US CEO Pay Ratio Rule Deadline Approaching: Are You Prepared?

US CEO Pay Ratio Rule Deadline Approaching: Are You Prepared?

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US CEO Pay Ratio Rule Deadline Approaching: Are You Prepared?
US CEO Pay Ratio Rule Deadline Approaching: Are You Prepared?
Calendar26 October 2017

If you still haven’t calculated your CEO Pay Ratio, there’s no time to delay. Despite a recent recommendation by the Treasury Department that the rule be repealed, it appears that the Security and Exchange Commission (SEC) is set to enforce the Dodd-Frank measure effective January 1, 2018. 

Mercer’s recent CEO Pay Ratio Spot Survey collected responses from 146 companies, representing all company sizes and various industries, on the methods they are using to comply with the Dodd-Frank disclosure requirement and found that 75% of them have already calculated their 2017 pay ratio. 

Contrary to what’s been commonly reported, a majority of these companies (57% of survey respondents) estimated their ratios at 200:1 or lower, whereas only 20% of companies reported ratios of 400:1 or higher.

Not surprisingly, the highest ratios are represented at retail/wholesale consumer goods industry firms and the lowest ratios are in banking/financial services. 

However, calculating the CEO pay ratio is only the first step to being prepared for January 2018. Companies should also be thinking about how they will approach their required proxy disclosures and what their strategy will be for communicating results to key stakeholder groups – investors, employees and the media. 

Our survey found that only 51% of respondents have started drafting proxy disclosures and even fewer – only 26% – have started thinking about how they will be communicating their ratio to both internal and external audiences.

Just Getting Started? What You Need To Know

The first step to preparing for the CEO Pay Ratio rule is to identify your best team for evaluating, calculating and communicating the ratio. Typically this will include stakeholders from HR, Legal and Communications. 

Next, consider your objectives. Do you want to determine a ratio with the greatest precision possible or are you looking to determine the lowest ratio possible? As part of the guidance identifying the “median employee,” the SEC has provided some flexibility for companies to consider giving you options for how to approach your calculation, including:

  • A reasonable approach to calculating a Consistently Applied Compensation Measure (CACM) for identifying the median employee.  Your chosen approach will highly depend on your company’s pay strategy and the data and resources available. Responses varied in our survey as 40% said that they are most likely to use W-2 Total Compensation or a Non-US Equivalent, 24% said Total Direct Compensation and 19% said Total Cash Compensation.

  • Simplification of data collection by statistical sampling or other approaches, which will benefit companies with significant data concerns. Only 11% of companies responded that they will simplify assumptions or use statistical sampling data collection approach for identifying their median employee.

  • Flexibility to exclude non-US employees, allowing a de minimis exemption of up to 5% of employees and/or a data privacy exemption. Nearly 70% of companies plan to use the 5% exclusion allowance, whereas only 13% plan to use data privacy.

  • Allowance for Cost-Of-Living Adjustments (COLAs) to identify the median employee, but the ratio must be disclosed both with and without COLAs. As a result, only 3% of companies plan to use COLAs in identifying their median employee.

Lastly, note that any approach you choose should be comprehensive in complying fully with the SEC requirements and reflects your company’s full workforce composition. It should also be replicable, defensible and cost-effective.

Required Proxy Disclosure: Providing The Right Context for Interpretation

Determining the methodology and calculating the ratio is only the start of the process in complying with the SEC rule. Companies should also be thinking about what’s needed for their required proxy disclosures and whether or not to include supplemental ratios and context on their compensation programs. 

Companies are required to disclose the following:

  • Total annual pay of the CEO, total pay of the median employee and the ratio between the two
  • The data you used to identify the median employee
  • Brief description of your methodology and material assumptions, including if you used any adjustments, estimates or bases for excluding employees

The challenge will be keeping these descriptions brief and not overly technical, especially if you take advantage of flexibility in the rule.

In terms of potential disclosure enhancements, you might want to provide further explanation about your ratio, in particular if you expect that it will be very different from your industry peers. You might also want to include additional ratios showing the effect of excluding non-US or part-time employees, for example, if you think it’ll put the required ratio in additional context. This is allowed as long as the supplemental ratios and information is clearly identified, not misleading and not more prominent than the required ratio.

Communication Matters: Key Messaging Considerations for Internal and External Audiences

Once your CEO pay ratio is disclosed publically, it becomes open to scrutiny by the media, investors, labor unions and employees. If you’re not prepared with a strategy for communicating results to key targeted stakeholders, you could be risking reputation damage, disengaged employees and unhappy investors. Some key areas to consider:

  1. Look for opportunities to integrate messaging into existing communication channels.
    Think about how you can incorporate transparent messaging about your pay ratio into communications that are already going out to your employees – for example, total rewards or performance management communications, leadership town halls – both before and after public disclosure. Communicating pre-proxy filing gives you the opportunity to get key messages out first, whereas communicating post-proxy filing gives you a chance to see how you compare with other companies and incorporate that into your broader pay story.

  2. Consider how you communicate the message to your employees – especially those whose pay might be below median.
    Compensation is still the #1 way to positively impact employees at work, according to our 2017 Global Talent Trends Study, but it’s not the only thing they care about. Use this as an opportunity to engage your employees in discussion about what they value at work, drawing a connection to your broader employee value proposition and be transparent about how pay is determined at your organization.

  3. Make sure your board, executives and managers are prepared to handle ad hoc questions.
    Your people managers, board members and executives are the ones that will have to respond to questions from your employees, investors and the media so give them advanced warning of what’s to come. Provide them with tips, talking points and elevator speeches for handling any potential tough questions and outline the details of your compensation programs for them to reference as needed.

Get To Where You Need To Be: Mercer Can Help

Wherever you are in the journey to complying with SEC’s CEO Pay Ratio rule, Mercer can help. Our approach is flexible and we can support you with one or all of the following, depending on what you need:

  • Determining what methodology to use to identify your “median employee” and compiling data consistent with your chosen approach
  • Preparing draft ratios under one or more methodologies
  • Drafting required proxy disclosure language and supplemental context if needed
  • Developing a communications strategy and draft materials targeted to your key internal and external stakeholders

Don’t delay. Complete the form below to speak with a Mercer consultant about calculating, disclosing and communicating your CEO Pay Ratio.

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