Report: CEO-to-worker pay ratio reveals company culture

Public companies in the United States are legally mandated to publish one key metric: the ratio between their CEO's compensation and that of their median worker. This rule, in effect since 2017, is documented in every company's proxy statement. However, many company leaders cannot readily provide this figure.

Analysis reveals that the average pay ratio across S&P 500 companies stood at 285:1 in 2024. For the hundred largest companies with the lowest pay scales among their employees, the average ratio was 632:1. This marks a substantial increase from approximately 21:1 in 1965. While often viewed through a moral lens, these figures can also serve as a potent indicator of a company's internal culture and decision-making processes.

The prevailing situation often arises from a series of individual compensation decisions, rather than a deliberate effort to achieve a specific ratio. Boards typically set CEO compensation by benchmarking against peer companies. This "comparative analysis", however, focuses solely on executive pay, neglecting the relationship with lower-level employee compensation.

A systemic issue lies in the fact that no single role is assigned the responsibility of scrutinizing this pay ratio. As an example, the Mondragon Corporation, a cooperative federation in Spain, has made a conscious choice to cap its highest-to-lowest pay ratio at six. This multinational entity has maintained profitability and success for over seven decades.

Companies should be capable of defending the pay ratio between their highest and lowest-paid employees to their entire workforce. A failure to know this figure or to defend it openly suggests a lack of transparency. Employees can accept pay disparities if they believe the underlying process was fair and open. A ratio that can be openly defended is crucial for building and maintaining trust.