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Category Archives: Proxy Disclosures

November 30, 2017

CEO Pay Ratio: Planning for Employee Reactions – Part 2

A few weeks ago, in the NASPP Blog entry “CEO Pay Ratio: Planning for Employee Communications,” I wrote about planning to communicate with employees on the topic of the upcoming CEO pay ratio disclosure. Since my initial post on this subject, I’ve come across some helpful content that is further food for thought when contemplating a communication strategy.

I keep hearing that companies have a range of emotions about communicating around the disclosure. In particular the concept of discussing the median employee aspect of the disclosure seems to trigger words like “panicked,” “petrified,” and “concerned.” It seems many companies do worry about how their employees will react to information about the median employee’s compensation.

Two recent blog posts by Margaret O’Hanlon, CCP further explore what you should and shouldn’t say to employees about the CEO pay ratio disclosure (thanks to the’s Advisor’s Blog for leading me to this information.) Some of the ideas O’Hanlon explored are:

In her first post (“Imagine CEO Pay Ratio Communications Going Well“), O’Hanlon suggests that instead of focusing on a panicked state or reluctance to communicate about this (and asking yourself the question “What good can come of this?”), ask yourself “What can I make of this?” Changing your focus should pave the way to different insights.

She also suggests imagining employees approaching the disclosure with the following reactions:

  • Not immediately overreacting to the numbers
  • Being willing to listen to the rationale for the numbers with an open mind, even though they are skeptical (or more)
  • Being able to spend a limited time mulling over with their colleagues what they have heard
  • Not going on social media to comment on the announcement

In her second post (“Imagine CEO Pay Ratio Communications Going Well – Part 2“), O’Hanlon offers a number of concrete suggestions for talking about the ratio with employees. Here are a few of her suggestions:

  • Prepare your employees. If you don’t, the CEO Pay Ratio and median employee information is bound to be a shock.
  • Use end-of-the-year focal review and merit pay communications. Articulate, repeat and reinforce what you do to make sure employee pay is competitive, how your practices are fair and how employee salaries are only one part of your company’s whole reward package.
  • Use people not technology. Distancing the message from the personal will leave your company open to employee claims that leadership is ducking responsibility. Identify a spokesperson to present the details of the CEO Pay Ratio, back it up with email or intranet information, but be sure that your communication strategy gives employees a chance to discuss their reaction with someone that they can open up to.

O’Hanlon mentions some other important idea in her blogs; they are definitely worth a read.

The CEO Pay Ratio disclosure time frame will be here before we know it, and companies are running out of time to take advantage of some of these proactive communication opportunities. It’s time to get ahead of the disclosure, imagine this going over well with your employees, and take realistic steps in advance to ensure the messaging results in a positive experience for employees, rather than a communication fail.

– Jennifer

November 2, 2017

CEO Pay Ratio: Planning for Employee Reactions

There’s been much buzz around the first round of CEO Pay Ratio disclosures, to occur beginning in the upcoming proxy season. While many companies are busily preparing for the disclosure itself, attention must also be given to other important tasks that stem from the disclosure – like preparing to communicate with the media, shareholders and internal employees.

According to a recent Willis Towers Watson poll, while most companies said employee reaction to the Pay Ratio disclosure is a concern, 48% of respondents said they had not taken any action to prepare for employee communications. Willis Towers Watson summarized their findings as follows:

“Despite the concern, nearly half (48%) of respondents haven’t considered how or even if they will communicate the pay ratio to employees. Only 14% have created a detailed communication plan to educate employees, and a similar number are not planning to say anything to employees. Just 16% are prepping managers to be able to discuss the results of their pay ratio with employees, although 39% are preparing leadership to respond to employees’ questions.

This gap between concern and communication comes as the SEC pay ratio disclosure rule’s implementation date in early 2018 quickly approaches.”

We are entering a time of year when many stock plan administrators and corporate compensation professionals spruce up their employee communications. There are year-end tax withholding and reporting communications, some companies provide communication around annual compensation, new benefits, and other information. Many companies may be thinking that they will communicate about the CEO Pay Ratio disclosure after the disclosure is made, if at all. May I suggest that now is the time to start laying the groundwork for those communications. If you’re already going to be communicating to employees about various aspects of their compensation and benefits, this is a prime opportunity to raise more awareness about what they have, why they have it, and the basis for their current compensation. Here are some ideas to consider in crafting a communication strategy around the disclosure (now is not too early to think about this!):

Use existing planned communications to include messaging about the CEO Pay Ratio before the disclosure.

