Here come the ratios: advice for Boards and Compensation Committees on the challenges of disclosing CEO/employee pay ratios.

Author:Shaw, David
Position:SPECIAL FOCUS: EXECUTIVE COMPENSATION 2016 REPORT
 
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The vast majority of Say on Pay proxy votes have been approved by shareholders, which is a strong indication that shareholders think that executive compensation is just fine. But the other shoe is about to drop, which will expose many publicly held companies to increased CEO pay scrutiny by the media, politicians and their own employees.

The impending disclosure of CEO to median employee pay ratios will create unique challenges for Compensation Committees, Boards and executive management. On or after the first fiscal year beginning January 1, 2017, companies will begin presenting the ratio of their CEO's pay to the median employee, for consumption by shareholders, media, politicians and, of course, their own employees. Directors & Boards spoke to three compensation experts, to get their views and advice for the board on dealing with the publication of pay ratios, and other issues of concern to compensation committee members.

All three experts agreed that shareholders, and particularly institutional shareholders, will have little to no reaction to the disclosure of pay ratios. "The vast majority of institutional shareholders understand executive compensation, labor markets, and the influence the CEO has in creating shareholder value and will not overreact to the pay ratio information," says Steve Pakela, managing partner at Pay Governance LLC. "They understand the impact of globalization and low-cost labor markets and how that would influence the pay ratio from company to company."

"As a general matter, most shareholders will likely not have a strong reaction," agrees Doreen Lilienfeld, Practice Group Leader of the Compensation, Governance & ERISA Group for Shearman & Sterling LLP. "Even the SEC conceded in its release that it's not generally possible to compare one company to another, and that the discretion awarded to companies will cause great variations. Shareholders have had a thorough picture for over a decade on senior executive compensation." For Belen Gomez, Director of Research and Strategic Partnerships for Equilar, shareholders "may find the statistic interesting, but I don't see the value delivered to shareholders by this disclosure. The ratio will confirm what we already know. CEOs are paid several times more than the average employee. That's not new information. I don't believe new insight is gained by calculating the actual ratio."

That's not to say that there won't be shareholder reaction. As Pakela notes, "I do think these...

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