Pay Ratio Enters the Home Stretch

Compensation experts are encouraging boards to have their HR teams perform dry runs of their pay ratio calculations this year and next year in preparation for the mandatory 2017 fiscal year disclosures. They are encouraging boards to monitor the HR, legal, and compliance teams charged with producing the pay ratio calculation and determine whether they are comfortable with the valuation methods they use.

At least initially, proxy advisors are not expected to issue recommendations on the basis of the pay ratio disclosure, except for in outlier cases. While some shareholder activists may complain about the ratio, it is not expected to have a significant effect on say-on-pay votes. Many experts are more concerned about the effect of the ratio on internal workforce relations than on external forces.

“In 2018, for the very first time, people are going to have a window into what the quote-unquote average employee earns in his or her organization,” says Sharon Podstupka, principal in the New York office of executive compensation consultant Pearl Meyer. Some may not like what they see.

Management and the board should agree on what the key messages are around the organization’s pay philosophy when it comes to competitive benchmarking, long-term wealth creation, career advancement opportunities, and governance processes that apply to how compensation works for employees at the company beyond named executive officers, Podstupka says.

Employees are expecting more transparency from their employers on compensation and career development than ever before. The pay ratio rule may have the unintended consequence of ushering in more employee demands on transparency.

“Pay transparency is one of those things we’re going to have to start to get used to and get better at, and what that means is thinking not just about the number, but the messages that surround the methodology,” Podstupka says.