The Sound and Fury of CEO Pay Ratios

The Sound and Fury of CEO Pay Ratios

Many public companies are probably glad they aren’t Honeywell International right now. The New Jersey-based industrial technology manufacturer recently had the distinction — or, rather, misfortune — of becoming the first issuer to report its so-called pay ratio. It disclosed in a proxy statement that CEO Darius Adamczyk earned roughly $16.8 million in 2017, an estimated 333 times the annual compensation of Honeywell’s median employee, at $50,296.

As was the case during the corporate accounting scandals of the early 2000s, groups ranging from activists to shareholders to politicians put executive compensation under the microscope following the “Too Big to Fail” bailouts of 2008. Now, a decade after the financial system meltdown, publicly traded companies like Honeywell are being forced to report pay ratios as part of the Dodd-Frank financial reforms. According to SEC guidance issued in September, companies must disclose the ratio of their chief executives’ total annual compensation to “reasonable estimates” of the pay of their median employees. The requirement went into effect with the 2017 fiscal year.

In theory, the pay-ratio disclosures can help investors, financial analysts and other interested parties identify cases in which executive pay is excessively lavish or disproportionate to performance. It is entirely possible they’ll also stir some anger. Research suggests that people disapprove of pay disparities along the lines of what corporate watchdog groups are projecting publicly traded companies will report in this initial round of disclosures. For its part, Honeywell’s pay ratio is both enormous-sounding, and, as columnist Michael Hiltzik of the Los Angeles Times points out, very much in line with expectations for public corporations in 2017.

So what, exactly, can we take away from Honeywell’s 333:1 figure? Critics of the mandate, such as the Center on Executive Compensation, have voiced concerns about the usefulness of pay ratio information, arguing that the ratios aren’t comparable between companies for a variety of reasons. They maintain that despite the sound and fury surrounding pay ratios, they don’t signify much at all.

Early reporting from publicly traded private equity firms suggests the limitations on conclusions one can draw from pay ratios. In February, Apollo Global Management LLC reported a pay ratio of essentially one-to-one for 2017. CEO Leon Black reportedly received salary and compensation of approximately $252,000, while the company’s median employee received $250,000. Meanwhile, Carlyle LP disclosed that co-founders David Rubenstein, William Conway, and Daniel D’Aniello each received total compensation of $281,750 for the year, just 1.4 times the median employee compensation of a little more than $201,000.

What the pay ratios don’t show in the case of the private equity firms are eight- and nine-figure company dividends paid to the executives.

It’s very early days in the pay ratio era, so it’s far too soon to speculate as to how SEC regulators might choose to modify the rules to address issues that emerge with the first batch of filings. Nevertheless, the disclosures will almost certainly continue to invite scrutiny of the companies as the public collects more information about CEO pay.

From Intelligize:

Honeywell Schedule 14A

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