Communicating pre-proxy filing is going to lend a key opportunity to share information about the basis and rationale for current pay before employees digest the actual CEO Pay Ratio figures. Education about existing compensation and corporate compensation philosophies ahead of time could aid in providing the employee the means to better understand why they may fall above or below the median, rather than leaving it to “surprise” them and filling an information void with imagination or assumption. Additionally, employees will have access to data about peer companies at the same time you do, likely well before you have time to craft further communications post-disclosure. Without a foundation of information and understanding in place to foster a belief that their current pay is fair, employees may be more likely to perceive differences to peer companies as negative.

Plan for post disclosure communications that will incorporate comparisons with other companies into your broader pay story. 

You won’t know about the ratio of peer companies until after the disclosures are made. Once you have that information in hand, it will be time integrate that information into your own messaging to employees. Pay is most often not just about dollars in a paycheck and employees will need to hear more about about what makes their pay package fair compared to peer companies that may have different CEO Pay Ratios. Is there a large equity component? Does your company’s ESPP discount stand out above other companies? Are there other benefits that need to be considered in understanding the overall package – including the parts not incorporated into the Pay Ratio calculation?

With year-end communications on the horizon, this is a great opportunity to integrate messaging that will help employees understand their bigger compensation picture.



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October 31, 2017

Contractors and the CEO Pay Ratio

When I posted the results of the NASPP’s quick survey on the CEO pay ratio, the data I got the most questions on were the results for how companies are handling independent contractors in the calculation. When we conducted that survey, the SEC’s guidance seemed to indicate that some individuals that are treated as contractors for other purposes might be considered employees for purposes of the CEO pay ratio. That has now changed.

The SEC’s Original Position

The SEC’s original position was that the final rules permitted the exclusion of workers who are employed by and have their compensation set by an unaffiliated third party (e.g., leased employees). A CDI issued by the SEC in October 2016 clarified that some workers who are considered nonemployees for tax purposes might be considered employees for purposes of the CEO pay ratio.

The SEC’s Reversal

In the guidance issued in September 2017 however (see the NASPP alert “SEC Issues Guidance on CEO Pay Ratio“) the SEC relaxes their original position significantly, stating:

We believe it would be consistent with Item 402(u) for a registrant to apply a widely recognized test under another area of law that the registrant otherwise uses to determine whether its workers are employees.

In addition, the CDI issued on this question in 2016 has been withdrawn and the new guidance seems to suggest that reliance on the determination of employee status for tax purposes is sufficient to establish employment status for the CEO pay ratio.

The July-August issue of The Corporate Counsel notes that in addition to the test used under the US tax code (which is fairly complex) companies might rely on the determination under the Fair Labor Standards Act (FSLA) or other laws.

A Shift in Administration = A Shift in Position?

The SEC notes in Release No. 33-10415 that the shift in their position is due to concerns expressed by commenters. I don’t doubt that this is the case, but I also wonder if it is partly attributable to the Trump administration’s pro-business agenda. Obviously, one way for companies to improve their CEO pay ratio is to contract out lower paid positions (e.g., in gig-economy type arrangements). The SEC’s original position was an obstacle to this approach; the new position is much less so.

– Barbara

P.S.—I removed the chart on how companies are handling contractors from the quick survey results (in case you are wondering why you can’t find it). Now the that SEC’s position has been changed, companies are likely changing their approach and I don’t think our data on this particular question is reliable.

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October 25, 2017

Update on the CEO Pay Ratio Disclosure

Now that the NASPP Conference is over and we’ve just about concluded our Meet the Speaker series for this year, it’s time for me to get back in the habit of writing blog entries.  Today I have some quick updates on the CEO pay ratio disclosure.

