With the initial pay ratio data failing to provide the earthshattering revelations proponents of the indicator had hoped for, the data provided by the disclosure is beginning to be put to other uses. This week, the New York Times published the “Marx Ratio” which utilized the median employee compensation metric included in the pay ratio and a company’s net income to “capture the relationship between a company’s profits — the return to capital, on a per-employee basis — and how much its median employee is compensated, a rough proxy for the return to labor.”
The NYT’s “Marx Ratio” is derived from dividing a company’s net income per employee (Net Income / Number of Employees) by the disclosed median employee compensation. According to the article, a “Marx Ratio” of 2.5 indicates that the per-employee earnings captured by shareholders were about 2.5 times as high as “typical employee compensation”. Further, ratios below one indicates “a more favorable return to labor” and thus a ratio of 0.5 indicates shareholders of a company earned only half as much per worker as it paid its median employee. In examining the “Marx Ratio” of 394 S&P 500 companies which had disclosed a pay ratio, the NYT, which “takes no stand in the debate”, provides some interesting data points, including:
- The “median Marx Ratio” was 0.82 indicating that among S&P 500 companies examined employees are benefiting more than shareholders.
- Given the year-to-year fluctuations in net income, there was no correlation between median employee pay and having a “better” Marx Ratio.
- For companies which operated at a net loss and thus had negative ratios, shareholders got nothing, and workers still go paid.
Even the NYT downplays the significance and accuracy of the ratio, noting it has “limitations” given the “imprecise measurement” of the pay ratio’s median compensation. As a result, the “Marx Ratio isn’t some definitive measure of how a company affects the economy and society. Rather, it is a tool for understanding the differences between companies and industries.”
The Center’s longstanding position views the pay ratio as an irrelevant and misleading metric. The Center’s concern with requiring the disclosure is that proponents which are unable to use the pay ratio effectively will begin to use it in other data analyses to derive meaning. The NYT’s analysis provides the first major alternative use of the pay ratio the Center has seen to date. There will be more and different uses of the pay ratio in the future.