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Boards and management teams are being advised to communicate their compensation philosophy clearly — for both executives and employees — before their pay ratio is disclosed in 2018, as it could have a negative effect on workplace morale.
Although calculating the rule could be cumbersome for some companies, experts say the biggest impact of the rule may be on employees, who will now be able to compare their pay to that of the median employee. This may prompt some compensation committees to begin assessing the pay of rank-and-file employees.
One way to combat this, experts say, is to communicate with employees about their pay and the ratio. “A company would be well served to start being more transparent and start communicating that they are working on the calculation and what the preliminary numbers are,” says Aalap Shah, Managing Director at Pearl Meyer.
The new disclosure may disturb the relationships between different groups of employees and the question becomes whether or not comp committees are going to feel the need to extend their reach into this workforce area.
Shah says this is unlikely. “The committees usually step back from that because they want to advise and shepherd management, not do management’s job. It may drive some committee members to ask for that information … but some are asking for that anyway regardless of the pay ratio,” Shah says.