well as the policies of proxy advisory firms, ISS and Glass-Lewis. In our analysis, we use the following target pay elements per proxy disclosure: disclosed base salary, target annual incentive, and target/grant date value of LTI awards.

Please note that the ratios used in this analysis are calculated from proxy disclosure. Therefore, if a COO or GC is not among the top 5 highest paid, as required in proxy disclosure, they are not included in the analysis—CFO pay disclosure is required.

What does our research show?

To evaluate market norms, Compensation Advisory Partners (“CAP”) conducted an analysis of senior executive target pay ratios among S&P 500 companies during the most recent three fiscal years (as of August 22, 2016).

  • At median, CEO pay was 2.2x the COO; i.e., for every $1.00 paid to the COO, the CEO was paid approximately $2.20
  • At median, CEO pay was 3.0x the CFO; i.e., for every $1.00 paid to the CFO, the CEO was paid approximately $3.00
  • At median, CEO pay was 4.0x the GC; i.e., for every $1.00 paid to the GC, the CEO was paid approximately $4.00

CAP also analyzed the S&P 500 senior executive pay ratios by industry.

  • For the CEO vs. COO ratio, the Utilities sector had the highest ratio of 3.0x at median, while Energy had the lowest ratio of 1.9x at median
  • For the CEO vs. CFO ratio, the Materials sector had the highest ratio of 3.5x at median, while Telecommunication Services had the lowest ratio of 2.2x, at median
  • For the CEO vs. GC ratio, the Consumer Discretionary sector had the highest ratio of 5.2x at median, while Consumer staples had the lowest ratio of 3.6x, at median

Note: Telecommunication Services was not included because the sample was too small.

Note: Telecommunication Services was not included because the sample was too small.

How do ISS and Glass-Lewis use pay ratios?

Both proxy advisory firms include senior executive pay ratios in their annual proxy analyses.

  • ISS includes the ratio of CEO pay versus the second highest paid active NEO, as well as the ratio of CEO pay versus the average of the other active NEOs. “Pay” includes all elements from the Summary Compensation Table; however, the grant-date value of stock options is updated to reflect ISS’ methodology which differs from accounting rules
  • Glass-Lewis includes the ratio of CEO pay versus the average of other NEOs during each of the past three years. “Pay” includes select elements from the Summary Compensation Table: Salary, Bonus, Non-Equity Incentive Plan, Stock Awards, and Option Awards

ISS also uses pay ratio as one of the inputs to the Compensation score it assigns companies in its QuickScore 3.0 tool, which is meant to influence investment decisions through an assessment of risk factors. The ratio of CEO pay versus the second highest paid active NEO is included in QuickScore 3.0.

When do proxy advisors perceive there to be a possible issue?

To our knowledge, these ratios have not been used by ISS or Glass-Lewis to justify an Against Say on Pay vote recommendation. However, large pay discrepancies can reinforce other negative assessments. In general, comments from ISS and Glass-Lewis are likely when the CEO to NEO ratio exceeds 4x. Ratios exceed 4x at 5-10% of S&P companies, depending on which ratio is used (see ISS and Glass-Lewis definitions above). Ratios rising to 5-6x, or greater, will receive more strongly worded commentary.


Since companies are very different in their organizational and operational structures, we believe that there is limited utility in the CEO pay ratio disclosure that will be required by the SEC under Dodd-Frank. However, looking at the ratios of leadership pay at companies in the same business sector and/or of the same size, can provide important information and insights. It is worthwhile for compensation committees to track this information internally and on a relative basis. Such information can be used as an input in the pay benchmarking process and as a barometer of healthy succession planning, as well as contributing to effective talent acquisition and retention.

Today, the SEC approved the final rules related to pay ratio. Companies will be required to disclose their CEO’s pay as a multiple of the pay of their median employee in their 2017 proxy (released in 2018 for calendar year filers). The SEC issued proposed rules in September 2013 and received over 280,000 comments related to the topic. For further details and thoughts please see our earlier CAPFlashes on the topic (Sept 20, 2013 and April 1, 2015) and look for more details in future CAPflashes.

Click here to read SEC’s press release on the topic.

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