The CEO-employee pay ratio disclosure rule adopted by the Securities and Exchange Commission in 2015 will require public companies to publish the ratio between the compensation of the CEO and the median annual compensation of every other employee in their proxy statements, starting with the 2017 fiscal year. In response to employers’ concerns over how to comply with this rule, the SEC issued guidelines late last month that give companies some flexibility in deciding how to calculate the ratio in order to reduce the cost of compliance.
Despite the commission’s efforts to ease the burden, leaders at these companies remain concerned over the impact these disclosures will have on their workforces. A new survey from Willis Towers Watson illustrates some of these anxieties, finding that one half of companies say their biggest challenge in complying with the rule will be in anticipating their employees’ reactions to the disclosure:
The poll also found that almost half of respondents (48%) have yet to think about how or even if they will communicate the pay ratio to employees. About four in 10 (39%), however, are preparing leadership to respond to employees’ questions. Less than two in 10 respondents (16%) are prepping managers to have discussions with employees, while 14% created a detailed communication plan to educate employees. A similar number are not planning to say anything to employees.
When asked whose reaction to the pay ratio disclosure brings the most concern, one half cited their employees. Twenty percent said they were most concerned about media reaction, followed by their shareholders (16%). Very few were concerned over the reaction of customers or CEOs.
Companies required to comply with this rule need to think carefully about how they will communicate their pay ratio to employees. Perhaps unexpectedly, the number they need to worry about more is not necessarily the salary of the CEO, but rather that of the median employee. Most US employees don’t have a problem with their CEO earning many times more money than they do, but they do have a problem with being paid less than their peers for reasons they don’t understand.
Calculating and disclosing a median salary immediately reveals to half of your employees that their pay is “below average” for the organization, and that might make them feel undervalued. At very least, many employees will want to know why their salaries stand where they do relative to those of their peers. If this communication is not managed thoughtfully, the disclosure of the median employee salary could damage morale and lead employees on the lower half of the grid to demand raises. Yet as the Willis Towers Watson survey indicates, most companies don’t have a robust strategy for communicating their pay ratio.