SEC Won’t Delay the CEO Pay Ratio Disclosure

Readers will recall that earlier this year, the SEC solicited comments on whether to delay implementation of the CEO pay ratio disclosure (see “What’s Going on With the CEO Pay Ratio” for a summary of the comments received). Based on comments made by the SEC Director of Corp Fin back in September, however, it doesn’t look like a delay is going to happen. Here’s what Broc Romanek had to say about it in his blog:

It’s big news—although not surprising if you’ve been paying attention. At the ABA Annual Meeting, Corp Fin Director Bill Hinman said that the SEC won’t be delaying the implementation of pay ratio (as always, speaking for himself & not the Commission). Bill also mentioned that Corp Fin would be issuing guidance on the pay ratio rules at some point in the near future. It’s still possible that Congress could delay—or repeal—the pay ratio rule. But I wouldn’t make that bet…

Speaking of a Repeal

In a 232-page report issued in October, the Treasury Department calls for the repeal of the CEO pay ratio, among a host of other reforms. Unfortunately, this requires Congressional action so don’t hold your breath (and don’t stop your preparations for making the disclosure).

SEC Issues Guidance on Calculating the Ratio

We posted an alert on this back in September but in case you missed it, the SEC has issued some significant and helpful guidance on calculating the CEO pay ratio. Key areas addressed by the guidance include:

  • Use of reasonable estimates
  • Reliance on internal records to determine compensation
  • Determining whether contractors need to be included in the ratio
  • Relief and examples for companies that want to use statistical sampling to determine the median employee

– Barbara


September 6, 2017

CEO Pay Ratio: Decisions, Decisions

Today I have part 2 of my series reporting the results of the NASPP’s quick survey on how companies are preparing for the CEO Pay Ratio. In this infographic, I look at the various decisions companies have to make as they identify their median employee. Want to know more? See Part 1 and the full survey results.

The infographic is interactive; hover over the graphs to see the data labels. Can’t see the infographic? Click here to view it on a separate web page.

CEO Pay Ratio Part 2

August 31, 2017

CEO Pay Ratio: Progress and Concerns

For today’s blog entry, I have a handy infographic illustrating some of the results from the NASPP’s recent quick survey on the CEO pay ratio. Stay tuned—I’ll have more data next week.

The infographic is interactive; hover over the graphs to see the data labels. Can’t see the infographic? Click here to view it on a separate web page.

CEO Pay Ratio

July 11, 2017

Early CEO Pay Ratio Disclosures – Part 1

There aren’t a lot of companies rushing to disclose their CEO pay ratio before they have to, but in his blog on, Mark Borges of Compensia highlights a few that he has found (“More CEO Pay Ratio Disclosures“).

Not surprisingly, none of the disclosed ratios are excessive; for all but one, the CEO’s pay is less than 20 times the median employee’s pay. Companies with excessive ratios probably aren’t keen on making the disclosure early. This week (today and Thursday), I have a few highlights from the disclosures, starting with the companies with the two lowest ratios. (I’ve linked each company’s name to its relevant proxy statement; you can find the disclosures easily by searching on the phrase “pay ratio” in the proxies.)

Adams Resources & Energy

Adam Resources & Energy’s ratio is impressively low at 5.7 to 1. Their median employee pay was about $70K but their CEO made only $400K, hence the low ratio (they do not appear to issue equity to their executives). They note in the disclosure that they have 654 employees, most of whom are truck drivers (they are in the oil and gas industry and transport liquid chemicals). They also note that they annualized pay for employees who only worked part of the year and they excluded employees on leave.

The proxy further notes that they excluded their 401(k) and medical benefits from the ratio—and with a ratio of 5.7:1, why not? Including those benefits will increase the pay disclosed for the median employee and employees comparing themselves to the median probably won’t think to include those components in their own compensation. But for companies that don’t have the luxury of such a low ratio, including those components might help bring down their ratio since the 401(k) and medical benefits are likely to be higher percentage of the median employee’s pay than the CEO’s pay.


NovaGold is in gold mining and has only 13 employees, including their CEO, which must make it pretty easy to find their median employee. Because they have an even number of employees, they note that they averaged the compensation for the sixth and seventh employees to come up with the median compensation (this also handily allows them to avoid disclosing the actual compensation of any one of their employees—potentially a concern with there being only 12 of them).

Their ratio is 13.5 to 1 and their median employee’s pay is around $400K, making them a company of fairly well-paid employees (well, at least half of the employees). Their disclosure includes a list of pay components that were included in the calculation. Besides the obvious (salary, bonuses, equity), they also included 401(k) match, ESPP match, life insurance premiums, auto allowance, and reimbursement of executive physicals.

