Keeping Pay Ratio Rational

Takeaways from San Diego

The recent pay ratio & proxy disclosure conference in San Diego provided useful insights into how U.S. publicly-traded companies are handling disclosure of how their CEO’s pay compares to that of their median employee.

New this year, the disclosure required under the Dodd-Frank financial reform act presents potential risks for companies at a time of growing sensitivity on executive compensation and income disparity. While still early to draw conclusions about the eventual effects, institutional investors and other experts at the conference offered their observations and advice for 2019.

Let’s be clear

An overriding theme of presenters’ comments was the importance of providing context around the numbers. A brief discussion of the company’s business strategy, HR approach, succession planning and board culture can provide a bigger picture of its compensation practices. This may be particularly important for companies with pay ratios that differ markedly from the rest of their industry or that show a trend in the ratio that is moving opposite that of most their peers.

Representatives of institutional investors from CalSTRS, BlackRock and Capital Research and Management suggested that companies still need to improve the linking of compensation practices with their long-term strategy. Other recommendations included clearly explaining any make-whole awards that compensate new executives who have lost pay in coming to the company and avoiding paying outgoing CEOs the same as their successors.

 “In communicating on compensation, simple plans are better,” said one investor panelist. “Don’t create a beautiful maze. Connect the dots for your readers and don’t forget that pictures are a great way to tell your story.

Some early returns

Among the interesting figures shared regarding the first wave of disclosure on pay ratios:

  • the average ratio for S&P 500 companies was 160:1
  • for the Fortune 1000, it was 158:1
  • for the Russell 3000, it was 71:1
  • median employee pay was $69,000 for S&P500 versus $108,000 for the tech industry
  • the highest ratios were in retail, consumer discretionary and consumer staples and materials
  • the lowest ratios were in financials, healthcare and utilities
  • 19% of the Russell 3000 provided some sort of supplemental pay disclosure such as adjusted workforce, full-time only employees used to find median or adjusted CEO pay due to one-time awards
  • some companies noted a low pay ratio this year due to caveats to prepare for higher ratios in the future

Better visibility

Several observations were raised for companies to consider in preparing next year’s proxy statements. These include not assuming that everyone knows new information about the company (a point that could be generalized to all company communications!). It’s important to remember that events such as acquisitions or external changes that may affect or change the compensation plan may not have been seen by all. Including the year’s highlights in the proxy is a good practice to ensure completeness.

If they are not already doing it, companies need to think about how they are portraying their practices and culture with regard not only to pay equity but also on highly visible issues such as the me-too movement and their environmental, social and governance policies.

Other recommendations included talking about the activities by board members to stay connected with the business such as visits to local branches or stores. Also mentioned were going beyond ritualized phrasing like “employees are our most valuable asset” to talk in depth about how the company’s HR policies are designed to contribute to improved performance.

A general theme throughout the conference was the need and expectation on the part of investors for transparency in order to understand the company. That this is also in the self-interest for companies was underlined by one panelist as: “If we don’t get the data from you, we are getting it from somewhere else.”

 Clear enough?

By |2018-10-11T17:29:00+00:00October 11th, 2018|Categories: Articles|Tags: , , , |0 Comments