CEO to Worker Pay Ratio Difficult to Calculate, Experts Say | NBC Bay Area
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CEO to Worker Pay Ratio Difficult to Calculate, Experts Say

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    Sam Brock investigates the SEC's new rule regarding CEO pay. (Published Monday, Aug. 17, 2015)

    The Securities and Exchange Commission approved a rule this month that requires publicly traded companies to reveal the ratio between CEO pay and median employee pay.

    But experts say that pay gap may not be easy to accurately calculate.
    Executive compensation experts told NBC Bay Area that CEO take-home pay is hard to pinpoint thanks to the variation and performance-based nature of a company’s stock awards.
    There can be large discrepancies between how much a CEO is paid in salary and how much a CEO actually earns each year, says Robert Daines, co-director of the Rock Center for Corporate Governance at Stanford University.
    “The CEO salary is usually a relatively small part of their take home pay,” he said.
    After all, Elon Musk made $35,000 in 2014. Larry Ellison made one dollar.
    “The vast majority of their pay is actually in stock options and the stock that they get,” Daines added.
    Take a look at salary alone, and the CEO-to-worker pay gap narrows.
    According to the Bureau of Labor Statistics, the average American CEO takes home about $180,000 per year, which calculates to roughly 5 times that of the average worker.
    Factor in the stock options financial experts point to and that gap begins to widen.
    A recent report from the American Federation of Labor and Congress of Industrial Organizations, which looked at 350 available companies on the S&P 500, points to a CEO-worker pay ratio of 331 to 1.
    A similar analysis by USA Today this year, shows that the gap rests at 219 to 1.
    This variation in ratio data isn’t surprising, says Robert Pozen, a Senior Fellow at the Brookings Institution. That’s because even calculating pay based on stock awards can get messy, he said.
    Say a CEO receives a salary of $1 million plus an additional $9 million in stock-related compensation, Pozen explains. It’s likely that those stock options are restricted shares that will vest over a period of time if certain targets are met, he added.
    In other words, the shares will be rewarded based upon performance and are not guaranteed.
    “So, the CEO may or may not get those restricted shares, but they are counted in the CEO’s pay on the year that they’re granted even if they may or may not vest,” Pozen said.
    Perhaps even more difficult to calculate is the idea of value and worth to a company when it comes to CEO pay, said Robert Daines.
    “I think the question of how much CEOs make is a really difficult one, and I don’t think academics have found a way to answer how much they should get paid,” said Stanford’s Robert Daines. “I don’t think there’s any good way to judge that.”
    Take, for instance, GoPro CEO Nick Woodman, the highest paid CEO in Silicon Valley according to data from the San Jose Mercury News.
    Woodman earned $800,000 last year, and his stock awards were almost $75 million. He founded a company, took it public, and reaped the benefits.
    Number three on that list is Yahoo’s Marissa Mayer. She didn’t found that company, though she was tasked with making it grow. Experts say that the amount of her total compensation—$42 million—is likely due to a need to woo her away from Google.
    “You have to pay a lot to get good talent,” Daines said.
    While value can be debated, the reality is the so-called CEO pay gap contains some inaccuracies.
    Beyond that, history shows that pay gap disclosures don’t work.
    “Disclosure hasn’t actually helped keep CEO pay down,” Stanford’s Robert Daines said. “Every time in the last twenty years there’s been a big problem, Congress has said let’s disclose more about CEO pay, but every time they disclose more, CEO pay increases.”