The question of how to provide context for their CEO pay ratio proxy disclosure has been one companies have been turning to as they near completion of their calculation work.  One perspective on this issue has come from a recent ISS Position Paper that recommends companies include in their disclosure a comparison to peer group disclosures. We would make the case that taking an approach that focuses solely on placing the pay ratio in context for shareholders is likely at odds with the message companies want to communicate to their employees, which they’ve expressed to be their biggest challenge regarding the pay ratio. For more on this topic, see our article, "Employee reaction tops U.S. companies’ concerns over fast approaching, pay ratio disclosure rule", Executive Pay Matters, October 18, 2017. Moreover, we believe that the data that led ISS to its conclusions would lead far too many companies to conclude their pay ratios are too high, prompting them to provide unnecessary explanations that could trigger negative employee reactions.

Results of ISS Global Policy Survey are unclear

The ISS Position Paper cites the recent 2017-2018 ISS Global Policy Survey, stating that 63 percent of investor respondents (from a sample size of 121 institutional investors) indicate “that they would both compare ratios between companies and assess a company’s year-over-year changes.” We did not expect the former result regarding peer group comparisons since our clients have not heard that directly from their shareholders, and we disagree that those comparisons should be in this coming year’s proxy, for reasons we’ll outline below. Conversely, we’ve expected that shareholders would have concerns about expanding ratios in subsequent years.  Companies are trying to mitigate this issue by choosing a median employee with total compensation that will not vary from year to year. 

What should not be overlooked in this discussion is the fact that in its adopting release, the Securities and Exchange Commission (SEC) was fairly direct in its view on how shareholders should regard the pay ratio disclosure. When it adopted its flexible set of rules, that might yield different median pay calculations depending on the approach a company takes, the SEC stated:

Consistent with this understanding of the Congressional purpose of Section 953(b), we believe the final pay ratio rule should be designed to allow shareholders to better understand and assess a particular registrant’s compensation practices and pay ratio disclosures rather than to facilitate a comparison of this information from one registrant to another. As we noted in the Proposing Release, we do not believe that precise conformity or comparability of the pay ratio across companies is necessarily achievable given the variety of factors that could cause the ratio to differ. Consequently, we believe the primary benefit of the pay ratio disclosure is to provide shareholders with a company-specific metric that they can use to evaluate the PEO’s [principle executive officer’s] compensation within the context of their company.

We think that the SEC statement speaks for itself, and should have been noted by ISS in its position paper as an authority for companies to consider in determining whether to include a peer group comparison. We are also dubious that the data ISS cited are accurate and should be used by companies.

Our position

We cannot overstate this:  Bureau of Labor Statistics (BLS) data used in the ISS position paper greatly overstate employee pay levels, and should not be used to compare pay ratios published in company proxies. 

There are three reasons that we disagree with using the BLS data:

  • First, these ratios use averages rather than medians to determine U.S. employee earnings. For most companies, there is a skew in average pay data that means the pay ratio will not equal the median, and in many cases the average is likely to be significantly higher. 
  • Second, the BLS statistics appear to overestimate adjustments made to base wages to the Summary Compensation Table (SCT) total compensation, and use a load factor that amounts to over 40% of wages, which seems high to us. The BLS Employer Cost of Employee Compensation (ECEC), from which this load factor is derived, shows that half of the load factor includes the value of employer provided FICA contributions (not part of SCT pay) and the value of health benefit coverage (which could be included in SCT pay, but only if that value is also included for the CEO). ISS states “Since many companies are expected to include non-cash benefits in calculating median employee pay, we adjusted the BLS weekly wages by assuming that wages account for 69.6% of total compensation to an employee based on the BLS data on employer costs for employee compensation.” We simply don’t agree with this assumption. In our work with companies, we have found that most add back far fewer items of additional compensation to base pay for employees who are paid at or near the median of their employee base, which would make the true adjustment far lower than the adjustment ISS calculated.   
  • Third, the data are limited to U.S. workers only. Our experience with global companies reflects that in most cases the U.S. median is substantially higher than the global median when including compensation from outside the U.S., even after companies use the 5% de minimis rule. 

