Stay current on changes and developments in corporate law with a wide variety of resources and tools.
By David Martin
David Martin is a Principal at CamberView Partners, a leading provider of investor-led advice to public companies on engagement and shareholder relations, activism and contested situations, sustainability and complex corporate governance matters. Prior to joining CamberView, Mr. Martin was a consultant in Willis Towers Watson’s executive compensation practice.
With the end of summer quickly approaching, it looks increasingly likely that companies will need to disclose the ratio of median annual compensation of employees to that of chief executive officer compensation (the “Pay Ratio Rule”) in their 2018 proxy statements. Although complying with the requirements of the rule is a challenging data collection exercise, the pay ratio also presents a unique opportunity for companies to disclose additional information, narratives and metrics that highlight a positive message regarding a corporation’s commitments to its workforce and compensation practices. Below are four considerations for companies as they compile and disclose information around the pay ratio that can help turn a reporting obligation into an opportunity.
Since say-on-pay became a requirement in 2011, leading companies have used an investor lens to determine how to position disclosures and practices around executive compensation. The disclosure of the pay ratio will arguably lead to companies spending more time describing, and in some cases defending, their pay practices to a broader range of stakeholders including employees, unions and the media. Companies whose pay ratios materially exceed that of peers should be prepared for increased media and investor scrutiny, including the potential for “vote no” campaigns by public pension or labor funds. In addition, the pay ratio may heighten the risk of workforce morale and retention concerns in light of the ease of comparing median compensation both internally and at peer companies.
Pay ratios are expected to be high on an absolute basis for many companies, but a good deal of public analysis will likely focus on peer comparisons. This may present challenges for companies that have similar market capitalizations or customer bases but different operational and organizational structures. For example, a vertically integrated company with a large number of employees involved in manufacturing would likely have a significantly different pay ratio than one that relies on suppliers and has a higher proportion of employees in professional positions.
Given the one-size-fits-all nature of the pay ratio, companies should prepare now to determine what decisions under their control will produce the most accurate figure. Examples of inputs under company discretion include:
Under the legislation that created the Pay Ratio Rule, companies are statutorily required to disclose the ratio of CEO pay to median employee pay. However, the regulation does not prevent companies from providing additional ratios as long as they are not displayed more prominently than the required ratio, are not misleading and are accompanied by a description as to why they are relevant. Companies should consider that investors will expect information provided in the first year to be disclosed in subsequent years for comparison and tracking.
One supplementary disclosure for consideration is using an alternative measure of CEO compensation such as realized pay. This metric may be appropriate in situations where the median employee is not granted any long-term or equity-based compensation, thus providing a comparison between actual take-home compensation for the CEO and company employees. Companies contemplating this approach will need to carefully consider how option exercises and other decisions taken by the CEO in the current and future years may impact alternative pay calculations.
Another approach would examine how workforce dynamics impact the ratio. Companies may want to examine the median employee of just U.S.-based employees or annualize seasonal or temporary workers, especially if they can demonstrate that a significant number of those workers are not interested or available for full-time employment. Alternatively, companies may consider excluding a geographic or operating segment of the company, especially if they can make the case that certain business units are not relevant to the pay ratio.
While supplemental pay ratio disclosures would, by design, include descriptions about their relevance and appropriateness, companies should also consider providing narratives that highlight positive approaches to employee compensation and workforce development. Topics for consideration could include:
The first year of the pay ratio is likely to create a great deal of disclosure noise for companies, regulators and investors alike. As with any new regulatory requirement, it may take time for all stakeholders to understand how to interpret data points. But given the amount of attention that has been focused on the Pay Ratio Rule, this new disclosure is likely to have important, and possibly unforeseen, implications for engagement regarding compensation as well as the potential to impact proxy voting decisions. Companies should take proactive steps to frame a positive corporate narrative that takes into account the sum total of efforts to build, invest and compensate their entire workforce.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)