This internal Pay Equity Multiplier (PEM) for CEOs to NEOs should be in the two times range.
Confirming the view of Immelt and some other corporate leaders, our research study identified some 1,600 companies in the Russell 3000 with CEO pay equity multiples less than four times, with a median pay equity multiplier of 2.
The principal key performance indicator for shareholder value is ROE (return on equity), which has two drivers, ROA (return on assets), and the equity multiplier (reciprocal of capital/assets ratio) or leverage factor.
Once an organization has set a target ROE, it must then determine the desired combination of ROA and equity multiplier that will produce that ROE.
We tested the first hypothesis by examining the return on assets (ROA) and return on equity (ROE), profit margin (MARGIN) and equity multiplier (MULTIPLIER) of firms over a 14 year period, 1982-1995.
Since profit margin, equity multiplier, and firm size are likely factors that would influence the market's assessment of firm value, these variables were included in the regression equation.
The equity multiplier
has been bumpy over the last 11 quarters, as equity had been increasing faster than the increase in total assets.
2] The urban banks also tend to be more leveraged, as indicated by their higher equity multiplier (the ratio of assets to equity capital).
Furthermore, banks with rapid asset growth often experience decreases in their capital ratios and increases in their equity multipliers.
The firm's profit margin is relatively low although it has improved since 2005; total asset turnover and the equity multiplier continue to increase.
The extended DuPont equation is a method of calculating a firm's return on equity (ROE) by utilizing the profit margin (PM), total asset turnover (TATO) and equity multiplier (EM).
It can be more completely expressed as return on assets (ROA) relative to an equity multiplier
or, more simply, the degree of financial leverage at a bank.