The combined effect of these three factors would cause companies to overestimate median pay in their industry, which would therefore underestimate the CEO pay ratios. For similar reasons, we think the data ISS published on size-adjusted, expected ratios for Fortune 500 and Russell 3000 companies also are likely to be misleading. This could cause companies with reasonable pay ratios to overreact and publish unneeded, potentially adverse explanations in their proxies.

We strongly caution any company from using this data to compare pay ratio with their peers. We think that this guideline is misleading and will cause an unwarranted overemphasis on disclosure and communications.

ISS disclosure suggestions will play poorly to employees

The ISS premise that companies should examine industry, company size and business mix when framing pay ratio disclosures against market dynamics seems reasonable enough. Its examples of how companies should disclose how their business strategy influences a potentially high pay ratio (e.g., offshoring may reduce costs but elicits a worse ratio) would be of interest to investors, without a doubt. However, we would argue that these issues have already been discussed and digested by investors reading the company 10-K and the Management Discussion & Analysis, so shareholders are well aware of the reasons for those strategic decisions.

ISS then argues that the narrative on the pay ratio is likely to be the most important aspect of the disclosure mandate as institutional investors look to understand the factors impacting CEO and employee pay, the drivers behind the board’s compensation-setting process, and how it reinforces the company’s management strategy. We believe that these arguments on the CEO pay side continue to be made in the Compensation Discussion & Analysis of the proxy, and so, have been addressed. As for the perspective on median worker pay, we agree that this should be the focus of the disclosure and have stated how to do so in a prior blog post, "The Do’s and Don’ts of CEO Pay Ratio Communications", Executive Pay Matters, September 12, 2017. However, we don’t see how relying on median pay numbers from the BLS statistics helps employees in any meaningful way. The downside of playing up company strategic decisions is that these disclosures run the risk of annoying employees, who will already be very focused on the perceived size of the ratio and the disclosure of median pay. 

ISS suggests that there are some key questions that both companies and investors may want to ask around 2018’s pay ratio disclosures:

  • “How does the company’s ratio compare with peer companies?” We discussed above why we disagree that disclosure will be useful for the vast majority of companies, at least in this first year. 
  • “What is driving any difference uncovered in the ratio? Is it the CEO’s pay, the median employee’s pay, or both?” Unless this disclosure is carefully crafted, we would be concerned that simply explaining why the CEO appears to be paid more than peers due to the vagaries of how pay is shown in the Summary Compensation Table will not be helpful when read by employees. The same applies for employee median pay that is below that of peers. Companies should point out circumstances where CEO pay may be higher for the year due to one-time grants, and how the ratio might look if those values were amortized, but we don’t think arguing the pay-for-performance issue is appropriate in this disclosure.
  • “Are there labor force issues, such as use of contractors, significant use of part-time employees, or offshore labor sourcing, that drive differences?” We don’t see any way that a discussion of these specific decisions will be well-regarded by employees. Worse perhaps, is that the media may have a field day highlighting these decisions to its U.S. readership, in a climate where terms like globalism and off-shoring are to be avoided in company communications. Certainly, more general references to how a company may be highly diversified and is global in nature, especially compared with peers, are appropriate subjects to disclose. But a balance must be struck between strategic business issues versus tactics that would be perceived negatively by the workforce.

Course of action

Companies should give careful consideration before adopting the ISS approach. The best disclosure for your company is going to be one that satisfies shareholders, assuming they are concerned about this disclosure, and it is consistent with the message you intend to send to your employees.


Jim Kohler 

Jim Kohler

Willis Towers Watson

Steve Seelig 

Steve Seelig

Willis Towers Watson

Richard Luss 

Rich Luss

Willis Towers Watson

Jim Kohler is a director of communication and change management with Willis Towers Watson. Steve Seelig is a senior regulatory advisor for executive compensation with Willis Towers Watson. Rich Luss is a senior economist with Willis Towers Watson.  Email,, or