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Soon-to-be-revealed ratios comparing what a company’s CEO makes to what its median worker makes may have more value than companies have expected.
The ratio’s utility to shareholders is one of the main points of contention around the reporting requirement, which was folded into the post-financial crisis Dodd-Frank Act.
Most corporate management and board members expect the disclosures to be “not at all helpful” to current and potential shareholders, according to a survey by compensation consultant Pearl Meyer. But a more recent survey from proxy adviser Institutional Shareholder Services Inc. found that most investors do plan on using the ratios to compare among corporate peers and over time.
The question is what that interest will look like come voting time. “It’s very unclear how the investor community will use this new data point,” Chris Wightman, a partner at advisory firm CamberView Partners LLC who previously led global corporate governance and portfolio compliance oversight at Vanguard Group, told Bloomberg BNA.
He said pension funds and labor funds likely will be looking at companies’ pay ratios, due before their next annual shareholder meeting, because they’ve been vocal on the issue. But big investors like Vanguard haven’t said yet if they’ll factor the ratios into their votes on executive compensation or the directors that set it.
ISS, which said it was somewhat surprised by the level of investor interest in pay ratios found in its survey, doesn’t intend to incorporate them into next year’s voting recommendations for shareholders. Neither does fellow proxy adviser Glass Lewis & Co.
“People might look at the survey and panic,” Marc Goldstein, head of U.S. research at ISS, said. “They shouldn’t panic.”
The investors surveyed still seem open to using disclosed data on pay ratios as a consideration for say-on-pay votes, which let shareholders weigh in on executive pay packages. They also said shareholders should use data on pay ratios as background material for their fall talks with corporate boards and management.
Those talks should focus first on asking how investors want to use the ratios, Wightman said. The next question, he said, is whether there’s any specific type of disclosure that investors want to see “to help put a company’s pay ratio into context.”
Most companies have estimated a ratio, and half of them have started drafting disclosures around it, according to a recent survey from consulting firm Mercer.
Ratios are expected to be higher in some industries, like retail, than others, like banking. Differences in a company’s size and labor force, including the use of contractors or part-time employees, could also result in different ratios.
“There was always a degree of flexibility” in the rule, Aaron Pedowitz, an executive compensation and benefits consultant at Mercer, said. New pay ratio guidance issued by the Securities and Exchange Commission in September gives companies “even more flexibility,” he said.
Wightman said that means companies will want to “be clear” in how they are calculating and disclosing their pay ratio.
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