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CEO Pay Ratio Year 2: Investors Chime In

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January 10, 2019 | Jennifer Namazi

CEO Pay Ratio Year 2: Investors Chime In

Last October I blogged about some of the considerations public companies are facing as we approach the second year of the CEO Pay Ratio proxy disclosure (“CEO Pay Ratio: Will Year 2 Be More Complex?”) Some of the present evaluation on the topic centers on questions companies should be asking internally about their pay practices and employee population in determining if additional or updated disclosures are needed in year two. As we approach a new proxy season, it seems that institutional investors are also doing some contemplating of their own, generating questions and suggestions on the disclosure and offering them up to the compensation committees of Fortune 500 companies.

A recent Willis Towers Watson blog by Steve Seelig, Jamie Teo and Rich Luss (“Reasons to consider expanded Year 2 CEO pay ratio disclosures”) describes a letter sent to compensation committees of Fortune 500 companies by 48 institutional investors requesting that the companies disclose additional information on their workforce compensation practices. Seelig et al write that “The letter posits that since “disclosure of the median employee’s pay provides a reference point for understanding the company’s workforce,” companies should move “to help investors put this pay information into the context of your company’s overall approach to human capital management” with more expansive disclosure.”

These letters from shareholders come just as companies are evaluating what (if anything) has changed since their year 1 disclosure and whether a year 2 disclosure is needed (based on information and guidance already provided by the SEC). Willis Towers Watson identifies two questions companies should now be asking in considering whether a year 2 disclosure should be made:
  1. Do the SEC disclosure rules require them to provide more information on why their pay ratio changed or stayed the same?
 
  1. Does the shareholder letter provide an opportunity to provide useful context to shareholders about workforce pay practices that can enhance a company’s communication efforts to shareholder, their employees and the media?
The answers to those questions will depend largely on individual company circumstances and disclosure decisions may vary from company to company.

In my original blog on this topic, I covered many of the factors that determine whether a year 2 disclosure may be needed, based on existing guidance from the SEC. Those evaluating factors still stand, and the newest added layer centers on whether additional disclosures on workforce pay practices should be made as requested in the shareholder letter. As the questions and potential answers to those questions are being tossed around in compensation circles, we should see further guidance on potential workforce pay practice disclosures in the coming weeks.

I anticipate writing additional blogs on this topic as more analysis and information becomes available. What seems certain at this time is that year 2 of the pay ratio disclosure requirements won’t pass by quietly.

-Jennifer
 
 

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