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1Scan for outdated or missing drivers - takes under a minute2Repair Windows errors before they cause bigger problems3Fix the driver behind crashes, sound loss and screen glitchesThe SEC’s CEO-to-median-employee pay ratio puts a company’s principal executive officer’s annual total compensation beside the annual total compensation of its median employee. It can help investors understand the company’s pay structure, but it is not, by itself, a measure of fairness, productivity, or whether executive pay is tied to performance. For that second question, investors need to read the separate pay-versus-performance disclosure, which uses a different measure called “compensation actually paid.”
What does the CEO-to-employee pay ratio measure?
For covered registrants, Item 402(u) of SEC Regulation S-K calls for three figures: the principal executive officer’s annual total compensation, the annual total compensation of the company’s median employee, and the ratio between those amounts. In plain terms, the ratio divides the CEO’s reported annual total compensation by the median employee’s reported annual total compensation. A figure of 175:1 means the CEO amount is 175 times the median employee amount under the company’s reported calculation.
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The denominator is the median employee, not the average employee and not necessarily the lowest-paid employee. To find a median, arrange the employees in the selected population by the compensation measure used to identify the midpoint; the employee in the middle is the median employee. Half the selected employees fall above that midpoint and half below it, subject to the population and methodology the company uses. A company with a large number of lower-paid or part-time roles can therefore have a different median—and ratio—than a company with a different workforce, even if their CEOs’ compensation is similar.
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Who reports it, and where should investors look?
Section 953(b) of the Dodd-Frank Act directed the SEC to require disclosure of the median annual total compensation of employees other than the CEO, the CEO’s annual total compensation, and the ratio of the two. The SEC adopted the pay-ratio rule in 2015. Covered disclosures appear in filings that call for executive compensation disclosure, such as proxy and information statements, registration statements, and certain annual reports. The exact filing context depends on the issuer.
The rule does not cover every public company. It excludes categories including emerging growth companies, smaller reporting companies, and foreign private issuers. Investors should confirm an issuer’s status and the filing’s context before assuming the disclosure is required or comparing the absence of a ratio with another company’s reported figure.
Look in the company’s proxy statement or other applicable filing for the pay-ratio discussion, commonly associated with Item 402(u). Read the explanation alongside the figures rather than relying only on a headline ratio or a third-party summary. The SEC Division of Corporation Finance’s September 21, 2017 guidance on calculating pay-ratio disclosure explains the flexibility available in identifying the median; the SEC’s August 5, 2015 rule release describes the rule’s purpose and scope.
How can a company’s method change the ratio?
Companies select a median from their employee population using annual total compensation or another consistently applied compensation measure. That distinction matters. A measure used to locate the midpoint is not automatically the same as the final annual total compensation reported for the selected median employee. Companies must explain the material aspects of the calculation and the assumptions or estimates that affect it.
Population and permitted exclusions
The people included in the calculation shape the distribution from which the median is selected. An issuer’s workforce can span countries, subsidiaries, occupations, and employment arrangements. The SEC rule allows specified flexibility and exemptions, so an investor should check which workers and entities the issuer included, as well as any disclosed exclusions. Do not assume that two companies’ populations are identical simply because both report a ratio.
When a filing describes an exclusion or a particular population boundary, consider its practical effect: changing who is counted can change who sits at the midpoint. The ratio may then move even if the CEO’s annual total compensation is unchanged. This is why the population description belongs beside the ratio in any notes or comparison table an investor keeps.
Geography, jobs, and employment status
Country mix can shift the midpoint because compensation levels vary by location. Job mix matters as well: a company with many manufacturing, retail, or service roles may have a different distribution from one whose workforce is concentrated in highly paid professional roles. Hourly and part-time work, as well as seasonal or temporary employment, can also affect the population and its compensation profile. These are not abstract caveats; they help explain why ratios can differ for reasons beyond the CEO’s pay.
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Consider a global company whose workforce includes many employees in locations with lower pay levels alongside a smaller number of highly compensated professionals. Its median can differ substantially from the median at a company with a workforce concentrated in one country or occupation, even if the companies have similar CEO compensation. That possibility is not a conclusion about either company’s pay practices; it is a reason to read the workforce facts before interpreting the ratio.
Estimates, sampling, and the measurement date
The company’s explanation should identify the measurement date and the consistently applied compensation measure used to find the median, along with relevant estimates or sampling. SEC guidance permits reasonable methods rather than requiring a single universal calculation procedure. When comparing issuers, note whether the methods are alike enough for the comparison to be meaningful; a superficially similar ratio may rest on substantially different inputs.
Investors can separate the process into two questions: how did the company decide which employee was at the midpoint, and how did it calculate that employee’s annual total compensation for disclosure? The first question concerns identification, including the population and consistently applied measure. The second concerns the final reported compensation amount. Keeping these stages distinct prevents a common mistake: assuming the method used to identify the median employee automatically describes every component of the final compensation figure.
