There’s been much buzz around the first round of CEO Pay Ratio disclosures, to occur beginning in the upcoming proxy season. While many companies are busily preparing for the disclosure itself, attention must also be given to other important tasks that stem from the disclosure – like preparing to communicate with the media, shareholders and internal employees.
According to a recent Willis Towers Watson poll, while most companies said employee reaction to the Pay Ratio disclosure is a concern, 48% of respondents said they had not taken any action to prepare for employee communications. Willis Towers Watson summarized their findings as follows:
“Despite the concern, nearly half (48%) of respondents haven’t considered how or even if they will communicate the pay ratio to employees. Only 14% have created a detailed communication plan to educate employees, and a similar number are not planning to say anything to employees. Just 16% are prepping managers to be able to discuss the results of their pay ratio with employees, although 39% are preparing leadership to respond to employees’ questions.
This gap between concern and communication comes as the SEC pay ratio disclosure rule’s implementation date in early 2018 quickly approaches.”
We are entering a time of year when many stock plan administrators and corporate compensation professionals spruce up their employee communications. There are year-end tax withholding and reporting communications, some companies provide communication around annual compensation, new benefits, and other information. Many companies may be thinking that they will communicate about the CEO Pay Ratio disclosure after the disclosure is made, if at all. May I suggest that now is the time to start laying the groundwork for those communications. If you’re already going to be communicating to employees about various aspects of their compensation and benefits, this is a prime opportunity to raise more awareness about what they have, why they have it, and the basis for their current compensation. Here are some ideas to consider in crafting a communication strategy around the disclosure (now is not too early to think about this!):
Use existing planned communications to include messaging about the CEO Pay Ratio before the disclosure.
Communicating pre-proxy filing is going to lend a key opportunity to share information about the basis and rationale for current pay before employees digest the actual CEO Pay Ratio figures. Education about existing compensation and corporate compensation philosophies ahead of time could aid in providing the employee the means to better understand why they may fall above or below the median, rather than leaving it to “surprise” them and filling an information void with imagination or assumption. Additionally, employees will have access to data about peer companies at the same time you do, likely well before you have time to craft further communications post-disclosure. Without a foundation of information and understanding in place to foster a belief that their current pay is fair, employees may be more likely to perceive differences to peer companies as negative.
Plan for post disclosure communications that will incorporate comparisons with other companies into your broader pay story.
You won’t know about the ratio of peer companies until after the disclosures are made. Once you have that information in hand, it will be time integrate that information into your own messaging to employees. Pay is most often not just about dollars in a paycheck and employees will need to hear more about about what makes their pay package fair compared to peer companies that may have different CEO Pay Ratios. Is there a large equity component? Does your company’s ESPP discount stand out above other companies? Are there other benefits that need to be considered in understanding the overall package – including the parts not incorporated into the Pay Ratio calculation?
With year-end communications on the horizon, this is a great opportunity to integrate messaging that will help employees understand their bigger compensation picture.
When I posted the results of the NASPP’s quick survey on the CEO pay ratio, the data I got the most questions on were the results for how companies are handling independent contractors in the calculation. When we conducted that survey, the SEC’s guidance seemed to indicate that some individuals that are treated as contractors for other purposes might be considered employees for purposes of the CEO pay ratio. That has now changed.
The SEC’s Original Position
The SEC’s original position was that the final rules permitted the exclusion of workers who are employed by and have their compensation set by an unaffiliated third party (e.g., leased employees). A CDI issued by the SEC in October 2016 clarified that some workers who are considered nonemployees for tax purposes might be considered employees for purposes of the CEO pay ratio.
The SEC’s Reversal
In the guidance issued in September 2017 however (see the NASPP alert “SEC Issues Guidance on CEO Pay Ratio“) the SEC relaxes their original position significantly, stating:
We believe it would be consistent with Item 402(u) for a registrant to apply a widely recognized test under another area of law that the registrant otherwise uses to determine whether its workers are employees.
In addition, the CDI issued on this question in 2016 has been withdrawn and the new guidance seems to suggest that reliance on the determination of employee status for tax purposes is sufficient to establish employment status for the CEO pay ratio.
The July-August issue of The Corporate Counsel notes that in addition to the test used under the US tax code (which is fairly complex) companies might rely on the determination under the Fair Labor Standards Act (FSLA) or other laws.
A Shift in Administration = A Shift in Position?
The SEC notes in Release No. 33-10415 that the shift in their position is due to concerns expressed by commenters. I don’t doubt that this is the case, but I also wonder if it is partly attributable to the Trump administration’s pro-business agenda. Obviously, one way for companies to improve their CEO pay ratio is to contract out lower paid positions (e.g., in gig-economy type arrangements). The SEC’s original position was an obstacle to this approach; the new position is much less so.
