2023 CEO Value Index – Examining the CEO Pay Ratio
A company’s CEO pay ratio compares the annual pay of the CEO to that of the company’s median employee and must be disclosed in a company’s annual report.
We have compared whether there is a correlation between a company’s CEO Pay Ratio and their 2023 CEO Value Index (‘CVI’) score, focusing on those companies that placed in the Top 10 and Bottom 10 in terms of how much value the CEO has delivered to shareholders for every £1 they are paid. This is based on our 2023 CEO Value Index analysis.
At upper quartile, the latest disclosed Pay Ratio (between the CEO and the company’s median employee) within the Top 10 constituents of our CEO Value Index is almost double that of the Pay Ratio within the Bottom 10, as shown in Figure 1 below. The Top 10 CEOs are paid significantly more than the median employee, yes, but could that simply be ‘The Ugly Truth’? The larger gap is justifiable in terms of performance (measured as Total Value Added over a trailing four-year period).
The Top 10 CEOs delivered the most value to shareholders and as such appear to be “worth it” – they created the most shareholder value for every £1 paid to the CEO. Should it concern us that the ‘Pay Ratio’ is correspondingly high?
The Top 10 companies have higher (almost double) CEO Pay Ratios compared with the Bottom 10. Whilst the CEO Pay Ratio may be a ‘go to’ metric for those highlighting excessive pay, it is interesting to see that closing the gap doesn’t necessarily mean better performance. In fact, while the gap cannot be ignored, it is important to understand what CEOs are being rewarded for.