As we all begin to prepare for the 2017 proxy season and setting 2017 compensation, one of the most important tasks for public companies and the executive compensation professionals who work with them is to collect the data necessary for calculating the CEO Pay Ratio for 2017. If you have not started this process, you should do it today (unless you are one of the lucky companies that have no employees outside the U.S.).
Disclosure of the CEO Pay Ratio won’t come until 2018. However, the ratio will be based on compensation for 2017. Nearly every company with which we have spoken—and the handful of consulting firms that seem equipped to help or handle the process for those companies—reports that it is a lot harder than it looks.
For most companies, the first two steps will be to:
- Take inventory of the number of employees in each country and total employees overall (excluding CEO).
(a) Include full-time, part-time, temporary, and seasonal employees as of the measurement date, and independent contractors not meeting the requirements for exclusion.
(b) Exclude leased employees or independent contractors employed and whose compensation is set by a third party, and new employees acquired through an M&A transaction made during the year.
For some companies, the first step should be to consider the need for an outside adviser who can assist in all aspects of the process, from data gathering to certifying its assumptions and methodology according to the 95% confidence interval with 0.5% margin of error suggested by the SEC’s final rule (if statistical sampling is used).
- Consider the Company’s circumstances and goals. The primary goal of every company should be, of course, to comply with the law by producing an accurate CEO pay ratio figure. Many companies will simply want to do this as quickly and inexpensively as possible. However, there will be decision points in the process as to which methodologies, assumptions, and exceptions the Company will use. Different methodologies, assumptions, and exceptions may produce different results, but they must be accurate and replicable in subsequent years.
It is imperative that companies involve all internal functions in the process, including HR, payroll, HRIS, legal, and information technology, from the beginning. Otherwise, one function may overestimate what the others can do and what information they have or can quickly acquire.
Finally, companies should consider running the pay ratio calculation based on 2016 pay, as a “dress rehearsal” to see how well their systems operate and get an idea of what the actual ratio will be.