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As new pay ratio disclosures trickle out, directors are anxiously searching for details as to what’s going on behind the curtain in calculating ratios, even while experts caution boards not to get bogged down.
Because the SEC has given companies a fair amount of flexibility in how companies calculate the ratio, the discussion in each disclosure will vary, experts say. Questions from board members in the audience of this month’s Agenda Education pay ratio webcast focused on the information being included and excluded in calculations by other companies.
According to Deb Lifshey, managing director at Pearl Meyer, most companies are planning to use just cash compensation. However, if it’s a company that distributes a lot of equity to employees, then the median calculation can be skewed by excluding grants of stock.
“If your equity is widely distributed, then the W-2 is not really reflective of annual total compensation, because you have people exercising [options], you’ll have stocks vesting, and that’ll come into the W-2 at weird times,” Lifshey says. Many of these types of companies—for example in the technology sector—are using base, bonus, and the grant-date fair value of equity, she says.
Meanwhile, board directors also questioned whether companies are including the cost of health care benefits when calculating employee median and CEO pay. In some cases, adding this information can bump up median pay, resulting in an overall “better” ratio, experts say. However, then the company has to add additional disclosure about why the CEO pay number is different from what’s reported in the summary compensation table.
“People will see you’re trying to manipulate the number a little. It’s probably better off just taking the hit rather than trying to beef it up,” Lifshey says.