CEO Pay Ratio: What It Is, How to Calculate It, and Why It's Becoming Mandatory
A practitioner guide to executive compensation
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The CEO pay ratio compares a company's chief executive's total annual remuneration to the median pay of its employees. In the UK, premium-listed companies with more than 250 UK employees have been required to publish this ratio since 2019. In the US, a pay ratio disclosure has been required under the Dodd-Frank Act since 2018, though the methodology differs from the UK's. Both frameworks are driving increased scrutiny of executive pay relative to workforce pay — a scrutiny that shows no sign of diminishing.
The Core Design Challenge
The UK calculation methodology starts with the CEO's 'single total figure of remuneration' — a number that attempts to capture the full economic value of everything the CEO received in the relevant financial year. This includes base salary, the annual bonus paid in the year, the value of LTI awards that vested in the year (at the market price on the vesting date), pension contributions or cash supplements, benefits, and any other payments. The single figure is then compared to the P25, P50, and P75 pay of the UK employee population — producing three ratios, not one.
The US methodology is simpler in concept but complex in practice: the company identifies the median employee's annual total compensation (using their own documented methodology, with allowances for statistical sampling), calculates the ratio of the CEO's total compensation to the median employee's compensation, and publishes the result. The flexibility in methodology has created significant variation in how companies calculate their median employee's pay — making cross-company comparisons more difficult than the single headline ratio implies.
The ratios produced by these calculations can be striking. Large consumer-facing companies with highly-paid executives and large workforces of lower-wage employees regularly report ratios of 200:1 or higher. The disclosure requirement does not mandate that a company reduce this ratio, or even that it provides a target. It requires only that the ratio be calculated, published, and accompanied by sufficient context for investors to understand it.
How the Approach Works
The narrative accompanying the ratio is where companies have genuine discretion and genuine strategic choice. A high ratio driven primarily by LTI vesting from a strong performance period looks very different from a high ratio driven by a generous base salary increase in a year of financial underperformance. The narrative should explain what is driving the CEO's single figure, why it is structured the way it is, and — increasingly — how the workforce's pay is moving relative to the CEO's over time.
The political and reputational context is intensifying. Major institutional investors, particularly those with explicit ESG mandates, are paying increasing attention to the workforce pay dimension of the CEO pay ratio. A company that increases its CEO's pay while holding or reducing workforce wages in the same year faces a more challenging proxy season than one that demonstrates that compensation growth is distributed across the organisation. For Total Rewards professionals, the CEO pay ratio has moved from a compliance disclosure to a strategic communication challenge — one that requires the same quality of narrative thinking as any major employee communication.
- →The ratios produced by these calculations can be striking.
- →The narrative accompanying the ratio is where companies have genuine discretion and genuine strategic choice.
- →The political and reputational context is intensifying.