Few boards would appreciate the recent national headline on Time.com: "This CEO Makes 900 Times More Than His Typical Employee."
The story focused on Marathon Petroleum's CEO's nearly $20 million compensation, the requirement this proxy season for corporations to report CEO pay, and how that compares to the median pay for employees.
In local news, the Kansas City Star covered the disclosures by calculating how long it would take an employee to earn one year of a CEO's pay. For example, Commerce Bancshares' median employee would need to work 90 years at 2017's pay to equal CEO David Kemper's $4.87 million.
Corporate leaders across the country have been preparing for the fallout from the new CEO pay ratio disclosure requirement, a rule that was part of the Dodd-Frank financial law. Unfortunately, it comes at a time when boards are facing pressure from many sides.
It's like a compensation "seesaw" directors are trying to balance, says Aubrey Bout, managing partner for Pay Governance, a compensation committee advisory firm.
Boards, he continues, are balancing the tension between motivating and retaining the CEO and pleasing all the other stakeholders, including employees, investors, proxy advisors, regulators, etc.
"I see boards agonizing; they're being pushed and they're nervous," he maintains. "We haven't seen this in a long time."
Quelling employee ire
There is a "heightened sensitivity to pay packages that could be deemed 'excessive,'" regarding executive and director pay, according to the recently released 2018 "Compensation Committee Guide," from corporate law firm Wachtell, Lipton, Rosen & Katz. (See box on managing compensation risk.)
The eye-popping headlines in the media were expected by many directors, but the top focus in the boardroom is on how employees will react to the news.
"When this first came up, one of the things my comp committees asked--all of them--was, 'How do we communicate this to employees?'" says Wendy Lane, a director for Willis Towers Watson, MSCI Inc., and Upm-Kymmene Oyj." Our first priority is employees because talent is the name of the game for any company."
Boards have been "vigilant" about figuring out how to share the information, adds Steve odland, CEO of the Committee for Economic Development who sits on the board of directors for General Mills, Inc. and Analogic Corporation.
"Boards need to be sensitive to it and there needs to be a communication plan," advises odland, a former CEO of Office Depot and AutoZone. "Sophisticated investors already understand it, so the issue is going to be employees of company."
The burden, he continues, is going to be on human resources departments. Boards should help HR think through how to handle pay disclosure and they need to make it clear, he adds, that compensation is market-based.
Indeed, given that many companies are growing and the stock market is strong, Pay Governance's Bout says he expects to see median pay for CEOs rise again this year, after increasing 4% in 2016.
"I'm seeing that CEOs definitely have leverage on their boards," he says. "Now we're at a point where CEOs are definitely bolder, and asking for bigger pay increases."
Tax windfall could mitigate disparities
When it comes to evaluating CEO pay, there are a lot of things on the minds of directors and comp committees, including the CEO pay ratio...