CEO Pay Ratio Explained
The CEO pay ratio is a mandatory SEC disclosure that reveals the gap between executive and worker compensation — and what it tells us about a company's pay practices.
What Is the CEO Pay Ratio?
The CEO pay ratio is a comparison of the total annual compensation of a company's CEO to the total annual compensation of its median (middle-ranked) employee. Required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, it has been mandatory for U.S. public companies since the 2017 proxy season.
A pay ratio of 200:1 means the CEO earned 200 times more than the company's typical worker. If the CEO earned $10 million and the median employee earned $50,000, the ratio would be 200:1.
Why Was the Pay Ratio Disclosure Created?
Congress mandated CEO pay ratio disclosure to increase transparency about corporate pay practices and give shareholders more information when making voting decisions on executive compensation. It was designed to highlight income inequality within companies and help investors assess whether executive pay is reasonable relative to the broader workforce.
How Is the CEO Pay Ratio Calculated?
Companies follow these steps to calculate and disclose their pay ratio:
- Identify the median employee: Companies survey their full workforce (globally, for most companies) and find the median compensated employee — the person at the 50th percentile of pay.
- Calculate median employee total compensation: Using the same methodology required for the CEO Summary Compensation Table, which includes salary, bonus, stock awards, option awards, and other compensation.
- Calculate CEO total compensation: The same figure disclosed in the proxy's Summary Compensation Table.
- Divide and disclose: CEO total comp ÷ Median employee total comp = the ratio.
Companies have some flexibility in how they identify the median employee — including using statistical sampling, reasonable pay estimates, and cost-of-living adjustments for international workforces — which can make apples-to-apples comparisons across companies tricky.
What Does the Pay Ratio Tell You?
The pay ratio is most useful as a signal, not an absolute measure. A high ratio doesn't automatically mean a company is exploiting workers — it may simply reflect:
- A large, low-wage hourly workforce (common in retail and food service)
- Many international employees where wages are lower
- A CEO with unusually large equity grants
- An especially lean leadership structure
Conversely, a low ratio doesn't mean the company is paying its CEO too little — it may reflect a highly-skilled, well-compensated workforce, or a CEO who takes a below-market salary.
Industry Context Matters
Comparing pay ratios across industries is like comparing apples to oranges. A 300:1 ratio might be typical for a large retailer but extreme for a technology company. PlainCEOPay provides industry benchmarks for exactly this reason — use the industry median when evaluating any individual company.
Limitations of the Pay Ratio
- Not comparable across companies: Different methodologies make cross-company comparison imprecise.
- Volatile year-to-year: Large equity grant years can spike the ratio dramatically.
- Global workforce effect: Companies with many low-wage international employees will show higher ratios than pure domestic employers.
- Part-time workers: Companies may include part-time workers in their median calculation, which can dramatically lower the "median employee" figure.
Where to Find Pay Ratio Data
Pay ratio disclosures appear in a company's annual proxy statement (DEF 14A) filed with the SEC. You can find them on the SEC's EDGAR database at sec.gov, or right here on PlainCEOPay — we've aggregated the pay ratio disclosures for 2,071 public companies.
FAQ
When did CEO pay ratio disclosure become required?
The SEC finalized its pay ratio rule in August 2015, and the first disclosures were required in proxy statements for fiscal years beginning on or after January 1, 2017. So most companies first disclosed pay ratios in their 2018 proxy statements (covering fiscal year 2017).
Do all public companies have to disclose a pay ratio?
The pay ratio rule applies to all SEC reporting companies that are required to include executive compensation disclosures in their annual proxy statements. Some smaller reporting companies and emerging growth companies are exempt from the requirement.
What's considered a "high" pay ratio?
There's no universal threshold, but research suggests the S&P 500 median CEO pay ratio is typically around 200:1–300:1. Ratios above 500:1 are generally considered very high, while ratios below 50:1 are considered low. Always compare within an industry for meaningful context.