The Advisors' Blog

– Broc Romanek

Although we have never urged disclosure of pay ratios, we have long advocated that boards use internal pay equity (essentially the same thing as pay ratios) as an alternative – and much more reliable – benchmarking tool to help set executive pay levels. For example, here’s an excerpt from a blog that I wrote five years ago:

Shouldn’t boards demand to see those ratios to protect themselves from liability given the known bad data in the peer group surveys they get year after year? Of course, advisors should be willingly recommending the use of this alternative since it’s their job to protect the board. Sadly, most advisors blindly adhere to the status quo as too often happens.

I just can’t see what is wrong with putting together internal pay numbers for a board to consider. Where is the evil here? I suppose the downside is it likely will reveal how badly the board has been doing its job setting CEO pay levels over the past 20 years when historical numbers are crunched. But it’s better to make a fix now than perpetuate the problem. Note that I am not saying boards need to demand the ratios as called for by Section 952(b) as simpler ratios are easy to generate. We have sample spreadsheets posted in the “Internal Pay Equity” Practice Area on CompensationStandards.com.

By the way, I also don’t see any problem with using peer group benchmarks either. It’s just that the data in those surveys now are useless due to “pay in the top quartile” craze. There needs to be a reset before that type of data can be relied upon again. This reset will be hard to do, but it’s necessary and certainly doable, particularly if CEO pay levels are brought down to Earth on a widespread basis. The longer boards wait, the harder the medicine will be to take.

Sadly, I don’t think much has changed during the five years that I wrote that blog. Here’s what a member who works with a lot of boards recently told me:

I have been surprised by the lack of board curiosity of the likely pay ratio. I thought they would be pressing management for an estimate. Instead, they seem to be unconcerned and the ratio will “be what it will be.” I think that is a Doris Day song from an Alfred Hitchcock movie.

Coming Next Week! “Annotated Model Pay Ratio Disclosures”: For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” tune in on July 20th – next Thursday! – for the first in a series of three monthly webcasts that serve as a pre-conference: “Pay Ratio Workshop: What You Need to Do Now.”

When you go to the webcast page on July 20th, you will be able to download a set of “Annotated Model Pay Ratio Disclosures“ in both PDF & Word format. The second webcast is on August 15th; the third webcast is September 27th. Register for the “Pay Ratio & Proxy Disclosure Conference” to be able to access these webcasts.