Pay Ratio Disclosure Could Lead To Employee Problems, Speaker Says

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By Mary Hughes

Nov. 13 — The long-awaited pay ratio disclosure requirement, when it becomes a reality, will be a detrimental issue at many companies because workers for the first time will see where they stand in relation to other company employees, a speaker said at a Nov. 13 law conference.

Michael Kesner, a principal with Deloitte Consulting LLP in Chicago, said not even economists can agree on the effects of the Frank-required disclosure, which the SEC has said it will finalize this year.

On one side, game theory proponents say that seeing a large disparity in the ratio between chief executive officer pay and median employee pay will motivate people to work harder and reach the upper echelons of pay. The flip side, Kesner said, is those who say it will demoralize and turn employees against the company.

Median Employee

A company will be required to disclose its pay ratio if it is required to disclose executive pay in a summary compensation table, Kesner said. Rules proposed by the Securities and Exchange Commission are flexible in that they permit statistical sampling, he said at the American Bar Association Joint Committee on Employee Benefits' Executive Compensation National Institute in Chicago.

In determining the median employee, companies should use whatever compensation measure makes the most sense for their workforces, he said. It may be base salary, or base salary and benefits, or W-2 wages, Kesner said. Once the median employee is identified, the company would then calculate the median employee's total compensation for the year using the same calculations as it uses to calculate CEO pay for the summary compensation table, he said.

Kesner gave examples showing how including health benefits or pension benefits in the methodology used to find the median employee could provide a lower or higher ratio, depending on the median employee's characteristics. He said these characteristics could change from year to year, for example, if the employee was married and had higher health benefits that added to total pay, or if the employee was older with a higher pension.

However, he cautioned that if the median employee changes, then the pay ratio changes and employers would have to explain why their ratio was larger or smaller than the previous year.

Supplementing disclosure to explain foreign or part-time employee factors is acceptable to the SEC as long as the supplemental disclosure isn't more prominent than the required disclosure, he said.

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