The NASPP Blog

Our Executive Director, Barbara Baksa, has dedicated a couple of blogs (“CEO Pay Ratio Disclosure Rules” and “More on the CEO Pay Ratio Disclosure Rules“) to helping all of us understand the new CEO Pay Ratio disclosure rules that were adopted by the SEC last month. Although the new disclosures aren’t imminent, companies still need to prepare. The mechanics of that has already been covered here in the NASPP Blog, so today I’m going to cover some of the more philosophical aspects of the new CEO pay ratio disclosure rules.

Another in a Long Line of Changes?

We’ve seen a lot of changes to executive compensation requirements and related disclosures over the past several years. Dodd-Frank’s Say-on-Pay gave shareholders a stronger voice when it comes to executive compensation matters. Last month the SEC adopted final CEO Pay Ratio disclosure rules that essentially require public companies to disclose the ratio of CEO pay relative to the pay of a median employee. Some are wondering – is this yet another attempt to reign in executive compensation?

The Real Impact?

One question that arises from all these changes – what has the true impact been on executive compensation? Have oversized, outsized, CEO packages become a distant memory? Many experts don’t seem to think so as of yet. The question then becomes, will the new CEO pay ratio disclosure rules really do anything to right-size executive pay? One of my favorite assessments of the situation came from a New York Times article (“Why Putting a Number to C.E.O. Pay Might Bring Change“) on the subject, which quoted Charles Elson, professor of finance and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware as saying,“The pay ratio was designed to inflame the employees. When they read that number, employees are going to say, ‘Why is this person getting paid so much more than me?’ I think the serious discontent will force boards to reconsider their organizations’ pay schemes.”

Shareholders have had more of a say for a while now. The latest approach seems to be to give shareholders (but really employees) a very simple number to explain how the CEO’s pay relates to that of the “median” employee – which in the employee’s case would undoubtedly cause them to compare their own pay to not only the CEO, but that of their median peer. I can see where this may lead – it’s quite possible many organizations will have incensed employees, especially those who realize their pay is below that of the median employee. In addition to preparing for the mechanics of the disclosures, companies should be thinking about how to handle the optics of the disclosure with their employees. It may be time to consider some changes to compensation programs now, in advance of the disclosure. If companies do anticipate some delicate situations as a result of the disclosure, they should craft a communication strategy well in advance. The earlier you get ahead of the curve on this one, the better. The last thing needed is a hit to employee morale.

There are no pay ratio disclosures yet, so it’s hard to tell just how large the pay ratios will be. According to the same New York Times article cited above, a 2014 study by Alyssa Davis and Lawrence Mishel at the Economic Policy Institute, a left-leaning advocacy group in Washington, showed that chief executive pay as a multiple of the typical worker’s earnings zoomed from an average of 20 times in 1965 to almost 300 in 2013.

For Some CEOs, Pay is Not the Most Important Thing

Not all CEOs need the optics of a pay ratio disclosure to evaluate the appropriateness of their compensation. Earlier this week, the CompensationStandards.com blog shared the story of a CEO who actually returned his RSU to the company, saying that “he does not believe that he should receive such an award unless Plum Creek’s stockholders see an increase in their investment return.” The estimated value of the RSU shares that were handed back to the company was about $1.85 million. From the appearance of it, the company’s board awarded the CEO a retention RSU grant. Several months later, facing tough economic times and lower than hoped company performance, the CEO approached the board and basically said he’s giving back the award because he didn’t deserve it. So clearly there are great examples of CEOs who are really focused on making sure their pay truly aligns with performance. I’d be interested to see the CEO pay ratio disclosure for that company, but we’ve still got quite a while for that – until the 2018 proxy season.

It’s not too early to start planning for the disclosure and evaluate current compensation practices and communication opportunities.

-Jenn