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Do Lower CEO Pay Ratios Lead To High ROI For These 5 Stocks?

James Dennin, Kapitall: The Swiss rejected a measure to cap CEO pay ratios. We took a closer look at stocks with a lower pay gap. 

Post-financial crisis, one aspect of the Dodd-Frank Act's proposed reforms to address improprieties in the finance sector was to get the Securities and Exchange Commission (SEC) to start monitoring CEO pay ratios.

Read more from Kapitall: Green Investing: Four Stocks With Falling Emissions and Rising Profits

Calculated by comparing the total compensation of a firm's chief executive with the median salary for employees, the number was supposed make executives more wary of golden parachutes and elaborate bonuses if regular employees aren't getting in on the action. 

However, after two years, this information still isn't available to the general public. Part of the reason is that pay-packages, especially among a company's leadership, are complicated. Most are related to performance. Many include stock which you're not allowed to sell for a certain period of time. And that makes a simple ratio between the two numbers all the more complicated to measure.

That didn't stop Bloomberg from trying to figure it out, and then publishing a list of their own. 

By looking at CEO pay, which companies are already required to disclose, and average median pay by industry (which is monitored by the government) experts at Bloomberg were able to come up with an approximation for the CEO pay ratio. The list went viral when eight of the companies on the list had ratios in excess of 1000 (which means that the CEO is paid what amounts to a thousand times their industry's median income.) 

Investing ideas

Some of the companies on the list disagreed with the methodology, and took an opportunity to attach comments to the figure. Bloomberg's list covers the top 250 companies on the S&P 500 by ratio. 

We decided to look at some of the least egregious offenders, with ratios of 176 or lower, and cross-referenced them with a screen for a positive return on investment (ROI). ROI is a performance metric that assesses the profitability of an investment by dividing the benefit of an investment by its cost. 

Only five stocks with positive ROI and more reasonable CEO pay ratios made it through our screen.

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