Community Corner

Dodd-Frank Act: The importance of putting CEO pay multiples into context

The Dodd-Frank Wall Street Reform and Consumer Protection Act – as the name implies – is a sweeping reform of multiple aspects of financial regulation. Of interest to Human Resource professionals are the Act’s executive compensation provisions, ranging from “say on pay” shareholder advisory voting to increased disclosure of executive compensation policies and practices that are expected to take effect in the 2011 and 2012 proxy seasons.

One new provision in particular captured our attention here at Radford – the requirement to disclose the CEO’s total compensation as a multiple of the median total compensation of all other employees (hereby referred to as the “CEO pay multiple”). This requirement is a reaction to the increasing gap between CEO and “rank-and-file” pay. But it is clear to many that this pay ratio is an overly simplistic means of illustrating that gap.

Many executive compensation and business experts have speculated that any ratio that appears to be out of line will be a prime target for attack by shareholders, employees, the media and politicos. However, there is no easy answer to what is “out of line” when it comes to this ratio. Organizations that otherwise appear to be comparable in terms of size and industry may have radically different CEO pay multiples for rational reasons embedded in their business models and operating requirements. A company involved only in semiconductor chip design will have a much lower CEO pay multiple than a similar entity that designs and fabricates the chips because the latter has a large workforce of lower-paid manufacturing workers. A company that has moved a segment of its workforce to lower- cost countries will have a higher CEO pay multiple than one whose workforce is based solely in the United States.

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