Complying with 'Name and Shame'

The Securities and Exchange Commission's CEO pay-ratio disclosure ruling is raising a host of HR-related concerns around unions, investor relations and employee communications.

Thursday, November 17, 2016
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Although the law doesn't go into effect until 2018, many HR professionals are worried about the Security and Exchange Commission's so-called "name and shame" ruling that requires publicly traded companies to disclose the ratio of the total compensation of their CEO to that of the median employee.

To get a better sense of the level of concern around the ruling, the Hay Group division of Korn Ferry surveyed nearly 150 publicly traded organizations and found 46 percent were "somewhat concerned" with obtaining and collating employee data needed to calculate the CEO pay ratio while 47 percent were "somewhat concerned" with what to disclose in the various filings. More than half -- 51 percent -- were "somewhat concerned" about determining the best methodologies to use in data collection and analysis. Another 53 percent were "somewhat concerned" about public perception and ensuring that the ratio reflects reality.

"Throughout the proposed regulations, companies have been pushing back significantly about the effort involved in getting to this [median] number," says Irv Becker, North American leader for Hay's executive pay and governance practice in New York. "[Finding] the median versus average is the big sticking point."

So far, he says most of his clients haven't invested much time or energy into this project. Roughly 60 percent of those surveyed are considering outsourcing the analysis to a third-party vendor to ensure correct calculations.

Still, he says, company leaders will face other challenges involving unions, investor relations and employee communications.

"Those numbers will be potentially used by shareholders and unions to get attention to this issue," says Becker, who led Hay's survey team. "I don't believe that these are reasonable numbers that a company can use to benchmark pay. It's meant to embarrass CEOs, management teams and boards." to a Mercer survey conducted in August of 177 companies across 12 industries, 60 percent estimated their ratios will be under 200:1 while 20 percent predicted over 400:1. Not surprisingly, industries employing more professional staff report lower ratios than those with more part time, temporary and less-skilled employees.

Gregg Passin, a senior partner and North America leader of Mercer's executive rewards practice in New York, says he expected the majority of ratios to be higher, closer to 400:1 or even 500:1.

Although ratios are industry-dependent, critics believe the ruling encourages unfair comparisons between multi-nationals and U.S. employers, even in the same industry. Take two manufacturers. The median employee for the first one may be a factory worker in India earning $14,000 a year. However, the median employee at the second company – that supports only U.S. plants -- may be a factory worker in Detroit earning $60,000 a year.  

Under the SEC ruling, Passin says, companies are required to disclose many details that include the compensation of the CEO -- which is already being reported -- and the median employee; the ratio between those numbers; methodology used; adjustments made to those numbers within the parameters of the rule; and the date the median employee was selected.

Yet managing the employee message is critical. He says HR should consider adding context by explaining why the median is at that level and offer alternative, more useful ratios like those involving just U.S. employees.

Another concern is the media. Passin believes some reporters may misunderstand the ruling and inadvertently write inflammatory stories or create lists that unfairly compare the highest company ratios or highest median employees by industry or city. He warns HR professionals to be prepared for the potential impact.

"The issue is putting this information into context for employees so they understand what it means to them," Passin says. "Some employees might be upset about their level of pay . . . If companies are communicating their compensation strategy (and value proposition) appropriately, that can be mitigated to a high degree."

Likewise, clarify your organization's compensation philosophy, adds Mike Kesner, principal at Deloitte Consulting in Chicago. He explains that HR must articulate to employees, especially those who fall in the bottom half, why they're not underpaid, that their compensation is market-based or competitive with like-industry positions.

While companies can disclose this information on their website, he says, managers also need to learn how to address this topic with staff.

"Prepare managers to have these kinds of conversations," says Kesner. "[Explain] the rigor around how you set pay for all employees so they can answer tough questions [and be] more transparent on how the pay system works."

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In many cases, he says, employers can take advantage of statistical sampling when gathering and analyzing data. He says the degree of accuracy won't vary greatly when compared to a detailed calculation of all employee compensation.

Meanwhile, he says confusion still surrounds the SEC's ruling issued last year.  When the SEC clarified its rules several weeks ago, new questions arose.

"The biggest issue that really frazzled a number of employers is the need to include contracted employees as employees under certain circumstances," says Kesner. "Some of them have to be included in your employee count when determining the median employee."

Another downside is that these numbers will establish an employer baseline for ratios and median employees. So if they ever fluctuate, investors, employees and others will demand answers.

"The countless hours being spent on this would be better spent making sure that pay and performance are aligned, that the right performance metrics are being selected, that the goals are being set properly," Kesner says. "This is a huge distraction."

But, on the heels of the Trump presidential victory, many now are left to wonder about the fate of the CEO pay-ratio disclosure. In a new piece on the topic, Willis Towers Watson's Steve Seelig, Ann Marie Breheny and Bill Kalten write that it is "rare to see regulatory agencies roll back regulations that have already been finalized," especially those adopted to implement legislative requirements, such as the CEO pay-ratio disclosure.

"That's not to suggest it's impossible," they write, "but even if the Securities and Exchange Commission's Republican majority in the Trump era wants to change existing regulations, it's possible that the pay ratio and say-on-pay rules would not be a priority. 

"It's more likely that a Republican-led Congress would seek to repeal all of Dodd-Frank," they write. "However, it's also possible that Republicans might hold their majority over both houses for only a brief two-year window, and with repeal of the Affordable Care Act and other priorities in the queue, we wonder where Dodd-Frank fits in the mix. Keep in mind that the Senate is not filibuster-proof, and it's highly likely that certain factions of the Democratic caucus would fight Dodd-Frank repeal."

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