The clock is winding down. Starting in 2018, public companies will have to disclose the ratio between the total pay of their CEO and median-paid employee. While many companies hoped the requirement would be delayed or repealed, it’s here — and it covers compensation paid in fiscal years beginning on or after January 1, 2017. A Mercer survey in August 2017 showed that 75% of companies have already calculated an estimated ratio, but only about 25% have thought about how to communicate it. How prepared are you?
What does the ratio mean?
Although the CEO pay ratio disclosures may not be useful in comparing executive pay levels or practices among companies, they are sure to make headlines. Even some investors have said the ratios are likely to have limited value — but they may use them anyway to evaluate year-over-year changes in the ratio at individual companies.
Be that as it may, as other investors and social media observers continue to advocate for the disclosure of CEO pay ratios, companies and HR professionals should take compliance efforts seriously.
Flexibility to comply
The SEC’s rule gives companies a lot of flexibility to decide how to identify the median employee. This is definitely helpful, but more choices mean more work, especially for those tasked with helping their companies comply for the first time.
For example, the rule allows companies to identify the median employee using a “consistently applied compensation measure.” There’s guidance on how to pick the measure, but the most appropriate choice will likely vary by company. Companies with robust HRIS or payroll systems may find compliance relatively easy, and welcome the opportunity to try different approaches….but others may find it challenging, especially those that recently made acquisitions, have global operations, or operate decentralized support functions. And, companies with non-US employees must consider how to account for them when finding the median employee.
Although the rules are written in black and white, interpreting them can be tricky.
Communicating the ratio
Collecting the data, selecting an approach to find the median employee, and calculating the ratio are just the beginning. While the SEC mandates that companies disclose information about the ratio in annual proxy statements, there is no standard approach and some companies may want to provide context to the ratio.
Also, companies may want to give more information to some stakeholders — like employees. Although the CEO’s total pay has been disclosed for years, finding out how much the median employee gets paid and what the ratio is, may be an unwelcome surprise to employees, particularly those paid below the median.
New regulations and processes bring their fair share of challenges and expense. The task of determining and communicating your company’s CEO pay ratio will require diligent data gathering, careful calculation, and deft communication. Although navigating these demands may seem daunting, a seasoned HR manager armed with proper guidance, techniques, and support should be able to tackle the challenge.
Interested in learning more about the SEC’s CEO pay ratio disclosure rule? Don’t miss Mercer’s Guide to CEO Pay Ratio Compliance, a nuanced legal analysis and detailed practical guidance to HR professionals responsible for their company’s compliance.