A new compensation rule could cause difficulties for CEOs

Businessman holding money
There may be some turmoil inside companies when CEO pay ratios take effect. (Getty/matthewennisphotography)

Public companies are finding their biggest challenge with putting in place the forthcoming CEO pay ratio disclosure rule is gauging how their employees will react. The Securities and Exchange Commission rule requires companies to publish in their proxy their CEO’s pay in comparison with the pay of their median employee and takes effect in fiscal 2018.

One half of 360 executives and compensation experts polled by human resources consultant Willis Towers Watson said their biggest challenge was how employees would react. It is feared there will be a backlash when these numbers become so public.

One CEO is afraid to go to a local restaurant once the numbers hit for fear of what might be said to him, said Steve Seelig, senior regulatory advisor for Executive Compensation at Willis Towers Watson. “Corporate managers need to be prepared. Workers will be shocked and angered.”

The poll also found nearly half of respondents haven’t considered how, or if, they will communicate the pay ratio.

“The bigger challenge for most companies is not how to determine the ratio itself, but rather how employees will respond to the pay ratio disclosure,” Seelig said.

The poll also found that almost half of respondents (48%) have yet to think about how or even if they will communicate the pay ratio to employees. About 4 in 10 (39%), however, are preparing leadership to respond to employees’ questions. Less than 2 in 10 respondents (16%) are prepping managers to have discussions with employees, while 14% created a detailed communication plan to educate employees. A similar number are not planning to say anything to employees.

Twenty percent said they were most concerned about media reaction, followed by that of their shareholders (16%). Very few were concerned over the reaction of customers or CEOs.

“It’s somewhat surprising that so many companies haven’t considered how or if they will communicate the ratio to their employees, given that so many are concerned about how they will react,” said Jim Kohler, director, Communication and Change Management at Willis Towers Watson. “We believe this is a golden opportunity for employers to begin a dialogue with not only employees but also customers, investors and the media about pay positioning and pay transparency.”

Other challenges loom. About four in 10 (39%) said determining the consistently applied compensation measure is their greatest challenge, followed by getting accurate pay data (38%), deciding how to craft their required disclosure (37%) and determining where their pay ratio stands compared with that of their peers, their industry and the market (35%).

Seelig said companies might now want to consider using statistical sampling to help determine the pay ratio given that the SEC guidance should virtually eliminate data challenges for companies that choose this method. According to the poll, only 4 in 10 companies were thinking about using statistical sampling.