Survey on Year Two Pay Ratios Raises Questions About Year Over Year Comparisons

April 12, 2019

The Wall Street Journal has reported that “median pay rose at most of the 282 companies” that have disclosed two years of pay ratio data so far, but that over a quarter of the companies reported substantial increases or decreases in that number, reinforcing that comparing pay ratio data is often meaningless between and even within companies.

As predicted, the focus is on the median employee.  The Journal’s data, taken from companies filing proxies by noon on April 9, so far only reports on the median employee and the number of employees at the company.  It does not report the pay ratios as disclosed in the proxy, perhaps reflecting that the ratio has not been a helpful comparison.

Overall, twice as many companies increased median pay as lowered it.  However, the Journal reports that 45 companies reported median employee pay increases of at least 10% and 33 reported declines of at least 10%.

Reasons for the large fluctuations vary widely.  As with pay ratios reported last year, companies that experienced large changes in year two included those with purchases or sales of businesses, changes in methodologies in calculating the ratio (as companies were able to learn from year one approaches), and broad changes in approaches to employee pay.  For example, Jefferies Financial reported a tripling of median pay because it sold off most of its stake in National Beef, which cut its workforce by nearly two-thirds.

Why it matters:  The wide fluctuation in the data reported by the Journal reinforces that the pay ratio is a flawed concept for comparing year-to-year changes between companies and even within the same company.  Further, it demonstrates that looking solely at the data without the context behind it is likely to lead to the wrong conclusions.