The CEO pay ratio
New rule’s debut gets muted response
- September 28, 2018
Publicly traded companies have begun disclosing a ratio that compares the compensation of their chief executive officers with the median pay of their workers.
The CEO pay ratio, required for the first time this year by the Securities and Exchange Commission, is intended to put the compensation of top executives under closer scrutiny. Nonetheless, the jury is still out on how helpful these figures are.
“Generally, people don’t really know what to make of it so far,” says Charlie Pontrelli, senior project manager at Equilar, a Redwood City, Calif.-based executive compensation firm. “The calculation is different between companies. A lack of comparability between one another doesn’t make [the ratio] super useful.”
Equilar prepared a survey of 2017 CEO compensation for Virginia Business looking at 47 Virginia-based publicly traded companies with annual revenues of more than $1 billion.
The firm examined proxy statements to analyze executives’ total compensation, including salary, cash bonus, stock and option awards, long-term cash and other compensation.
Equilar’s CEO total compensation numbers often differ from the amounts reported in company proxy statements because the firm excludes changes in pension plan value and above-market earnings on deferred compensation.
Average total compensation in 2017 for CEOs in Equilar’s survey was $7.3 million, down from $7.8 million the previous year.
Virginia executives, on average, did not fare as well in 2017 as those surveyed nationwide by Equilar in its June study of CEO Pay Trends. The median total reported compensation for 500 chief executive officers was $11.9 million in 2017, a 3.5 percent increase from 2016.
Michael Lawrie, the chairman, president and CEO of DXC Technology, a Tysons-based IT services company, leads the Virginia CEO pay list with total compensation of $32.2 million in 2017. His pay package represented a 72 percent increase over his 2016 compensation of $18.7 million.
Lawrie’s company was formed last year in the merger of Computer Sciences Corp. (CSC) and the Enterprise Services business of Hewlett Packard Enterprise. Lawrie was chairman, president and CEO of CSC. Total shareholder revenue (TSR) at the combined company jumped 49 percent year over year.
The ratio of Lawrie’s pay to company employees’ median salary is 806 to 1. Nonetheless, the highest CEO pay ratio on the Equilar list, 2,429 to 1, was reported by Universal Corp., a 100-year-old Richmond-based tobacco merchant with operations in 26 countries. The company buys, processes and sells tobacco for customers such as Richmond-based Altria Group.
Equilar values the 2017 total compensation of Universal CEO George C. Freeman at $3.5 million, the 35th highest on its Virginia list.
In explaining the high CEO pay ratio in its proxy statement, Universal points out that 94 percent of its 21,150 employees are located outside the U.S., many in countries where salaries are significantly lower than the average pay in the U.S. Unskilled, seasonal employees make up 64 percent of the company’s global workforce.
Universal CEO pay ratio is based on a median employee compensation of $1,528, the amount paid to an unskilled, seasonal tobacco worker in the Philippines. The company said SEC rules did not permit it to annualize seasonal pay.
When CEO compensation is compared with the annual median pay of Universal’s U.S. employees, the ratio falls to 206 to 1, the proxy statement said.
Low ratio at Freddie Mac
The lowest pay ratio among Virginia CEOs was found at McLean-based Federal Home Loan Mortgage Corp., known as Freddie Mac. CEO Donald H. Layton earned $651,000 while the median pay of Freddie Mac’s employees was $123,027, a ratio of 5 to 1. Layton ranked 46th in total compensation on the Virginia list.
CEO pay ratios for seven of 47 Virginia companies were not available when Equilar conducted its survey. The disclosure rule affects a company’s first fiscal year beginning on or after Jan. 1, 2017. One of the seven companies began its latest fiscal year before that date, and the other six had fiscal years that ended in June or September.
While the CEO pay ratio rule did not take effect until this year, it originated in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Many companies had been bracing for its enactment for the past eight years.
Tony Meyer of Meridan Compensation Partners LLC of Lake Forest, Ill., said earlier this year that the mandated CEO pay ratio was “driving increased external scrutiny of pay programs and communications to both internal and external audiences.”
In a recent email, however, Meyer indicated the effect of disclosing the pay ratio was still unclear. “We have not received information about how the inaugural CEO Pay Ratio disclosure has been received by companies and employees,” he said. “It has been our observation, though, that internal and external reactions have been far more muted than many anticipated. Most institutional investors are not that interested in these ratios.”
Meridian provides executive compensation and consulting governance services for publicly traded and privately held companies.
Equity awards and bonuses
Equity awards and bonuses continued to be the main component of a majority of chief executives’ compensation on the Equilar Virginia CEO pay list.
In 2017, the equity awards averaged $4.4 million, eclipsing the average of salary and bonuses, which averaged $2.6 million. CEO salaries alone averaged $973,069.
Kenneth Asbury, president and CEO of CACI International, an Arlington-based professional services and information technology company, received the biggest percentage jump in total compensation. It rose to $5.8 million in 2017, a 171 percent increase from his 2016 compensation of $2.2 million. CACI acquired the National Security Solutions unit of L-3 Communications in early 2016.
Two women were among the top-paid chief executives in Virginia in 2017.
One is Phebe N. Novakovic, chairman and CEO of General Dynamics, a Falls Church-based aerospace and defense company.
She was the second-highest-paid CEO on the Equilar list, at $21.2 million, virtually the same amount as the previous year.
But Novakovic received the largest bonus in 2017 among the CEOs, $5.3 million, a 3 percent increase above her bonus of a year before.
The other female in the male-dominated CEO ranks was Lynn A. Dugle of Engility Holdings, a Chantilly-based engineering and logistics services company. Dugle earned $3.9 million in total compensation. She became CEO in March 2016. (In September, Reston-based SAIC announced it is buying Engility in a stock deal worth $2.5 billion.)
The largest percentage bonus increase year over year — 259 percent — went to James A. Squires, CEO of Norfolk-based transportation company Norfolk Southern.
Squires’ bonus was $2.6 million, compared with $724,950 from a year ago. His combined bonus and salary also saw the biggest percentage increase in that category, 122 percent.
His total compensation, $10.2 million, was fueled largely by an equity award worth $6.5 million.
Salary goes toward fund
The biggest percentage drop in base salary involved C. Michael Petters, president and CEO of Huntington Ingalls Industries of Newport News, America’s largest military shipbuilding company.
Petters’ salary dropped from $328,847 in 2016 to $1 in 2017. During 2016, he asked the HII board of directors to reduce his base salary, previously $950,000 a year, to $1. The rest of the money was given to a fund offering educational grants to the children of company employees.
Petters’ total compensation dropped 7 percent from 2016 to 2017, from $6.2 million to $5.8 million.
The largest dollar drop in total compensation was that of John J. Haley, CEO of Willis Towers Watson, a multinational risk management, insurance brokerage and advisory company based in Arlington.
Haley’s total compensation declined $24 million, or 86 percent, plummeting from $28.1 million in 2016 to $3.9 million in 2017. Haley was the head of Arlington-based Towers Watson & Co., which merged with London-based Willis Group in 2016.