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CEO Pay Ratio: Planning for Employee Reactions

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November 02, 2017 | Jennifer Namazi

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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