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:
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:
Jeremy Cohen is vice president, Financial Communications, Chicago.
Tamara Snyder is executive vice president, Employee Engagement, Chicago.