Reusing the median employee
A company generally may use the same median employee for up to three years if it has not had a workforce or compensation-arrangement change that it reasonably believes would significantly affect the ratio. That means an investor should check whether the median employee was newly identified or carried forward from an earlier year, and whether the company explains a significant change. A reused employee does not automatically make the ratio invalid, but it is relevant context for interpreting year-to-year movement.
For a year-over-year comparison, record whether the company reused the employee and whether it describes a significant change to its workforce or compensation arrangements. If the median employee or method changes, the ratio can reflect both that change and shifts in compensation. Without that context, a rise or fall cannot be attributed confidently to a single cause.
What does “compensation actually paid” add?
Pay-ratio disclosure and pay-versus-performance disclosure answer different questions. Item 402(u)’s CEO amount is annual total compensation used in the pay-ratio disclosure. Item 402(v), by contrast, requires companies to disclose the relationship between executive compensation actually paid and the registrant’s financial performance. The SEC’s pay-versus-performance compliance guide describes a table that contrasts total compensation with compensation actually paid and requires descriptions of relationships between compensation actually paid and financial measures.
“Compensation actually paid” is a defined regulatory measure, not a casual synonym for cash the executive received. It is also not interchangeable with the CEO’s annual total compensation in the pay ratio. The disclosures have different purposes and may use different measurement concepts. Investors who collapse them into one number risk drawing a conclusion from an apples-to-oranges comparison.
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The pay-versus-performance table generally covers five fiscal years; smaller reporting companies have scaled disclosure covering three years. It provides a separate performance lens: investors can examine how compensation actually paid relates to the performance measures the company reports. To interpret it, check the fiscal years shown, the definitions behind the figures, and the performance measures used. Then keep that analysis distinct from the employee-pay comparison.
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A practical reading pairs, but does not merge, the disclosures. First ask what the pay-ratio CEO amount says about annual total compensation relative to the median employee’s annual total compensation. Separately, ask what the pay-versus-performance table says about compensation actually paid over its reporting period and how that measure relates to the company’s stated performance measures. The different time frames and definitions matter: the pay ratio is not a substitute for the performance table, and the performance table does not provide a different version of the median employee ratio.
What do actual company examples show—and not show?
The following figures come from issuer disclosures for 2025 compensation reported in 2026 proxy statements. They illustrate how a ratio depends on the selected workforce and denominator; they are not industry averages, representative benchmarks, or a basis for ranking companies without further analysis.
| Issuer and reported 2025 measure | CEO annual total compensation | Median employee annual total compensation | Reported ratio |
|---|---|---|---|
| Chevron Corporation, 2026 proxy | $26,828,240 | $152,970 | 175:1 |
| onsemi, global median employee, 2026 proxy | $17,678,866 | $14,060 | 1,257:1 |
| onsemi, median U.S.-based non-manufacturing employee, 2026 proxy | $17,678,866 | Not stated in the cited proxy information summarized here | 91:1 |
Chevron’s proxy cautions that companies may use different methodologies, exclusions, estimates, and assumptions, which can limit comparability. The onsemi proxy’s two ratios make the workforce-composition point especially visible: its global median-employee ratio was 1,257:1, while the ratio using the median U.S.-based non-manufacturing employee was 91:1. Those figures reflect different employee reference groups at the same issuer, not different CEOs or a change in the company’s overall pay-ratio rule. The cited proxy information gives the CEO amount and global median amount but does not state the dollar compensation amount for the U.S.-based non-manufacturing median in the summarized figures.
The example also shows why a supplemental ratio needs a precise label. The 91:1 figure describes a ratio using a median U.S.-based non-manufacturing employee; it should not be mistaken for the company’s global median-employee ratio. Before comparing figures, retain the population description with the number rather than copying the ratio alone.
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Random freezes, missing sound and display glitches usually trace back to one bad driver. Find and replace yours safely.Free scan · under a minuteThese examples do not establish what a “normal” ratio is. They also cannot show, on their own, whether a company pays employees fairly, whether the CEO’s incentives are well designed, or whether executive compensation tracks performance. A useful interpretation requires the company’s stated method, workforce characteristics, business model, compensation mix, and the distinct performance disclosure.
How should investors compare companies?
Before treating two ratios as comparable, make a short filing-based check of the inputs. The goal is not to force a single universal score from disclosures that allow methodological differences; it is to understand what each reported number actually describes.
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- Confirm the filing and fiscal year. Identify the proxy statement or other filing, the compensation year covered, and whether the ratio is required for that issuer. Avoid comparing a number from one year with a figure from another as if they were contemporaneous.
- Read the population description. Check which workers and subsidiaries are included and whether non-U.S., part-time, seasonal, or temporary employees are included or excluded. Note any supplemental ratio for a workforce segment that differs substantially from the global employee population.
