HR corner: CEO pay disclosure – Preparing for compliance or hoping for a delay?

June 7, 2017
| United States

By Pamela Murray, Senior HR Consultant, HR Partner, Atlantic Region

With some of the executive orders being proposed by the Trump administration, one might be tempted to think that the executive compensation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act will meet a swift demise and that companies can stop worrying about their CEO pay ratio calculations.

While it’s certainly possible that the Securities and Exchange Commission (SEC) could delay the compliance deadline of the Pay Ratio Disclosure Rule or that Congress could repeal Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, those actions could take time and the latter may not pass the Senate.

The final Pay Ratio Disclosure rule requires public companies in the U.S. to disclose the ratio of CEO pay to median employee pay with their 2018 proxy statements, with reporting based on fiscal year 2017 pay. As such, many companies are moving forward with their compliance efforts — working through these calculations — but are also considering the impact this newfound knowledge will present to shareholders and customers as well as to employees, who will be concerned about where they fall in relation to the median pay.

Step 1 — Choose a strategy and calculation approach

As companies consider their approach to pay ratio calculations, it’s time to think through an overall strategy. To identify the median employee, the final rule allows companies to select a methodology based on their own facts and circumstances. A company could use its total employee population, a statistical sampling of that population or other reasonable methods.

Here are some of the key challenges to ensuring compliance:

  • It requires hard, careful work. Some companies don’t have the bandwidth, and doing this last-minute will create a hardship for executive compensation staff who have many other tasks (it will also increase the risk of not being compliant). Calculations can be generated based on employee totals as early as October 1, and companies should be in a position to know their calculation method far before that date.
  • Finding the data and determining the median. Companies without complete data will be challenged and would be wise to consider statistical sampling to help estimate pay levels where data are hard to get.
  • Using a more inclusive definition means less flexibility. The more basic compensation definitions will result in the company ending up with several “medianable” employees from which to choose the appropriate median employee.

Step 2 — Preparing managers and employees

Employees generally question their pay appropriateness, so it’s important for you to be prepared if they react strongly to the pay ratio and the median employee pay figure used to calculate it.

Percentage of employees who agree they understand...
Percentage of employees who agree they understand...

Source: 2016 Willis Towers Watson Global Workforce Study

Rather than fearing pay ratio disclosure, consider this an opportunity to discuss how compensation is determined for the workforce and how it aligns with the company’s values, brand, culture and future growth plans.

Getting the message out

Fostering a culture of transparency and trust can be accomplished via Total Rewards statements, manager pay communication effectiveness training, pay administration guides, online learning for pay administration and determination, and a host of other communications aimed at educating and informing both employees and managers.

Moving forward or lying low

Even though the SEC is reviewing comments on how organizations are coping with unexpected compliance challenges, it is important for public entities to prepare for this regulation now, as it is no small undertaking and one with significant implications.

Many organizations are already engaging experts to ensure they are prepared for any compliance changes, understanding they may not be best suited to address this new rule and that sitting on the sidelines is a risky business decision.