By Geoff Colvin and Ryan Derousseau
August 26, 2015

This morning we’re hearing a little, and soon we’ll be hearing much more, about the new statistic du jour, the ratio of a CEO’s pay to the pay of the median worker at his or her company. So here’s my advice on how to think about this trendy new statistic: Ignore it. As a bit of data, it’s meaningless, and as a gauge of a CEO’s value, it’s worse than useless because many people will believe it actually means something.

The SEC this month imposed a rule requiring the companies it regulates to start reporting this ratio in 2017. Glassdoor, the employment website, yesterday released its own calculation of the ratios for the S&P 500 companies. The highest ratio, being reported this morning across the web and around the country, belongs to Discovery Communications CEO David Zaslav; his pay last year was $156,077,912 vs, $80,000 for the median employee, for a ratio of 1,951.

Except that this seemingly precise figure means nothing. About $145 million of Zaslav’s huge pay number came from stock awards, not cash. The amount of that $145 million he actually received was $0, and that’s all he may ever get. Much of it is in the form of restricted stock units that he gets only if the company meets certain performance targets; even if it does, he wouldn’t get some of that stock until 2019, and who knows what the stock will be worth then. He also received stock options, which are doled out over a four-year period. They were granted at strike prices in the $42-$44 range; this morning the stock is around $26. Whether those options will ever be in the money is impossible to say.

Yet, by the rules of accounting, Zaslav was “paid” $145 million in stock awards last year. Thus the towering ratio.

Even if a meaningful ratio could be calculated, it would be useless because of the differing nature of different businesses. No. 2 on Glassdoor’s list is Chipotle CEO Steve Ells, with a ratio of 1,522. His company employs about 53,000 workers, most of them in its fast-food restaurants. Down at No. 433 on this list is Intuitive Surgical CEO Gary Guthart, with a ratio of just 21. His company, which makes da Vinci robotic surgery machines, employs about 3,000 workers, many of them in high-tech R&D. Those ratios cannot be usefully compared.

The really unfortunate aspect of all this is that when the ratios start showing up in companies’ SEC filings, charts like Glassdoor’s will become irresistible, and even people who should know better, like legislators, will think they mean something. Company directors will have to remember that the ratios are only a distraction from their most important job, evaluating leaders. CEOs who are pilloried in the press for their high ratios may be excellent (or awful). Ditto those who are lauded for their low ratios.

Evaluating leaders is always hard, requiring wisdom and judgment. It has never been reducible to a number. But this newly fashionable number is particularly pernicious.


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