CEO Pay Ratio: Grade School Math or Grade-A Headache?
Using the CEO pay ratio calculation requires determining the median employee pay. This is difficult because of three distinct data problems.
See how people analytics can help you determine CEO pay and meet disclosure requirements
Disclosure of the CEO Pay Ratio in annual proxy filings takes effect this year. Understandably, this mandate from the 2010 Dodd-Frank Act is causing a lot of concern and worry amongst business leaders–from the cost of calculating it to the fall-out of disclosing it.
On the face of it, this is a relatively simple calculation: it is the ratio of the CEOs compensation and the median employee pay. If you have this data, it’s grade-school math to calculate the ratio–so why the angst?
The math isn’t the problem, it’s getting the data to do the math. And this challenge is costing organizations $100,000 or more to produce the number they need for their filing.
The Pains of the CEO Pay Ratio Mandate
While CEO pay is no longer at its peak, overall compensation for CEOs is still much higher than it was in previous decades. According to data from the Economic Policy Institute, CEO compensation was 940% higher in 2018 than it was in 1978. This massive growth drastically separates the CEO from other top earners. However, the way that compensation is paid out continues to evolve.
Now, CEO compensation is shifting away from the use of stock options and towards the use of stock awards. That change alone makes up close to half of all CEO compensation. That said, the relationship between CEO compensation and the stock market is just one challenge.
Calculating total CEO pay is difficult because it also includes company contributions to defined contribution retirement plans, preferential life insurance premiums, preferential stock purchase discounts and more. To add another level of complexity, in response to the pandemic, some CEOs are now taking a pay cut or even relinquishing their salaries for the year.
The pain of determining the CEO Pay Ratio is hitting organizations on two fronts: the practical efforts and costs of calculating it, and the optics of disclosing it.
Pain #1: Calculating Median Employee Pay
Part of calculating the CEO Pay Ratio requires determining the median employee pay. Organizations need to know how much everyone in their workforce is paid, expressed as a single amount per person (including commissions, bonuses, etc), and then determine what the median (not average, so simple totals won’t suffice) amount is.
This is a challenge for most organizations because of:
1. Data in disparate pay systems
Organizations with multiple pay systems will need to extract and consolidate potentially millions of rows of data.
2. Different pay packages
Different pay packages for different employee types adds complexity to the calculations–again across potentially millions of rows of data–as organizations try to get to a single pay number per employee.
3. Data volume
Running the calculations across millions of rows of data and then determining the median of all those rows is simply beyond the capabilities of payroll solutions, and that’s assuming that all payroll is in a single solution. Extraction to Excel is an option, but the sheer volume of data makes doing the calculations incredibly labor intensive.
Pain #2: Shortcuts that Lead to More Headaches
What if we used a sample to determine the mean?
The reporting requirement does allow organizations to calculate their median using a representative sample of employees, but this presents it’s own challenge from determining what a representative sample looks like, to being able to justify their methodology for choosing their sample should they be called upon to do so. A bad sample could lead to Commission sanctions.
What if we excluded allowable groups?
Most organizations would prefer that their reported ratio be as small as possible to reduce the potential fall-out, both internal and external. Organizations can exclude certain populations but they don’t have to, which means that before excluding an eligible population, organizations should see what impact that will have on their calculation. However, this kind of “what-if” modeling gets expensive really quickly (or slowly, depending on how long it takes them to crunch the numbers) when you’re working with by-the-hour consultants to get these numbers.
Pain #3: Communicating the Ratio
Business leaders are worried that the calculation doesn’t accurately reflect the distribution of pay and that the crudeness of the calculation, coupled with a lack of context for the numbers, will lead to employee dissatisfaction, public scrutiny, and pressure from the board or shareholders to justify compensation strategy.
Organizations are wise to proactively communicate the factors that impacted their calculations to provide context. However, in the absence of good data to support their arguments, what is intended to be context can easily be perceived to be simple justifications.
Visier People® Provides CEO Pay Ratio–Without Pain
Organizations that use Visier People will discover that this simple calculation is, in fact, really quite simple to obtain. Here’s how Visier People’s analytics spare organization’s the pay ratio grief. (You can also see a video on Visier’s other compensation-related analytic capabilities here)
Median Employee Pay Metric
Visier People’s upcoming quarterly release includes the all-important Median Employee Pay metric. Now current–and future–Visier customers will be able to calculate this metric easily because:
All the necessary data across all their pay systems already exists in their Visier People instance if they previously chose to add it. And even if this data still needs to be added, Visier will assist in adding it, at no charge, as part of our continuous value delivery model
All those different pay structures and compensation options have been categorized for easy use
In addition, we’ve added CEO Pay and a calculation that uses the Employee Median Pay and CEO Pay to determine the current CEO Pay Ratio. This enables Visier People customers to calculate the ratio for their submission with a single click–no expensive consultant required.
Visier’s simple, on-the-fly analysis editing enables users to tweak the metrics to see if adjusting the included populations–within the allowable parameters–impacts the calculations. With just a couple of clicks, organizations can determine whether or not it’s to their advantage to include a location in their filing.
Further, organizations can determine which pay elements should be included in the Employee Median Pay metric and CEO Pay element so that the number is both transparent and representative of the organization’s realities.
Strategic Communication with Data Journalism
Smart organizations will strategically communicate their CEO Pay Ratio by including context that explains the number. For example, by including a breakdown of the type of worker, earnings by month, and compensation by job, organizations can position the CEO Pay Ratio disclosure in the most positive light.
Visier People’s unique data journalism format makes it simple to breakdown the realities of your workforce and labor costs and use data visualizations to better illustrate the story behind the numbers.
For example, if your workforce consists of a large number of part-time or seasonal workers, Visier People enables you to quickly create an analysis showing the income earned by seasonal workers in relation to the time worked (as opposed to the annualization forced by the CEO Pay Ratio calculation). You can then isolate your full-time staff and illustrate the average salary for that group.
Each additional visual can be prefaced with an introduction so that the viewers are able to understand the bigger picture better. Share the analysis in presentations (or in print), while ensuring the security of your data using Visier’s roles and permission capabilities.
Visier isn’t just about saving you the effort of this one regulatory requirement–it’s about getting a clear view of your workforce realities, seeing the connections, measuring the impact, and preparing for the future.
Not only can you save yourself the headache of the CEO Pay Ratio in future years, you could also be leveraging that insight into workforce costs across your organization. Imagine being able to report your total cost for the workforce (arguably every organization’s biggest expense) and accurately tie this to your organization’s business outcomes–all with a few clicks in Visier People.