– Barbara
P.S.—I removed the chart on how companies are handling contractors from the quick survey results (in case you are wondering why you can’t find it). Now the that SEC’s position has been changed, companies are likely changing their approach and I don’t think our data on this particular question is reliable.
Now that the NASPP Conference is over and we’ve just about concluded our Meet the Speaker series for this year, it’s time for me to get back in the habit of writing blog entries. Today I have some quick updates on the CEO pay ratio disclosure.
SEC Won’t Delay the CEO Pay Ratio Disclosure
Readers will recall that earlier this year, the SEC solicited comments on whether to delay implementation of the CEO pay ratio disclosure (see “What’s Going on With the CEO Pay Ratio” for a summary of the comments received). Based on comments made by the SEC Director of Corp Fin back in September, however, it doesn’t look like a delay is going to happen. Here’s what Broc Romanek had to say about it in his blog:
It’s big news—although not surprising if you’ve been paying attention. At the ABA Annual Meeting, Corp Fin Director Bill Hinman said that the SEC won’t be delaying the implementation of pay ratio (as always, speaking for himself & not the Commission). Bill also mentioned that Corp Fin would be issuing guidance on the pay ratio rules at some point in the near future. It’s still possible that Congress could delay—or repeal—the pay ratio rule. But I wouldn’t make that bet…
Speaking of a Repeal
In a 232-page report issued in October, the Treasury Department calls for the repeal of the CEO pay ratio, among a host of other reforms. Unfortunately, this requires Congressional action so don’t hold your breath (and don’t stop your preparations for making the disclosure).
SEC Issues Guidance on Calculating the Ratio
We posted an alert on this back in September but in case you missed it, the SEC has issued some significant and helpful guidance on calculating the CEO pay ratio. Key areas addressed by the guidance include:
Use of reasonable estimates
Reliance on internal records to determine compensation
Determining whether contractors need to be included in the ratio
Relief and examples for companies that want to use statistical sampling to determine the median employee
Today I have part 2 of my series reporting the results of the NASPP’s quick survey on how companies are preparing for the CEO Pay Ratio. In this infographic, I look at the various decisions companies have to make as they identify their median employee. Want to know more? See Part 1 and the full survey results.
The infographic is interactive; hover over the graphs to see the data labels. Can’t see the infographic? Click here to view it on a separate web page.
For today’s blog entry, I have a handy infographic illustrating some of the results from the NASPP’s recent quick survey on the CEO pay ratio. Stay tuned—I’ll have more data next week.
As I promised on Tuesday, for today’s blog entry I have highlights from a few more CEO pay ratio disclosures (for the first installment in this series, see “Early CEO Pay Ratio Disclosures – Part 1“).
I’ve linked each company’s name to its relevant proxy statement; you can find the disclosures easily by searching on the phrase “pay ratio” in the proxies.
Northwestern Corp’s CEO pay ratio is 22 to 1, which they acknowledge is up from 19 to 1 the year before. Northwestern has been voluntarily disclosing their CEO pay ratio since 2010 (i.e., since Dodd-Frank was adopted), stating that they are committed to internal pay equity. Over that time period, the CEO’s pay has ranged from 18 to 24 times the median employee pay. Although they calculated the ratio in compliance with the SEC requirements this year, at least for the first few years that they made the disclosure their methodology for calculating the ratio probably varied from the SEC’s requirements, since the SEC’s proposed rules weren’t issued until 2013.
Northwestern provides electricity and natural gas in Montana, South Dakota and Nebraska and has a little over 1,500 employees. The disclosure includes a tabular presentation comparing the CEO’s pay to the median employee’s pay by component of pay (base salary, equity awards, non-equity incentive compensation, change in pension value and NQDC earnings, and all other compensation). The CEO’s total compensation was approximately $2.8 million and the median employee’s compensation was just over $124,000.
Northwestern’s disclosure notes that they used total cash compensation to identify the median employee. They further note that they believe this is appropriate because they don’t grant equity broadly and only 7% of their employees receive annual equity awards (how disappointing). Interestingly, they did not annualize compensation paid to employees who worked only part of the year.
Range Resources has the highest ratio (77 to 1) and the shortest disclosure of the four that I’ve highlighted in this series of blog entries. Their disclosure is so short I can reproduce it for you in full:
As a result of the recently adopted rules under the Dodd-Frank Act, beginning with our 2018 proxy statement, the SEC will require disclosure of the CEO to median employee pay ratio.
