CEO Pay Ratio Considerations in a Global Company

In January of 2015, I was responsible for total rewards at a publicly-traded, global manufacturer.  At that time, the CEO Pay Ratio rule was not yet finalized, but we wanted to begin planning for its eventual passage, so we worked with our outside executive compensation consultant to review various reporting considerations.  Our outside consultant was very helpful in summarizing the internal work that lie ahead.  What follows are some of the key items we discussed updated to reflect the final rule.

Global Company Considerations

Data Gathering

Global companies have additional work in terms of gathering the required data.  If you have one HRIS system with all the data needed to report the CEO Pay Ratio, my guess is that you are probably in the minority.  While many global companies will have the requisite annual salary data, information will also be needed for bonuses, annual incentives, grant date fair value of equity awards, changes in pension value, non-qualified deferred compensation and other compensation in order to calculate the ratio.  While the information for the CEO and other named executive officers (NEOs) are already collected and reported in the Summary Compensation Table (SCT), this will require additional data collection and computation for the “median” employee.

Non-US Employees

Additional considerations arise for companies with a workforce outside the US.  In total, if non-US employees are less than or equal to 5% of the total employee population, then the company can exclude all of the non-US employees from this exercise.   Global companies with more than 5% of their workforce outside the US will need to examine the headcount for each country.  They may exclude up to 5% of the non-US workforce, but cannot “cherry pick” which countries to exclude.  Any country with more than 5% of the total workforce must be included in the determination of median employee.  Additional proxy disclosure is required when excluding employees from outside the US.

Data Privacy

There is a data privacy exception when determining which employees to include in the calculation of median employee.  Companies can exclude employees located in countries with data privacy laws when determining the median employee.  Again, additional disclosure will be required when companies use the data privacy exemption.

Foreign Exchange

Nothing in the SEC ruling specifies what Foreign Exchange (FX) rate to use.  We decided to use a weighted average annual FX rate when converting from foreign currencies to US dollar.

Timing

The final rules allow companies to choose a day in the last three months of the completed fiscal year to determine the median employee.  Our approach was to use payroll reports from the last day of our fiscal year.  For our modeling, we started gathering payroll information in January 2016.  We used this as a “dress rehearsal” for when the ratio would need to be reported.  It took several weeks to gather the necessary information and we identified some of the challenges that we hoped to improve on when we planned to calculate the ratios again using 2016 data in early 2017.  In effect, 2017 would have served as another dress rehearsal before calculating the required CEO Pay Ratio in early 2018 using 2017 data.

Manufacturing Company Considerations

As a global manufacturer, the company has employees represented by unions in the US and Works Councils outside the US.  Additionally, there are a number of seasonal and temporary workers that need to be accounted for when determining the median employee.  It is important to keep in mind that the final rule does not allow companies to annualize compensation for seasonal or temporary workers.

Other Ratio’s

During discussions with our outside consultant, we quickly realized that the required ratio by itself is not very valuable.  In order to make more sense of the collected data and be able to communicate more effectively with our employees, we came up with additional ratios to review.  We also reviewed other metrics to add some perspective to the ratios being reported.  Some of the other metrics include:  age, tenure with the company, total years in current role, total years of relevant work experience, and, highest level of education completed.  Please refer to the template below that we used for preliminary internal reporting and discussions with our Compensation Committee / Board of Directors.

Value of Company-Paid Benefits

This is not a requirement under the rule, but given the fact that company-paid benefits account for a significant portion of employee compensation, we felt it was prudent to include this in the calculation of the ratios.  Since we had recently prepared total reward statements for our global employee population, we already had this information readily available once the median employee was identified.

Sample Template

Communication Strategy

Starting the work in early 2015 helped us identify the amount of time necessary to collect the needed information, have discussions with our senior leadership team, Compensation Committee and Board of Directors and finalize a communication strategy.  Using the template above, we reviewed the resulting ratios and started to frame a communication strategy for employees as well as for our annual proxy.

Next Steps

As we now know, the final CEO Pay Ratio rule requires that companies disclose the ratio in the 2018 proxies using 2017 compensation data.  It’s not the actual CEO Pay Ratio that is causing concern; it’s the fact that companies will now be reporting total compensation for the “median” employee.  Half of a company’s employee population will be below the total compensation amount reported in the proxy.

What is your organization doing to prepare?  Have you developed an internal communication strategy for educating the employee population about this new publicly disclosed information?  Will you only report the required ratio in your proxy statement, or will you report supplemental ratio’s to craft your message to investors and shareholders? Please comment on LinkedIn at https://lnkd.in/djvXXXd.