The CEO pay ratio disclosure to be required beginning in 2018 may create the opportunity for mischief by politicians, pundits, the media, and others, because it focuses on the fundamental but hot-potato question of pay fairness.
Other requirements of the Dodd-Frank Act that focus shareholders on whether company executives are paid commensurate with the value they create. Say-on-pay voting results overwhelmingly reflect that CEOs do deliver an acceptable level of company performance. The upcoming pay-versus-performance disclosure will not really change that dynamic much, since most shareholders already have figured out their own methods for determining appropriate CEO pay levels.
The CEO pay ratio is really the people’s pay disclosure. It opens the debate on CEO pay to, frankly, everyone. This ratio will become part of the national discourse on pay inequality, and will certainly be mentioned in local and national newspapers. Viewers will see the numbers on TV newscasts, and consumer advocates will highlight the ratio when recommending products or services. Local and national politicians will see the numbers, which will predictably lead to more controversy when it comes to tax laws, government contracting regulations, wage and hour laws, and other public policies. Unions will use it to promote their case for worker rights and higher wages.
Most significantly, the pay ratio is likely to prompt public-company workers to question whether they are being paid fairly, because companies will be required to disclose the compensation paid to their “median employee.” Those below the median will wonder what it takes to get them to that level, and why their company is not paying them more. Those at or above the median will naturally wonder whether their pay levels are determined fairly, or how the level of CEO pay might be hindering their pay increases. Workers also will be looking at companies across the street and pondering if their median pay is higher, and whether it might be a good idea to look around.
Many business groups look at the time and effort required to produce this ratio as a waste of company time and resources. Clearly, having to focus on data gathering and statistical sampling approaches are painful exercises.
But many of our clients also view the pay ratio disclosure as a chance to make sure their employees understand the company’s pay value proposition. Companies that get this communication effort right will find they actually have strengthened their relationship with the workforce, with better productivity and reduced turnover as likely outcomes.
Steve Seelig is a senior regulatory adviser for executive compensation in Towers Watson’s Research and Innovation Center. Email: [email protected]werswatson.com