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Pay Ratio Disclosures Are an Employee-Relations Opportunity … Really

    Client Alerts
  • October 03, 2017

Most companies are now devoting substantial resources and effort to ensuring compliance with the SEC’s new rules requiring disclosure of the ratio of the CEO’s and median employee’s respective annual total compensation. Because the disclosure is required for fiscal years beginning on or after January 1, 2017, calendar-year-end companies must include it in their upcoming proxy statements.

As the number crunching and parsing of new SEC disclosure guidance (see Doug’s Noteshere and here) begins to take shape, these companies will soon get a sense of the magnitude of their ratio and, therefore, of any concerns it may raise. Discussions are also taking place regarding the extent to which companies can, or should, provide supplemental proxy disclosure that adds explanatory context to the mandated ratio disclosures.

In the course of all of that analysis, it would be a shame to overlook “silver-lining” opportunities to engaging in proactive, positive dialogue with the company’s various stakeholders. And the most important constituency at most companies is the employees.

Pay ratio disclosures may be disconcerting to employees for a variety of reasons. Most obviously, while the CEO’s total compensation has long been public information, its stark numerical contrast to median employee compensation could be expected to generate negative emotional responses from some members of the workforce. Less obvious, but perhaps as disconcerting, may be the realization by half of your employees that they are compensated below the median. This realization could be further exacerbated by negative comparisons to peer company compensation medians and ratios, which will likewise now be public.

Failure to proactively address these issues could result in a disgruntled subset of employees, which could in turn lead to lost productivity , a general decline in workforce morale or even employee departures to seemingly higher-paying competitors. Therefore, it would be wise to proactively coordinate with the company’s HR department and internal communications personnel to fashion a tailored communication plan designed to at least minimize potential negative consequences.

But why not also turn this into an opportunity to highlight positives about the company? Rather than being defensive or dismissive, focus on communicating the company’s commitment to its stated values, culture of fairness, efforts to incentivize the proper employee conduct and the enterprise-wide benefits of attracting and retaining exceptional senior leadership. If communications are handled correctly, most employees will appreciate the company’s willingness to be transparent and forthcoming about a topic of such sensitivity (even if they don’t agree fully with everything you say).

Communication techniques will vary from company to company, depending on the company’s existing culture, size, industry, locations, complexity and other factors. Here are some tips for analyzing your own situation:

  • Consider some form of direct communication from your CEO and/or chair of the board of directors or lead independent director. This could be town hall-style discussions, a casual video chat or just walks around the offices/facilities to engage one-on-one.
  • Consider also, or alternatively, a written communication/brochure providing additional color and context for the SEC disclosures (being careful that such writing is not “additional proxy materials” that must be filed with the SEC).
  • Be sure you fully understand how your CEO’s compensation and median employee’s compensation compare (positively or negatively) to your peer companies and why.
  • Anticipate how employee reaction may vary depending on the region in the U.S. or country in which they reside. Take into account geographic, cultural and language issues.
  • Provide a method for employees to ask questions and receive prompt, thoughtful answers.
  • Use employee reactions as a bellwether for the company’s overall culture. If it is hostile and prolonged, it may signal broader issues that should be addressed. Likewise, no discernible reaction could indicate fear of the consequences of voicing concerns, which also must be addressed. In either case, consider whether this is an opportunity to improve certain aspects of your corporate culture.
  • Avoid providing too many details, numbers and data, which may just sound defensive and confusing. Keep it basic and principals-based. Use plain English. Understand that employee reactions may be more emotional than rational.
  • Highlight the extent to which the company and the board of directors spend time and resources structuring a company-wide compensation system and determining executive compensation that reward performance, encourage behaviors that inure to the benefit of all stakeholders and enhance the company’s overall competitive advantage. If you engage a compensation consultant, explain why and the beneficial objectivity and expertise they provide. Most employees do not have a sense of the scope of this undertaking.
  • Address the issue directly, without apology. Answer questions in the same manner. Employees will appreciate your candor.
  • If serious concerns are raised, consider following up in six months or so to assess whether they are continuing, have worsened or have been adequately addressed. Don’t let significant issues fester.

If handled correctly, this can be a great opportunity to actually strengthen management’s relationship with the workforce, which should be a primary and ongoing strategic goal of the company. Handling it correctly will, however, require thoughtful planning and coordination.