Mr. Ventura had 2016 annual total compensation of $9,862,925 as reflected in the Summary Compensation Table included in this Proxy Statement. Our median employee’s annual total compensation for 2016 was $127,938. As a result, we estimate that Mr. Ventura’s 2016 annual total compensation was approximately 77 times that of our median employee.
Although I suspect that 77:1 is lower than many of the ratios we’ll see once all public companies are making this disclosure, but perhaps given its steepness, they felt that no good could come of belaboring the point. Best to be quick about it and move on.
Range Resources is a natural gas, gas liquids, and oil company and they have close to 800 employees.
Annotated Sample CEO Pay Ratio Disclosures
If you are involved with calculating your company’s CEO pay ratio, don’t miss the Pay Ratio & Proxy Disclosure Conference, which will be held on October 17 in advance of the NASPP Conference. Everyone who registers for this program can also attend three pre-event webcasts on preparing for the disclosure and will receive annotated sample disclosures in PDF and Word. Don’t wait to register—the first webcast is scheduled for July 20 and the early-bird rate is only available through July 28.
There aren’t a lot of companies rushing to disclose their CEO pay ratio before they have to, but in his blog on CompensationStandards.com, Mark Borges of Compensia highlights a few that he has found (“More CEO Pay Ratio Disclosures“).
Not surprisingly, none of the disclosed ratios are excessive; for all but one, the CEO’s pay is less than 20 times the median employee’s pay. Companies with excessive ratios probably aren’t keen on making the disclosure early. This week (today and Thursday), I have a few highlights from the disclosures, starting with the companies with the two lowest ratios. (I’ve linked each company’s name to its relevant proxy statement; you can find the disclosures easily by searching on the phrase “pay ratio” in the proxies.)
Adam Resources & Energy’s ratio is impressively low at 5.7 to 1. Their median employee pay was about $70K but their CEO made only $400K, hence the low ratio (they do not appear to issue equity to their executives). They note in the disclosure that they have 654 employees, most of whom are truck drivers (they are in the oil and gas industry and transport liquid chemicals). They also note that they annualized pay for employees who only worked part of the year and they excluded employees on leave.
The proxy further notes that they excluded their 401(k) and medical benefits from the ratio—and with a ratio of 5.7:1, why not? Including those benefits will increase the pay disclosed for the median employee and employees comparing themselves to the median probably won’t think to include those components in their own compensation. But for companies that don’t have the luxury of such a low ratio, including those components might help bring down their ratio since the 401(k) and medical benefits are likely to be higher percentage of the median employee’s pay than the CEO’s pay.
NovaGold is in gold mining and has only 13 employees, including their CEO, which must make it pretty easy to find their median employee. Because they have an even number of employees, they note that they averaged the compensation for the sixth and seventh employees to come up with the median compensation (this also handily allows them to avoid disclosing the actual compensation of any one of their employees—potentially a concern with there being only 12 of them).
Their ratio is 13.5 to 1 and their median employee’s pay is around $400K, making them a company of fairly well-paid employees (well, at least half of the employees). Their disclosure includes a list of pay components that were included in the calculation. Besides the obvious (salary, bonuses, equity), they also included 401(k) match, ESPP match, life insurance premiums, auto allowance, and reimbursement of executive physicals.
Stay tuned: on Thursday I’ll look at two more early disclosures.
When I presented for the Western PA NASPP chapter last Wednesday, I told the group I expected the House to vote any day on the Financial CHOICE Act. And I was right—the House approved the Act the very next day. The CHOICE Act would repeal or weaken much of the Dodd-Frank Act, including repealing the CEO pay ratio disclosure.
Is It a Law Now?
No way; the Act still has miles to go before it becomes law. It has to be introduced in the Senate, pass through committee in the Senate, be voted on (and passed) by the full Senate, and then be signed into law. And the Act is very controversial; it is much broader than just the compensation-related provisions of Dodd-Frank, making significant changes to banking and financial regulation. To give you an idea of how broad it is, the Morrison & Foerster memo summarizing the Act is four pages long and doesn’t even mention repeal of the CEO pay ratio.
According to Morrison & Foerster, passing the Act as it stands now is likely to be an uphill battle:
Senate passage would require a 60 vote majority and Republicans control only 52 seats. There is no indication that any of the 46 Democrats, or 2 independents that caucus with the Democrats, will support the measure as passed by the House. As a result, it is likely that fundamental changes to the CHOICE Act would be required in order for it, or portions of it, to pass the Senate, be reconciled with the House bill and become law.
As reported by govtrack.us, Skopos Labs (a provider of predictions about legislation) is currently giving the Act a 25% chance of passing (but hey, that’s up from 1% the first time I looked at the prediction).
What Does It Do?
