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For covered U.S. public-company registrants, the CEO-to-worker pay ratio is the principal executive officer’s annual total compensation divided by the annual total compensation of the company’s median employee. A result of 100:1 means the reported CEO amount is 100 times the reported median-employee amount under the company’s disclosed method. The figure offers a point of comparison within one company and year; on its own, it does not show whether workers are paid fairly or explain why the ratio is high or low.
How to calculate the CEO-to-worker pay ratio
SEC Regulation S-K Item 402(u) requires covered registrants to disclose three figures: median employee annual total compensation, the principal executive officer’s (PEO’s) annual total compensation, and the ratio between them. The calculation is:
PEO annual total compensation ÷ median employee annual total compensation = pay ratio
For illustration only, if the PEO’s reported annual total compensation were $10 million and the median employee’s were $100,000, the ratio would be 100:1. The numerator is the PEO’s compensation; reversing the figures would produce the wrong ratio.
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1. Set the employee population date
The company selects a date within the last three months of its most recently completed fiscal year to determine its employee population. The general population includes employees of the registrant and its consolidated subsidiaries in the United States and abroad, including full-time, part-time, temporary, and seasonal employees. The rule provides specific exceptions; it does not let a company exclude any group it chooses. Independent contractors employed by unaffiliated third parties are not treated as employees for this rule. The SEC’s adopting release explains the framework.
2. Identify the median employee
The company may review its full employee population, use statistical sampling, or apply another reasonable method. It can rank employees using annual total compensation or another consistently applied compensation measure, such as payroll or tax data, to identify the midpoint. Reasonable estimates and assumptions are permitted. The company must describe its identification method and disclose material assumptions, adjustments, and estimates; if it uses a consistently applied compensation measure, it must identify that measure. SEC staff guidance discusses the calculation methods and the imprecision they can involve.
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3. Calculate both annual total compensation figures
After identifying the median employee, the company calculates that person’s annual total compensation using the same Item 402(c)(2)(x) definition that applies to the PEO’s annual total compensation. It is not necessarily just salary: total compensation can include multiple elements. For example, one issuer’s fiscal 2025 proxy described using base salary or wages, actual cash incentives, and grant-date fair value of equity granted during the year to identify its median employee. That is the issuer’s stated measure, not a template every company must use. The issuer’s proxy statement gives that example.
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Divide the PEO’s annual total compensation by the median employee’s annual total compensation and express the quotient as a ratio, commonly “X to 1.” A 100:1 result means the PEO’s reported amount is 100 times the median employee’s amount under the issuer’s method.
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Who is included—and which exceptions apply?
Part-time, temporary, seasonal, and non-U.S. employees
The general population includes U.S. and non-U.S. employees of the registrant and consolidated subsidiaries, including part-time, temporary, and seasonal workers. The SEC permits certain exclusions for non-U.S. employees: a data-privacy exemption when foreign law prevents compliance, subject to the rule’s conditions, and a de minimis exemption covering up to 5% of total employees who are non-U.S. employees. Employees excluded under the data-privacy exemption count toward that 5% limit. The company must explain relevant exclusions. See the SEC adopting release and current SEC staff interpretations for details.
Annualizing compensation
A company may annualize compensation for permanent employees who worked less than the full fiscal year, including qualifying new hires, and for employees on unpaid leave. It may not annualize compensation for temporary or seasonal employees, and it may not make full-time-equivalent adjustments. As a result, part-time status does not automatically turn reported actual compensation into a hypothetical full-time wage. The SEC staff interpretations address annualization details.
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Reusing the median employee
A company may generally use the same median employee for up to three years if it reasonably believes there has been no significant change in the employee population or compensation arrangements. It still calculates that employee’s compensation for the applicable year. If the employee’s circumstances change, the rule allows use of a substantially similar employee in specified circumstances. See the SEC staff interpretations for technical cases.
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What does the ratio tell employees?
The ratio shows the relationship between the disclosed PEO compensation and the selected median employee’s compensation at that company for that year. It can help employees see how those two reported amounts relate, provided they also read the company’s methodology and workforce context.
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The median is not a description of every worker’s pay, the full wage distribution, or necessarily what an employee would regard as the typical job or household income. The ratio does not explain the cause of the difference, establish whether wages are adequate or compensation is fair, or measure workplace quality, productivity, or the PEO’s contribution to results.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How to read or compare ratios responsibly
The SEC provides a disclosure framework, but issuers can use different reasonable methods and have different workforces. Those differences can make ratios difficult to compare directly. One issuer cautions in its proxy statement against using its figure to compare companies, even within the same industry, because methodologies, exclusions, assumptions, and workforce practices can differ.
Before drawing a conclusion, look for these details in the proxy disclosure:
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- Employee population: the determination date, workforce size, and geographic and job mix.
- Exclusions: whether non-U.S. employees or other permitted groups were excluded, and why.
- Median-identification method: whether the issuer reviewed the full population, sampled it, or used another method, and which consistently applied measure it used.
- Compensation inputs: which pay elements, estimates, and assumptions were used to identify the median and calculate final total compensation.
- Part-year treatment: whether compensation was annualized where allowed and whether the issuer reused a median employee.
- PEO compensation: which compensation elements contributed to the numerator, including any significant equity awards.
For a year-to-year comparison at one employer, check whether the population, compensation arrangements, median employee, or estimation approach changed. A changed ratio alone does not establish a change in pay fairness. For cross-company comparisons, place each ratio beside these disclosures and treat the result as a rough comparison, not a definitive ranking. The SEC staff calculation guidance explains why permitted methods can yield some imprecision.
Which employers must disclose it?
Item 402(u) applies to registrants required to make the relevant executive-compensation disclosures, with exemptions that include smaller reporting companies, emerging growth companies, and foreign private issuers. It is therefore not a requirement for every employer, or even every public company. For a particular issuer, confirm its current status and the applicable rule. See the SEC pay-ratio rule page and adopting release.
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