As 2017 comes to a close, public companies will face a new wrinkle in the preparation of public filings with the newly required inclusion of a company’s pay ratio. The pay ratio disclosure, a component of the 2010 Dodd-Frank Act, will require public companies for the first time to report:
- the median annual total compensation of all employees, excluding the CEO;
- the annual total compensation of the CEO; and
- the ratio between the two.
Although the SEC provides flexible calculation methods, this remains a complex undertaking that raises many compliance and communication challenges. Many companies are currently in the data-gathering process, determining which statistical method will be used to calculate the median employee’s total compensation.
Just as important, however, is to begin developing a communications strategy to address potential concerns from the many affected constituencies and mitigate risks related to employee morale, investor sentiment or negative media exposure. Being on the front foot of communications for this new disclosure, we believe, will help safeguard against potential reputational damage to your organization. We offer these considerations for key stakeholders:
Employees: It is fair to say that pay matters to everyone, so this disclosure provides a quantifiable data point for scrutiny and comparison with other employers. Identifying median employee compensation could cause strife with the half of employees who learn they are paid below the median. Willis Towers Watson conducted a survey and agrees, with nearly half of surveyed companies noting their number one challenge is “forecasting how their employees will react.”
Earning employees’ trust is already difficult enough, but now employees will be able to compare official pay to others in their industry, which could lead to increased turnover and pressure for wage hikes, particularly if unions are involved. In these cynical times, the most important action companies can take to build trust according to the 2017 Edelman Trust Barometer is to treat employees well; pay is one part of that.
Investors: While investors are already familiar with executive pay and get a ‘say on pay’ vote, this disclosure will now provide greater insight into how management compensates and values its employees, both in absolute terms and relative to peers. The potential for fallout could impact a company’s sources of capital.
Edelman recently released an Edelman Trust Barometer Special Report gauging the factors that influence investor trust in public companies, and 7 in 10 surveyed noted that prioritizing employee commitment impacts investor trust and willingness to invest in a company. In another survey from proxy advisor ISS, nearly 75 percent of surveyed institutional investors noted that they will be analyzing the data either annually and/or to compare against industry peers, so we believe this will become an important topic that public companies should be prepared for in investor interactions.
Media: Given that executive compensation has been a lightning rod for media coverage in the past, we would expect that engaged business and local media also may focus on this disclosure. Mercer conducted a preliminary survey in 2016 that found the average CEO to median employee ratio to be around 200:1. When compared to peers, this may not seem out of line, but most companies will be reporting an optically outsized number which could set off a media frenzy for companies located in municipalities focused on wage issues, or particularly for companies in the well-covered retail and hospitality sector or others in which hourly employees make up a large base.
5 Communications Suggestions for the Pay Ratio Disclosure
As companies plan for disclosure, it is critical that firms start to connect the dots across public relations, investor relations and internal communications teams. Here are five suggestions to help guide your communications strategy:
- Be able to convey at a high level how the total compensation for your median employee was calculated. Companies may use unique statistical approaches, and it is therefore vital to have thorough and clear disclosure of the methodology that does not confuse employees, investors or the media.
- Get a sense if your ratio will be an outlier. This may result in negative coverage that warrants proactive scenario planning. The same can be said for self-reported employee salary data published on Glassdoor; wide discrepancies may raise eyebrows.
- Prepare talking points and messaging around the company’s compensation and total rewards story. Determine how your compensation package compares to peers, and what unique elements differentiate yours. A singular number may fail to include non-monetary rewards such as PTO, insurance and other benefits beyond compensation, and it certainly does not convey the intangible aspects of the employee experience, such as a strong career development program or opportunities for upward mobility.
- Make sure your team is prepared to explain the executive and employee compensation strategies, and, if possible how both tie to company goals (internal and external). Some business media, such as Bloomberg and The Wall Street Journal, already prepare CEO pay reports. Media tend to harp on outsized executive pay, and having a response plan will help alleviate any pressure.
- Trust is a key component of driving valuation higher. Eighty-two percent of investors surveyed in Edelman’s Trust Barometer Special Report: Institutional Investors claims that their trust in a company is critical to their investment considerations. And nearly half agree that appropriate executive compensation, aligned with investor interests, also affects their decision-making. Perception matters and a compensation story that is incongruent with industry peers can be a trigger for investors who already follow compensation closely. Investor relations should be prepared to talk through the company’s vision and how its recruiting and retention strategy play into that.
Jeremy Cohen is vice president, Financial Communications, Chicago.
Tamara Snyder is executive vice president, Employee Engagement, Chicago.