CEO pay ratios (calculated against a company’s median employee), will be appearing in proxy statements of companies whose market cap is greater than $75 million and whose fiscal year ended in December 2017 (With some exceptions, i.e., emerging growth companies and foreign private companies). Once the ratio is calculated, a company may report the same finding for three (3) years, providing that nothing material has changed within those three (3) years which would have a substantial impact on the calculation, and that the company states that the go-forward calculation is an estimated number. The initial calculation is what is proving to be time-consuming and burdensome for HR.
While the goal of the Dodd-Frank Disclosure requirement was to ensure pay equity, the outcome of publishing the pay ratio could have unintended ramifications for a company. Current employees may view this information in a negative light if their company reports lower median pay than a competitor; prospective employees may use this metric as a means to evaluate a particular company for which they are interviewing. Current and potential investors may draw conclusions about a company based on this metric, without having full context around the ratio.
How will having global operations in the support functions of a company impact the ratio? If a company outsources lower level positions (i.e., maintenance, security, etc.), how will that affect the calculation? What about a CEO who is a founder and receives a good part of his/her compensation in the form of stock? Will the value of that compensation component be included in the calculation?
Ultimately, will it be worth the time and expense it may take to calculate and accurately report the metric? Probably not, but since it is before us now, it will, hopefully, only be one of several metrics by which to assess a company, and any negative impact of this ratio will be minimal to a company. Wishing CHROs the best of luck executing this one!