What Is the CEO Pay Ratio?
The CEO pay ratio compares the total annual compensation of the CEO to the total annual compensation of the company's median employee. A ratio of 300:1 means the CEO earns 300 times what the median worker earns.
This disclosure was mandated by Section 953(b) of the Dodd-Frank Act and implemented by the SEC's final rule adopted in 2015. Companies first reported pay ratios in proxy statements filed in 2018.
How Is the Median Employee Identified?
Companies must identify the median employee using a “consistently applied compensation measure” (CACM) across all employees worldwide, including part-time, seasonal, and temporary workers. Common approaches:
- Total cash compensation (base salary + bonus) for all employees
- W-2 box 5 wages (Medicare wages) for US employees, with international equivalents
- Payroll records with adjustments for part-time status
Companies can exclude up to 5% of non-US employees from the calculation. They can also use statistical sampling and reasonable estimates. The median employee can remain the same for three years unless there is a significant change in the employee population.
Why Pay Ratios Vary So Much by Industry
Pay ratios range from under 50:1 to over 3,000:1 across public companies. The biggest driver is not CEO pay, it is the median employee's pay level:
Limitations of the Pay Ratio
While the pay ratio provides a useful data point, it has significant limitations:
- Not comparable across companies. Different industries, geographies, and business models make direct comparisons misleading. A tech company with 5,000 engineers will have a lower ratio than a retailer with 200,000 part-time employees, regardless of how much the CEO is paid.
- Methodology differences. Companies have discretion in choosing the CACM, excluding workers, and applying adjustments. Two identical companies could report different ratios.
- Doesn't capture the full picture. A CEO with a low pay ratio might still be overpaid relative to performance. A CEO with a high ratio might be leading a high-performing company with a large hourly workforce.
How to Read the Pay Ratio in Context
The pay ratio is most meaningful compared within an industry rather than across the whole market. A CEO whose ratio is well below their sector peers is paying workers more generously relative to the sector; one significantly above is an outlier worth a closer look at the proxy.
This approach accounts for industry differences — a tech company with mostly salaried engineers will always show a lower ratio than a retailer with a large hourly workforce. CEOPayWatch reports the SEC-disclosed CEO total compensation; to read a specific company's pay ratio, open its DEF 14A on SEC EDGAR, linked from every company profile.