The NASPP Blog

I’ve been listening to the recordings of the sessions at the 22nd Annual NASPP Conference.  And frankly, I’ve been surprised—pleasantly surprised by how much I’ve learned.  All of the sessions I’ve listened to have been very enlightening, even the ones where I thought I already knew everything on the topic.

Take the session on pay-ratio disclosure. I wasn’t really sure how interesting this session would be, since the rules haven’t been finalized yet. I mean, really, how much could there possibly be to talk about?  But it turns out that the panel had a lot to say and all of it was very interesting.  So for today’s blog entry, I feature five things I learned from listening to the panel, “Pay Ratio (& Other Issues): Pointers from In-House.”

1.  Run a Test Calculation.

If you haven’t already, you really should perform a test of how you will calculate your CEO pay ratio.  It might prove to be harder than you expect.  Patty Hoffman-Friedes of Seagate Technology noted that they actually didn’t get very far in their test, but they are now much more prepared for the final calculation.  Things you haven’t thought about come to light. Patty noted that Seagate provides shoes to employees in China and they had to think about whether those should be included in compensation.

2.  How Will the Ratio Be Used?

The panel spent some time discussing how the ratio will be used by ISS and investors.  Although it isn’t clear how ISS will use the disclosure, everyone felt that they will eventually use it.  But, as Patty noted, perhaps the bigger question is how the NY Times will use the disclosure.

Stacey Geer of Primerica brought up a concern that hadn’t occurred to me: how employees will react when they realize they are below the median.  Valerie Ho from ICF explained that she is planning to educate her HR business partners on the ratio, so that they can be prepared to address employee inquiries.  She will also be looking to them for feedback on what employees are saying about the ratio.

3.  Your Peers Are the Wildcard.

As moderator Barry Sullivan of Semler Brossy noted, the first year the rules are in effect will be a little bit like the Wild West. Everyone will have to decide on an approach and draft their disclosure without really knowing what their peers will be doing and how their ratio will compare to that of their peers.

Panelists recommend using your outside advisors—attorneys and compensation consultants—for a sanity check, since they will at least have some insight into trends and practices among their clients.  Ask for feedback on your methodology and help with drafting the disclosure.

4.  Year-Over-Year Comparisons Are Likely to be a Challenge.

Several panelists noted concerns about how much variation will exist in the results from one year to the next. If the median employee shifts from the United States to another country, if the company acquires another company, if there is a significant reduction in force, if a new CEO steps in—all of these events, and lots more, could cause significant year-to-year variability in the ratio, which could be confusing for investors and the media.  Before you decide on a methodology, make sure you run comparisons of the results for the past several years, so you can get a feel for how much the number changes from one year to the next.  And keep this potential for variability in mind when drafting the disclosure.

5.  Thorough, Accurate, Ease of Calculation, Reliable, and Reproducible (and Defensible)

The panel touched on the various approaches companies can take to find the median employee.  Primerica has 1800 employees located in the US and Canada; Stacy Geer can download W-2 income to a spreadsheet and calculate the median in about ten minutes. But fellow panelist Charles Grace of EMC—with 60,000 employees in 75 countries and upwards of 30 payroll systems—has a much more involved decision-making process.  Include all employees in the calculation or use statistical sampling? What compensation to include?  Patty Hoffman-Friedes noted that the range of approaches Seagate is considering could involve using salary, using actual wages earned, including benefits, or including all elements of compensation (even shoes for those employees in China).

Patty explained that Seagate has five touchstones that they are using to evaluate the methodologies: thoroughness, accuracy, ease of calculation, reliability, and reproducibility.  Barry Sullivan noted that a sixth is defensibility.  I think these are great touchstones for any company to consider as it decides on a methodology.

– Barbara