Stay tuned: on Thursday I’ll look at two more early disclosures.

– Barbara

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April 25, 2017

IBM’s Premium Priced Options

I was recently asked to comment on a premium priced option granted to IBM’s CEO for an article in Bloomberg (“IBM Says CEO Pay Is $33 Million. Others Say It Is Far Higher“). There are a number of things that I find interesting about the grant.

The Option Grant

The option was granted to IBM’s CEO and is for a total of 1.5 million shares, granted in four tranches. Each tranche cliff vests in three years and has a different exercise price, ranging from $129.08 to $153.66 (premiums ranging from 5% to 25% of FMV).

The option was granted in January of last year, about a month before IBM’s stock price hit its five-year low. IBM’s stock price recovered to the point where all four tranches were in the money around mid-July and the option has mostly been in-the-money since then. IBM’s stock is now trading at around $160 (down from a three-month high of around $180). Either the options were very effective at motivating IBM’s CEO or IBM didn’t set the premiums high enough (or both).

The option doesn’t vest until January 2019 and we all know what can happen to any company’s stock price in that period of time, so there’s no guarantee that the option will still be in-the-money when it vests. The option has a term of ten-years, however, so if it isn’t in-the-money, there’s still plenty of time for the stock price to recover before it expires.

A History of Premium-Priced Options

This isn’t IBM’s first foray into premium priced options. From 2004 to 2006, IBM granted a series of stock options to its executives that were priced at a 10% premium to the grant date market value. In 2007 they dropped the practice and granted at-the-money options, then they ceased granting options altogether. This is the first option IBM has granted since 2007.

The Valuation Mystery

The reason I was asked to comment on the option is that the value IBM reported for the option (which is also the expense IBM will recognize for it) is significantly less than amount that ISS determined the option was worth. IBM reported that the option has a grant date fair value of $12 million but, according to the Bloomberg article, ISS puts the value at $29 million.

It’s not unusual for there to be variations in option value from one calculation to the next, even when all calculations are using the same model and the same assumptions. But a variation this large is surprising. Both IBM and ISS say they are using the Black-Scholes model, so the difference must be attributable to their assumptions. If I were to guess which assumption is causing the discrepancy, my guess would be expected term. The dividend yield and interest rate aren’t likely to have that much of an impact and it seems unlikely that there would be significant disagreement as to the volatility of IBM’s stock.

Why Price Options at a Premium?

The idea behind premium-priced options is to require execs to deliver some minimum amount of return to investors (e.g., 10%) before they can benefit from their stock options. It’s an idea that never really caught on: only 3% of respondents to the NASPP/Deloitte Consulting 2016 Domestic Stock Plan Design Survey grant them.

I’ve never been a fan of premium-priced options. I suspect that most employees, including execs, assign a very low perceived value to them (or assign no value to them at all), so I doubt they are the incentive they are supposed to be. And the reduction in fair value for the premium is less than the amount by which the options are out-of-the money at grant and far less than the reduction to perceived value, which makes them a costly and inefficient form of compensation.

– Barbara

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March 21, 2017

Dodd-Frank Repeal Losing Steam?

Back in February, it seemed like repeal of the CEO pay ratio disclosure was only a matter of time and that when it goes, it might take a lot of the rest of Dodd-Frank with it (see “More Challenges to Dodd-Frank,” February 9). But now the GOP’s push for a repeal seems to be losing steam.

Piwowar’s Request for Comments

As I noted on February 9, SEC Chairman Piwowar has requested comments from companies that have encountered unexpected challenges in implementing the CEO pay ratio. Comments are posted to the SEC’s website as they are received: so far, the SEC has received over 60 individual comment letters and a form letter (of which there have been over 3,000 submissions). The overwhelming majority of comments, including the over 3,000 form letters, are opposed to a further delay in the implementation of the rule. Given the veritable wealth of information on executive pay that is included in the proxy, it is surprising to me that anyone feels they need to know the ratio of CEO to median employee pay to figure out that CEOs are overpaid but apparently a lot of people really do want to know this. Go figure.

If you have encountered challenges (expected or unexpected) in preparing for the disclosure, now is a good time to tell the SEC about them. Comments are due by March 23 but, in my experience, most governmental agencies will still consider comments received after the deadline. If you are interested in reading about the challenges other companies have encountered, check out the letters from Borg Warner Flushing Financial, Stein Mart, and Finish Line.

