The panelists at the Equilar conferences never fail to engage the audience in important discussions on the current state of executive compensation and last week’s Compensation Committee Forum at the Nasdaq was no exception. There was one theme that was of particular interest to me that I want to share: preparing internally for the CEO Pay Ratio disclosures.
Please put this front and center on your radar!
Those of us attending heard loud and clear that the real story will not be the disclosures themselves, but the internal communications challenges that all companies will face once median employee salaries become public.
There is no question that boards should be working now—today, next week, and throughout the year—to ensure that HR management is preparing to get ahead of the foreseeable corporate risk that could come from this disclosure. Here’s how:
- Over the next year, bring HR management into the boardroom to present their plans and recommendations for refreshing current internal compensation communications to the workforce, specifically in the context of this new wave of transparency.
- By end of 2016, management and the board should agree on the messages about pay philosophy, competitive benchmarking, long-term wealth creation, career advancement opportunities, and the governance and processes that apply to how compensation works for employees at the entire company, not just for the NEOs.
- In 2017, the organization should be ready to implement its upgraded compensation communication strategy, which should include carefully timed and planned activities, such as manager training and education sessions. The plan should have collateral materials, such as talking points and answers to frequently asked questions, with an escalation process in place to ensure that when (not if) the toughest questions come up, the right people are ready to respond successfully.
With the board’s focus on this as a critical issue, management can be empowered to lay the appropriate groundwork and create a solid plan. By the time the ratio is disclosed in 2018, employees will be in a position to better understand how their pay is determined. Removing the mystery around pay—such as how base salaries are set, how bonus pools are funded, and how decisions are made—makes it less likely people will make misinformed assumptions about how they are paid relative to their internal and external peers. The employee fallout that promises to come along with the CEO Pay Ratio disclosure will then be a nothing more than a crisis averted for your organization.
Read more from Sharon on this topic in her in Agenda Week Opinion article “Boards Should Act Early to Alleviate Pay Ratio Headaches” (subscription required).
