Sadly, it appears that the CEO Pay Ratio requirement will not be repealed before the upcoming 2019 proxy season. Disclosure of the CEO Pay Ratio turned out to be a non-event for the vast majority of companies. The media reported some disclosures, particularly the higher ones, but the story “never got legs.” However, we have learned some lessons that may be helpful for this year’s calculation and reporting.
Determining the median employee and the rest of the calculation process should be easier this year. Many companies should be able to use the same median employee in 2019 as they used in 2018. SEC rules require a company to identify its median employee only once every three years (and calculate total compensation for that employee each year), unless there has been a change in (a) the original median employee’s circumstances, or (b) the company’s employee population or employee compensation arrangements that the company “reasonably believes would result in a significant change in its pay ratio disclosure.” For example, if the median employee used in calculating the 2017/2018 ratio received a large bonus or equity award, the company probably could not use that employee.
Investors and compensation professionals all agreed that the best approach to disclosure is to keep it simple (stupid). Investors observed that they found lengthy explanations of the ratio and alternative ratios to be confusing. Resist the urge to explain or provide supplemental disclosure.
Finally, keeping up with current events, some have suggested that companies should consider using the data collection and calculation process developed in connection with the CEO Pay Ratio disclosure, to also review gender pay equity (which may be required by law or best practice at some future date). However, in light of litigation and state and local laws developing on the issue this is one task you do not want to undertake without the protection of the attorney-client privilege.