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The SEC will not be delaying implementation of the pay ratio rule, according to guidance released by the commission and staff yesterday afternoon. Accordingly, boards are being urged not to drag their feet.
The guidance comes after The National Law Review and other news outlets reported on comments made by William Hinman, director of the SEC’s Division of Corporation Finance, at the American Bar Association’s annual meeting last Friday, in which he noted there would not be a delay.
“I got a lot of calls on Friday,” says Deb Lifshey, managing director at executive compensation consultancy Pearl Meyer. “I suspect this year there were a lot of others out there procrastinating because it’s not a fun process.”
“As you get into the trenches and you’re looking at the data, there are so many nuances, it’s not possible to address every question that every issuer has in its unique workforce population,” Lifshey says. “While the SEC wants to provide guidance and information, it also wants to leave the rule flexible, so it’s been very hesitant to give specifics on how to comply with the rule.”
According to forthcoming executive compensation research by Pearl Meyer, about half of large companies it polled said they have started pay ratio work such as collecting data and identifying the median. But, says Sharon Podstupka, principal in Pearl Meyer’s New York office, only 10% of the boards of those companies have talked about the disclosure.
“So, they’re crunching numbers, but they’re so far in the weeds trying to figure this out that they just have not even been through what they’re going to put in the proxy,” Podstupka says. Fourth-quarter compensation committee and board meetings are approaching, and internal teams working on pay ratios should be preparing slides for meetings that describe methodologies used to calculate the ratio, Lifshey says.
After that, Lifshey says, boards and members of management need to discuss how to talk with various stakeholders about the ratio.
“Beyond the proxy [disclosure], three quarters [of companies] haven’t even talked about their broader communication and messaging strategies,” Podstupka says. “We’re creeping up on October here.”
The SEC has emphasized that the ratio is supposed to be used by shareholders to compare pay practices over time at individual companies, not to compare companies to their peers.
Early on, some observers had suggested that companies might be able to provide supplemental disclosures in the proxy to defend their ratios; however, neither Lifshey nor Podstupka advocate that companies do this unless their ratio is far out of bounds compared to their peers.
Podstupka says that human resources leaders and others should be thinking carefully about how to communicate about the ratio to the workforce and other stakeholders such as labor unions.
“What’s challenging about that now is that people are still trying to figure out what the numbers are, A, and B, they’re not quite sure what their situation is going to be,” says Podstupka. “If my ratio looks high, what’s the cause of that? Is it because we made a one-time special payment to my CEO? How do we tell that story, and which audience is going to pose the most risk from a messaging standpoint in that scenario?”