While many companies continue to have concerns about the mechanics of complying with the new CEO pay ratio disclosure rule — gathering the pay data, choosing the right sampling approach and identifying the median employee — even more are concerned about explaining the pay-setting process to employees and about how their pay ratio will look in comparison to other companies’ ratios. These are among the key findings of an online poll of almost 600 corporate compensation professionals conducted during Towers Watson’s September 17 webcast exploring the implications of the CEO pay ratio disclosure.
As Figure 1 shows, the top concern among those polled was how their CEO pay ratio will compare to other companies’. This finding was in sharp contrast to a similar poll we conducted in late 2013 after the Securities and Exchange Commission (SEC) first proposed regulations to implement Dodd-Frank’s CEO pay ratio provision, which requires companies to disclose the ratio of their CEO’s pay to that of their “median employee.”
Figure 1. Companies’ top concerns about complying with the CEO pay ratio disclosure
In that earlier poll, companies were far less concerned about how their pay ratio might compare to other companies’ ratios, with only 31% citing that issue among their top concerns (respondents could select multiple concerns). Levels of concern about the mechanics of compliance increased modestly over the two polls. This suggests that, while the complexity of gathering the necessary payroll data from far-flung operations and identifying the median employee remain a concern, companies are beginning to focus more on the potential reputational implications and communication challenges of explaining their pay structures to shareholders and other stakeholders as the effective date of the requirement draws closer.
The employee communication challenges also loom large in the recent poll, with half of the respondents citing that issue among their top concerns. One of the key unknowns in the pay ratio disclosure is how employees will react when they begin comparing their compensation not only to their company’s CEO, but to the median employee’s pay. As explored on last week’s webcast, employee perceptions that they’re paid fairly are strongly linked to enhanced engagement and retention.
Webcast attendees were also polled on how well their employees understand how their pay is set. Only a third of the respondents agreed that their employees understand why they get paid what they get paid, while a slightly larger percentage (37%) disagreed. Clearly, many companies have more work to do to equip managers and supervisors to discuss the pay-setting process and educate employees about how their pay structures are designed and why they are fair. (For more on the employee implications of this new disclosure requirement, see “Could the CEO Pay Ratio Disclosure Lead to Employee Misunderstanding and Lost Productivity?” Executive Pay Matters, August 7, 2015.)
As we saw in another recent Towers Watson survey, relatively few companies at this point have a good handle on what they’ll need to do in order to comply with the final pay ratio disclosure rules. In fact, only 17% of those polled September 17 agree that they understand all of the costs, effort and data that will be needed to comply, while almost two-thirds (65%) disagreed. In a survey of 170 compensation professionals in U.S. companies conducted last month, only 48% agreed that their companies had identified the data they’ll need and know how they will capture it to calculate the pay ratio, while even fewer (41%) say they’re prepared for how the disclosure will affect employee perceptions of their pay.
As we discussed on last week’s webcast, Tower Watson recommends that employers begin the planning process now to develop a comprehensive employee communication strategy around pay leading up to the CEO pay ratio disclosure. As part of that strategy, companies should review and, if necessary, revise their employee value propositions and rewards communication efforts to enhance transparency and foster greater employee understanding and engagement. For example, those than haven’t already done so should consider introducing a total rewards statement and portal to better communicate the value of the employee pay package.
To listen to a recording of our September 17 webcast on the pay ratio, click here.
Kate Van Hulzen leads Towers Watson’s Communication and Change Management practice globally. Steve Seelig is a senior regulatory advisor in Towers Watson’s Research and Innovation Center in Arlington, Virginia. Paul Platten leads the firm’s Rewards, Talent and Communication business globally. Email firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com.