- Record how the median was identified. Find the measurement date, consistently applied compensation measure, and whether statistical sampling, estimates, adjustments, or other methods were used. Note whether the company reused a median employee from an earlier year.
- Separate the identification measure from the final compensation figure. Read how the company calculated the median employee’s annual total compensation, and do not assume that the measure used to select the employee is identical to that final figure.
- Consider workforce and geography. Compare country mix, wage levels, job mix, and employee status. Ask whether a ratio difference might be explained by a different distribution of workers rather than a difference in CEO compensation alone.
- Keep the performance analysis separate. Review the Item 402(v) table’s compensation actually paid, time period, and performance measures as a distinct disclosure. Do not substitute it for Item 402(u)’s annual-total-compensation figure.
For a practical side-by-side review, write down each issuer’s ratio, compensation year, employee population, median-selection approach, and any carried-forward median employee. Add the CEO and median employee annual total compensation amounts where disclosed, then note the separate pay-versus-performance period and measures. This compact record makes differences in method and workforce visible and helps prevent a ratio from being detached from its definition.
After this check, the ratio can serve as one piece of an investor’s assessment of compensation structure. It is most useful when read with its method, the company’s pay design, the relevant performance measures, and broader workforce facts. It is weakest when stripped from that context and treated as a moral verdict or a stand-alone measure of incentives.
What the disclosure can tell you about incentives and pay design
The ratio is descriptive: it states the relationship between the CEO’s annual total compensation and the median employee’s annual total compensation under the issuer’s disclosed method. It can prompt useful questions. For example, investors may ask what portions of CEO compensation are included in the annual total, how the company’s workforce composition affects its midpoint, and whether changes in the reported ratio stem from a changed workforce, a changed method, changed compensation, or some combination.
It does not identify why the ratio has a particular value. Nor does the ratio alone measure employee morale, productivity, the adequacy of wages, or the quality of the CEO’s incentives. Those judgments require other evidence and, for performance alignment, attention to the separate Item 402(v) disclosure. A high ratio should not automatically be treated as proof of unfairness or poor incentive design; a lower ratio is not proof of fairness or effective incentives.
Similarly, a year-over-year movement deserves explanation rather than a reflexive conclusion. If the company reports a different ratio, examine whether the median employee changed, whether the workforce or compensation arrangements changed materially, whether the method or assumptions changed, and whether the two years are otherwise comparable. The company’s own disclosure is the starting point for distinguishing an actual compensation change from a population or calculation effect.
Investors should also resist treating a cross-company ranking as a direct measure of management quality. Two ratios may differ because of the employee groups represented, geography, job mix, or the permitted calculation methods—not necessarily because one CEO is paid more in an economically comparable sense. The number is useful as a prompt for filing-based questions, not as a score that resolves them.
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Why the SEC created the disclosure
The statutory requirement came from Section 953(b) of the Dodd-Frank Act. In adopting the rule on August 5, 2015, SEC Chair Mary Jo White said, “The rule provides companies with substantial flexibility in determining the pay ratio, while remaining true to the statutory requirements.” She also described the shareholder purpose: “The new rule will provide shareholders with information they can use to evaluate a CEO’s compensation, and will require disclosure of the pay ratio in registration statements, proxy and information statements, and annual reports that call for executive compensation disclosure.”
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The flexibility White described is important to interpretation. The ratio gives shareholders a recurring disclosure to examine, while the permitted methods and varied workforces mean its context matters. Use it as a starting point for questions about compensation and workforce composition—not as a substitute for reading the accompanying disclosures.
Frequently Asked Questions
Is the CEO-to-median-employee ratio the same as compensation actually paid?
No. The pay ratio uses the CEO’s annual total compensation and the median employee’s annual total compensation under Item 402(u). Item 402(v)’s compensation actually paid is a separate defined measure used in pay-versus-performance disclosure.
Does the median employee mean the lowest-paid employee?
No. The median is the midpoint of the selected employee population using the company’s compensation measure. The lowest-paid employee may be far below that midpoint.
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Can companies use the same median employee in later years?
Generally, yes. A company may reuse the median employee for up to three years if it has not had a workforce or compensation-arrangement change it reasonably believes would significantly affect the ratio. Check the filing for whether the employee was reused.
Why can two companies have very different pay ratios?
Their workforce populations and methods may differ, including geography, job mix, part-time or seasonal roles, permitted exclusions, estimates, and sampling. Compare those details and the compensation year before drawing conclusions from the ratios.
Does a high ratio prove that a company’s pay is unfair?
No. The ratio is one disclosure about CEO and median-employee annual total compensation; by itself, it does not measure fairness, productivity, morale, or incentive quality. Read it with the company’s method, workforce facts, pay design, and pay-versus-performance disclosure.
The Bottom Line
The CEO-to-median-employee ratio is a useful starting point, not a verdict. Check who is included, how the median was identified, and what year the figures cover. Then keep that comparison distinct from Item 402(v)’s compensation-actually-paid disclosure and its performance measures.
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