Not a Priority?

Trump’s executive order requiring review of all “existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies” seemed to target Dodd-Frank along with other legislation (see “Dodd-Frank Under Scrutiny“). But, as reported in an article on Bloomberg (“Dismantling Dodd-Frank May Have to Wait“), repeal of Dodd-Frank was notably absent from Trump’s priority-setting speech to Congress on February 28.

Financial Choice Act a Long Shot

The Bloomberg article also noted that there is significant opposition to the Financial Choice Act. This act would repeal or weaken much of Dodd-Frank, but one analyst quoted in the article gives it only a 10-20% chance of passing.

It’s Not Over Until the Secretary of the Treasury Sings

The Executive Order calling for a review of all existing laws, regulations, etc. also requires the Secretary of Treasury and the Financial Stability Oversight Council to report their findings to the Administration by early June. Until then, there’s still a chance the rule may be delayed or repealed.

– Barbara

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February 9, 2017

More Challenges to Dodd-Frank

As I mentioned in my blog on Tuesday, we are starting to see some movement towards repeal or revision of at least parts of the Dodd-Frank Act.  The Administration’s executive order isn’t the only action that has been taken; here are a couple of other developments:

CEO Pay Ratio—The SEC Weighs In

On Monday, February 6, Acting SEC Chair Michael Piwowar issued a statement on the CEO pay ratio disclosure. Piwowar requests comments on “unexpected challenges that issuers have experienced as they prepare for compliance with the rule and whether relief is needed,” and encourages detailed comments to be submitted within 45 days. Piwowar also notes that he has directed the SEC staff to “reconsider the implementation of the rule based on any comments submitted and to determine as promptly as possible whether additional guidance or relief may be appropriate.”

While that’s pretty vague, is does indicate that, in addition to the Secretary of the Treasury and the Financial Stability Oversight Council, the SEC is also looking at the CEO pay ratio rule. Even so, it’s hard to say what this means. As we all know, and as an article in the Wall Street Journal notes (“GOP-Led SEC Considers Easing Pay-Gap Disclosure Rule of Dodd-Frank“), it is difficult for the SEC to move quickly on matters like this:

Republicans on the SEC could be stymied by the commission’s own procedures on the pay-ratio rule because undoing a regulation is handled by an often lengthy process that is similar to creating one. It also is difficult for the SEC to delay it outright, because of the commission’s depleted ranks. There are just two sitting commissioners—Mr. Piwowar and Kara Stein, a Democrat—meaning the SEC is politically deadlocked on most matters. Ms. Stein on Monday signaled opposition to efforts to ease the pay rule. “It’s problematic for a chair to create uncertainty about which laws will be enforced,” she said.

And Then There’s Congress

An article in Bloomberg/BNA reports that the Financial Choice Act is likely to be reintroduced into Congress this year (“Dodd-Frank Rollback Bill Expected in February, Duffy Says“). Originally introduced last year, this bill would repeal or restrict major parts of the Dodd-Frank Act, including reducing the frequency of Say-on-Pay votes, limiting application of the clawback provisions, and repealing the CEO pay ratio and hedging disclosures. Jenn Namazi blogged on the Act last year (see “Post Election: Things to Watch – Part I” and “Part 2“).

The Financial Choice Act is bigger than Dodd-Frank. The bill would also require a joint resolution of Congress before any “major” rulemaking by the SEC and a number of other agencies could go into effect. Mark Borges notes in his blog on (“Acting SEC Chair Weighs in on CEO Pay Ratio Rule“) that the bill is expected to require the major proxy advisory firms to register with the SEC and, among other things, disclose potential conflicts of interest.

Poll: What Are You Doing?

It’s hard to know what to do in response to all this. Preparing for the CEO pay ratio disclosure requires a lot of time and resources, which most on the corporate side would view as wasted if the disclosure is eliminated. But if the disclosure isn’t eliminated, stalling preparations now could result in an implementation time crunch.

In his blog on (“As Predicted—Hitting the Pause Button on the CEO Pay Ratio Rule“), Mike Melbinger says: “Postponement and revision of the rule seems likely. Now might be a good time to stop spending time and money on this calculation.” Take our poll to tell us what your company is doing (click here if the poll doesn’t display below).

– Barbara

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