CEO Pay Ratio

DEFINITION

Under Section 953(b) of Dodd-Frank, public companies must disclose annually in the DEF 14A: (1) CEO total compensation, (2) median employee total compensation, and (3) the ratio of the two. The methodology for identifying the median employee is flexible — companies may use statistical sampling and adjust for cost-of-living. The disclosure is consistent across companies in name but not in methodology.

WHY IT MATTERS FOR RETAIL INVESTORS

Headline pay ratios are useful for sector benchmarking but should be read with care. A retail or hospitality business will show a ratio of 800:1 because most employees are hourly; a tech firm with all engineers may show 100:1. The interesting comparison is within an industry. Watch year-over-year changes within a single company — a sudden jump usually means the CEO got an unusual stock grant.

RELATED TERMS

• Executive Compensation
• DEF 14A