Stay current on changes and developments in corporate law with a wide variety of resources and tools.
By Jacob Rund
More than 1,000 publicly traded companies have disclosed their fiscal 2017 pay CEO-to-worker comparisons to investors this year, with thousands more set to file as proxy season heats up.
As of April 5, transportation provider CH Robinson Worldwide Inc. sits in the exact median spot of all filers, with a pay ratio of 130-to-1. Yum China Holdings Inc., operator of Pizza Hut and KFC restaurants in China that’s incorporated in Delaware, on March 30 reported the largest ratio to date at 2,818-to-1, according to Bloomberg data. This surpassed the 2,526-to-1 number of Aptiv Plc, a technology company that previously had the biggest reported pay disparity.
At least nine companies have disclosed ratios greater than 1,000-to-1 thus far. And more filings are trickling into the Securities and Exchange Commission every day, meaning that number is likely to grow.
These ratios, mandated by Congress and now being reported for the first time, are intended to reveal gaps in compensation between a company’s CEO and its self-calculated median employee. The ratio reporting requirement was included in the 2010 Dodd-Frank Act enacted after the 2008 financial crisis.
So what pushes a company’s ratio into this realm of outliers?
It could be as simple as a genuinely large CEO compensation package, but, as evidenced in several disclosures, it’s often a fusion of multiple factors.
According to Mercer principal consultant Tom Langle, “aside from CEO pay, there are two primary workforce reasons” why a company would have a ratio greater than 500-to-1. The first is a large percent of employees who work part time or seasonally, and the other is a “significant overseas workforce” located in countries with low labor costs.
A number of companies that employ mostly part-time or seasonal workers and offer comparatively high CEO pay have landed in the upper-echelon of ratios.
Children’s Place Inc., a youth-focused clothing retailer that just disclosed its pay ratio, is among the most recent examples of how a labor pool consisting almost entirely of non-salaried workers can affect a pay ratio. The company on April 3 disclosed a 1,813-to-1 ratio, saying its median employee was a “part-time, hourly retail store associate” logging 15 hours per week and making $8,693 per year. It’s CEO, Jane Elfers, on the other hand, received $15.7 million in annual compensation.
Kohl’s Corp., another retailer with a large part-time employee population, reported a 1,264-to-1 ratio and median worker pay of $8,976. CEO Kevin Mansell earned $11.3 million during fiscal 2017.
Theme park operator Six Flags Entertainment Corp., which relies on seasonal employees that work one or two months each year, has one of the top 10 largest ratios reported as of April 5 at 1,804-to-1. The company’s proxy statement said its median worker made $8,322 and that seasonal employees made up 82 percent of its workforce.
The SEC’s pay ratio rules prohibit companies from annualizing the pay of their seasonal or temporary workers. But firms can annualize the pay of a part-time or full-time worker who wasn’t employed during the entire fiscal 2017.
In any company with lots of seasonal or part-time workers or a lot of turnover, “you’re going to have very high ratios,” Deborah Lifshey, a managing director at pay consultant Pearl Meyer, told Bloomberg Law.
“It’s hard to avoid and I’m not sure there’s an answer except that most people expect that” companies like McDonald’s and Walmart Inc. and other large retailers depend heavily on those kinds of workers, she said. “It’s part of the business model. The ratio might be higher, but that’s not always a bad thing.”
The SEC allows companies to exclude certain pockets of workers in non-U.S. jurisdictions from their median worker calculation as long as they don’t account for more than 5 percent of their total workforce. This so-called de minimis exemption lets firms leave out some workers in low-wage countries, and, in theory, leads to a median employee with higher pay.
But the exemption’s 5 percent cap can limit the overall impact on final ratios, especially for corporations with large, non-U.S. worker populations. Those companies have some of the biggest reported ratios to date.
Apparel maker Hanesbrands Inc., in its March 12 proxy statement, said more than 80 percent—about 55,000 people—of its workforce is employed at “supply chain facilities located primarily in Central America, the Caribbean Basin and Asia.” Its median employee was a Honduras-based equipment operator making $5,237 per year, and its pay ratio for fiscal 2017 was 1,830-to-1.
Cigarette maker Philip Morris International Inc. on March 29 disclosed a 990-to-1 ratio, saying in its proxy statement that 99.8 percent of its employees were based outside of the U.S.
Another factor that can contribute to a larger-than-average ratio is the way companies calculate principal executive compensation when they changed CEOs during a fiscal year.
Under the SEC rule, firms that underwent a CEO transition can do one of two things: They can either add together both executives’ pay to come up with an annual total, or they can take the pay of the CEO who served nearest to the end of the fiscal year and annualize it.
Langle said the second option provides a little more “wiggle room” and that as long as a company has a calculation that’s “defensible, it would likely fly.”
Six Flags had a new CEO take over in mid-July of last year, and the company opted to combine the pay of both executives to come up with a total compensation of about $15 million.
“My guess is that companies that had a transition occur mid-year are probably more likely to choose the combining approach,” Langle said.
That way any one-time awards given to a new CEO won’t be compounded when the individual’s compensation is annualized, he added. These awards are often intended for a multi-year period, but must be included in the ratio calculation.
“Frankly, I would expect that companies would choose the option that leads to a lower CEO pay number and therefore a lower pay ratio,” Langle added.
To contact the reporter on this story: Jacob Rund in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Fawn Johnson at email@example.com
Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)