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By Michael Greene
Oct. 16—Companies need to provide a narrative to explain why the difference between their CEO's annual compensation and the median annual compensation of all other employees is appropriate when complying with the pay ratio disclosure rule that is expected to be finalized this year, according to panelists who spoke Oct. 13 at the National Association of Corporate Directors 2014 Board Leadership Conference.
The pay ratio rule is not something that directors will be able to ignore, said Sharon Podstupka, a Vice President at Pearl Meyer & Partners.
Pay ratio disclosures present a “unique opportunity” for companies to the tell a story about their business strategy and how pay drives that strategy, according to Jill Kanin-Lovers, a director at Heidrick and Struggles Inc., Dot Foods and The Homeownership Preservation Foundation.
Under Dodd-Frank—and a Securities and Exchange Commission rulemaking promulgated in 2013, but not yet finalized—public companies are required to disclose the median annual compensation of all employees and the annual income of their CEO.
SEC Chairman Mary Jo White told the Senate Banking Committee Sept. 9 that she hoped the pay ratio rule would be finalized this year.
According to Podstupka, it is important for companies to show how their pay ratios were calculated and why their pay is fair and reasonable. The important thing is that the company “tell a story” and “tell that story well,” she said.
Companies may also consider using numbers to explain their story, according to Thomas J. Kim, a partner a Sidley Austin LLP and former chief counsel and associate director with the SEC's Division of Corporation Finance. Kim suggested that some companies may benefit by creating additional ratios to explain their pay policies.
Pay ratio disclosures might take up a lot of space in proxy statements, and it is important for a company to understand that their proxy is not just an external communication tool to shareholders, but also an internal communication tool, according to Podstupka.
The median pay number will be out there for employees to see, which could affect the organization's culture as well as workforce productivity, she added.
Kim also noted that the SEC has concluded that it will be difficult to compare ratios among different companies even if they have similar market capitalization.
For example, similar companies may have very different types of workforces and their pay ratio “stories will be very different.”
The “Beyond the Number: Communicating CEO Pay Ratio and Strategy” session was part of the 2014 NACD Board Leadership Conference Oct. 12-14 at the National Harbor in Maryland.
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