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Pay ratios as a means of comparison

A measure which is gaining currency internationally is the ratio between a chief executive's remuneration and the average pay of the rest of the employees working in the organisation.

In August 2015, the United States Securities and Exchange Commission (SEC), the regulator charged with overseeing America's public companies, adopted a new rule on executive pay. Under the Dodd's-Frank Act passed in 2010, public companies must now publish a ratio which compares the pay of their chief executive to the median pay of employees. Commencing in 2017, it is estimated that around 3,800 companies will have to start disclosing their CEO pay ratio.

The move follows increasing concern over expanding executive compensation packages in the United States and the widening gap between CEO remuneration and the average pay of workers. The CEO-to-worker compensation ratio has grown from 20-to-1 in 1965, peaked at 376-to-1 in 2000 and was 303-to-1 in 2014 (Economic Policy Institute, Issue Brief #399, June 2015).

To give some context, in the 2013 Fairfax annual survey of pay rates at listed companies in New Zealand, the average ratio was 26-to-1, up from a ratio of 22.5-to-1 since 2011 (the survey covered 39 companies on the NZX50, of which 23 had consistent data available for the previous three years.)

Pay ratios are affected by the pay rates that apply in different industries, as well as the chief executive's remuneration. Companies with a high average staff wage (such as Telecom, Air New Zealand, NZ Refining and Xero) had some of the lowest chief executive pay ratios in the 2013 survey with NZ Refining on 7-to-1, and Xero on 2.6-to-1. Similarly, pay rates in the IT, oil and gas industries were amongst the highest in New Zealand in 2013 with correspondingly low ratios, while retail and aged care were amongst the lowest paid with correspondingly high ratios (reported in the Sunday Star Times, October 2013).

In the United Kingdom, the Government Financial Reporting Manual (FReM) requires the disclosure by public sector entities of pay multiples (ratios) of top pay to median pay for employees. For the 2014/15 year, pay ratios for ministerial departments were similar to the New Zealand Public Service, ranging from 2.7-to-1 to 10.8-to-1. The median ratio of the 20 ministerial department ratios published in 2014/15 was 5.33-to-1.

NZ Public Service chief executive pay ratios

In 2015, the average pay of a chief executive in the New Zealand Public Service was 5.7 times the average pay of employees (including managers). The ratio refers to a comparison of average chief executive salary to the average Public Service employee salary, and has remained relatively stable over the past four years with some annual variation (source: Human Resource Capability Survey, State Services Commission).

Pay ratios vary amongst agencies, with the highest in 2015 being 7.7-to-1 and the lowest 2.2-to-1. The range of ratios reflects differences in the size and complexity of agencies (and therefore, differences in chief executive job size and pay), and the different mix of occupations in their workforce that influence average staff pay rates.

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