After some fits and starts (and probably some dashed hopes of more than a few compensation managers), the pay ratio disclosure requirement is finally upon us. Our November 7, 2017, For Your Information covers recently issued SEC interpretive guidance intended to help companies comply with the new disclosure requirement. But there’s more to it than simply complying with the requirement; companies also will need to prepare for the implications of making their unique pay ratio public.
The Compensation Discussion and Analysis (CD&A) section of the annual proxy is typically a point of interest for analysts and shareholders. Starting with the 2018 proxy season, when the new CEO pay ratio disclosure requirements take effect for all companies on a calendar year, it’s expected that the media will pay attention, as well. That means the components of the CEO pay ratio may reach local and national headlines, bringing an unfamiliar concept into the spotlight. For many employees, however, the real news will be the disclosure of the median employee’s compensation. Employees will see quickly if they are paid more or less than the median employee not only at your company but also at other organizations within the same industry or geography. This information may change their perceptions with regard to their current compensation.
So, what can you do to get ready to manage potential reactions from employees? Here are a few questions to consider:
- What do employees know about the company’s compensation philosophy and how their pay is established? What opportunities are available to educate your population before the proxy is released? Does the company have a strong employee value proposition or total rewards statement to shift the focus beyond pay?
- As first-line communicators, managers are often viewed as the most trustworthy source of information for employees. How will you prepare managers to respond to questions they receive? Are they comfortable talking about career and learning opportunities to help employees grow in their careers (and pay)?
- What do employees understand about how the company is structured? Are most employees full-time, U.S.-based? If your business relies heavily on seasonal, part-time or off-shore employees, it’s likely that your median employee’s compensation and CEO pay ratio may look different from competitors that are staffed differently.
- How closely linked are the CD&A and internal messages about compensation? What messages will be included in the CD&A and what messages may be better suited to internal communications?
- What is the CEO’s or other senior leader’s normal cadence of communications with employees about pay and performance? Are there opportunities to ramp up messages before the proxy is released?
- Think about groups that may have unique concerns about the pay ratio disclosure. Some examples may include employees with a similar job title to that of the median employee, groups that have employees paid on both sides of the median, and groups that have expressed interest in pay transparency or pay equity. Some employees may be part of collective bargaining units. What special communications needs may they have?
- Even if the CEO pay ratio disclosure doesn’t apply to your company, is your organization prepared to respond to questions about CEO and median employee compensation?
Your company’s CEO pay ratio will send a message to your most important stakeholders – employees, customers and shareholders. But, the ratio is only part of the story – subject to misinterpretation without context. Your company has the opportunity to own its narrative, so that all stakeholders understand the intended meaning of the analysis.
And remember that the CEO pay ratio isn’t a one-time disclosure; it will be disclosed in the proxy each year, bringing an annual opportunity to promote the value of being part of the company. In future years, the focus may shift toward year-over-year changes in the ratio and the compensation of the median employee.