A lot of what the Act does is well outside the sphere of equity compensation. Here is what it does in the areas of Dodd-Frank that I am most interested in:
Repeals the CEO pay ratio disclosure
Limits Say-on-Pay votes to years in which substantial changes are made to exec pay packages (eliminating the Say-on-Pay-Frequency vote).
Repeals the hedging policy disclosure
Limits Dodd-Frank clawbacks to situations where the officer has control or authority over the financial reporting that triggered restatement
This Cooley memo provides a thorough list of all of the provisions of the Act.
Why CHOICE?
CHOICE stands for “Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs.” In the words of Matt Levine, a blogger for Bloomberg View:
The sheer art of naming something “Choice,” but “Choice” is an acronym that resolves to include “Hope”! Imagine if you could create hope by adjusting bank capital requirements. It is daring, inventive, impressive stuff. It’s no USA Patriot Act—what is?—but it is an achievement in acronyming that would make the financial industry proud.
The glimmer of hope that the CEO Pay Ratio will be delayed or repealed continues to dim (although it hasn’t been completely snuffed out yet).
The SEC Delay
The comment letters submitted to the SEC about delaying the effective date were overwhelmingly opposed, although most were form letters and not nearly as many were received as on the proposed regs. More importantly, the SEC may not currently have enough commissioners to effect a delay. Although a new chair has been appointed, in his recent Equity Expert Podcast with us, Steve Seelig of Willis Towers Watson explains that three commissioners are needed for a quorum. The SEC currently has only three total commissioners (including the chair); a commissioner could prevent a matter from being voted on just by not showing up for the vote. One of the current commissioners is a Democrat (and even worked with Senator Dodd at one point) and may not be supportive of a delay.
Steve noted, however, that even if a delay can’t be effected, the SEC staff could issue interpretive relief that would make it easier to calculate the ratio). Steve had a lot of insightful things to say about the ratio; the podcast is definitely worth a listen.
The Financial Choice Act
The Financial Choice Act has already passed through the House Financial Services Committee, only a month after it was introduced by Jeb Hensarling (R-TX). This act would dismantle or weaken many provisions of the Dodd-Frank Act, including a full repeal of the CEO Pay Ratio. But even with the quick passage through committee, this act has a ways to go and the odds of it passing are still low.
The bill is close to 600 pages long and does a whole host of other things besides repealing the CEO pay ratio; a memo from Cooley, “It’s baaaack — the Financial CHOICE Act of 2017,” provides a rundown of the scope of the bill.
Back in February, it seemed like repeal of the CEO pay ratio disclosure was only a matter of time and that when it goes, it might take a lot of the rest of Dodd-Frank with it (see “More Challenges to Dodd-Frank,” February 9). But now the GOP’s push for a repeal seems to be losing steam.
Piwowar’s Request for Comments
As I noted on February 9, SEC Chairman Piwowar has requested comments from companies that have encountered unexpected challenges in implementing the CEO pay ratio. Comments are posted to the SEC’s website as they are received: so far, the SEC has received over 60 individual comment letters and a form letter (of which there have been over 3,000 submissions). The overwhelming majority of comments, including the over 3,000 form letters, are opposed to a further delay in the implementation of the rule. Given the veritable wealth of information on executive pay that is included in the proxy, it is surprising to me that anyone feels they need to know the ratio of CEO to median employee pay to figure out that CEOs are overpaid but apparently a lot of people really do want to know this. Go figure.
If you have encountered challenges (expected or unexpected) in preparing for the disclosure, now is a good time to tell the SEC about them. Comments are due by March 23 but, in my experience, most governmental agencies will still consider comments received after the deadline. If you are interested in reading about the challenges other companies have encountered, check out the letters from Borg WarnerFlushing Financial, Stein Mart, and Finish Line.
Not a Priority?
Trump’s executive order requiring review of all “existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies” seemed to target Dodd-Frank along with other legislation (see “Dodd-Frank Under Scrutiny“). But, as reported in an article on Bloomberg (“Dismantling Dodd-Frank May Have to Wait“), repeal of Dodd-Frank was notably absent from Trump’s priority-setting speech to Congress on February 28.
Financial Choice Act a Long Shot
The Bloomberg article also noted that there is significant opposition to the Financial Choice Act. This act would repeal or weaken much of Dodd-Frank, but one analyst quoted in the article gives it only a 10-20% chance of passing.
It’s Not Over Until the Secretary of the Treasury Sings
The Executive Order calling for a review of all existing laws, regulations, etc. also requires the Secretary of Treasury and the Financial Stability Oversight Council to report their findings to the Administration by early June. Until then, there’s still a chance the rule may be delayed or repealed.