– Average ratio for S&P 500 companies was 160:1
– For the Fortune 1000, it was 158:1
– For the Russell 3000, it was 71:1
– Median employee pay was $69,000 for S&P500 versus $108,000 for the tech industry
– Highest ratios were in retail, consumer discretionary and consumer staples and materials
– Lowest ratios were in financials, healthcare and utilities
– 19% of the Russell 3000 provided some sort of supplemental pay disclosure such as adjusted workforce, full-time only employees used to find median or adjusted CEO pay due to one-time awards
– Some companies noted a low pay ratio this year due to caveats to prepare for higher ratios in the future
Steven’s book (“The CEO Pay Machine“) is an easy-to-read & entertaining dissection of how we got to where we are – and how we can fix it. His book is laden with stories that really “tell it like it is.” Please check it out & tell others that can help make a difference…
With a season of pay ratio disclosures in the books, the debate whether the ratio should be calculated continues. Here’s an excerpt from this ValueEdge blog:
As the dawn follows the night, so must the “investors don’t know what they want” be followed by the “it’s too expensive” argument. Others have suggested pay ratio disclosure sheds a light on income inequality. Yes, but existing disclosure of executive pay already shows how much executives are paid. If the goal is to highlight income inequality, couldn’t we do it in a less costly way? For example, we could disclose the ratio of a CEO’s pay to the median salary of a worker in the company’s industry. The Bureau of Labor Statistics provides plenty of industry data for comparison.
If companies don’t know what the median pay is for their employees, we suggest that what is expensive is their ignorance. They should want to know. They should have the capacity to know.
We find it material. We believe journalists, securities analysts, board comp committees, and scholars will as well. We look forward to developing many years of pay ratio data to help us understand better the ROI of the management and boards of our portfolio companies. In the meantime, we suggest that firms like Pearl Meyer spend more time telling clients what they need to hear instead of what they want to hear and leaving the determination of what shareholders need to know to shareholders themselves.
At our recent “15th Annual Proxy Disclosure/Executive Compensation Conference” there was a lot of discussion about how to prepare for Year 2 of pay ratio. The biggest decisions are whether you’ll use the same median employee – some analysis is required to determine whether there’s been a material change to your workforce – and whether to elaborate on the details of that decision-making process and year-over-year changes to the ratio. This Willis Towers Watson memo explores the factors you need to consider for these issues. Here’s an excerpt:
You may be required to identify a new median employee if there were changes to the employee population or the median employee’s compensation arrangements or circumstances (e.g. if they left the company) – and you’ll need to determine whether to disclose recalculations, changes to circumstances and/or the methodology to identify a “substantially similar” Year 2 median employee. In addition, your disclosure will be different if you change your approach to including personal and non-discriminatory benefits in the “total pay” calculation.
The application of statistics to pay demographics may help determine whether organizations must use the same median employee for Year 2, regardless of whether they used statistical sampling in Year 1. Some companies may be disappointed to discover they can’t use the same employee they selected in Year 1, while others will discover that differences in that employee’s Year 2 Summary Compensation Table pay will influence the pay ratio.
It was a surprisingly rough year for say-on-pay (especially for small-caps, according to pg. 14 of this Willis Towers Watson memo). And even if you’ve achieved majority approval, you could still run into problems with proxy advisors & shareholders if your approval level was below-average. This Exequity memo covers what ISS & Glass Lewis want to see after a low vote, and also recommends taking these 14 steps to bounce back:
1. Assess the SOP vote itself and try to determine which shareholders did not support the SOP proposal.
2. Assess the ISS and GL proxy reports to see which items caused ISS or GL to recommend against your company’s SOP vote.
3. Convene a team to help guide shareholder engagement efforts and identify shareholders, and applicable contacts, for outreach.
4. Prepare for shareholder meetings/calls to discuss the SOP vote and points raised by proxy advisory firms, as well as the company’s perspective.
5. Determine what changes (if any) could be made to address issues raised by ISS and/or GL (this Willis Towers Watson memo (pg. 18) suggests creating more rigorous metrics, adjusting the pay mix, clarifying the CD&A, etc.)
6. Have a core team engage with shareholders and listen to what drove shareholders to not support the SOP vote and, even among shareholders that supported the SOP vote, any critical comments they raise about the company’s pay programs.
7. Discuss the findings of the shareholder engagement effort with the broader team, discuss possible courses of action, and come up with recommendations.
8. Discuss shareholder engagement efforts with the compensation committee/board of directors, issues raised, and possible courses of action.
9. Decide what action(s) (if any) to take to address issues raised by shareholders and/or ISS and GL.
10. Prepare a mock-up of next year’s proxy disclosure detailing engagement efforts and discussing action(s) taken as a result and the rationale.
11. Review mock-up disclosure and see what comments the team or committee/board have.
12. Enact any changes that were approved and prepare for next year’s proxy.
13. Monitor and test how proxy advisory firms and shareholders may react to the next proxy statement.
14. Prepare next year’s proxy, being sure to include information detailing shareholder engagement efforts and the changes made by the company as a result (even if it was keeping things as they were), along with a compelling rationale for such actions.
I’ve blogged about the recent groundswell of interest in the gender pay gap. This Bloomberg article contrasts that with the “ho-hum” reaction to pay ratio disclosures. Here’s an excerpt:
The wave of pay ratio disclosures coincided with a different discussion of inequities in the workplace, one that all but drowned out talk of CEO pay: the #MeToo movement. Although it began as a movement about sexual harassment, #MeToo gave renewed prominence to decades-old discussions about pay inequity between women and men. Among the companies whose images have been tarnished by allegations of gender pay disparities is Google, which last year was sued for pay discrimination, and both Microsoft and Twitter have been sued for favoring male engineers for advancement.
Obviously, gender-based discrimination is a legal and business risk – and shareholders increasingly want information and commitments from companies. But gender pay & pay ratio issues aren’t mutually exclusive. One of the big takeaways from our “Proxy Disclosure Conference” was that, in reality, pay ratio is probably contributing to the trend of gender pay & other human capital disclosure, since companies now have the data to calculate and disclose more information about their workforce.
Some people even speculate that pay ratio will garner more attention over time because the public will track changes to the number. And if shareholders remain focused on human capital issues, a company’s broader pay ratio narrative – who’s in its workforce, how talent is developed & motivated, the impact of income inequality – could become pretty important.
Last month, I blogged about recent changes to GICS classifications that might affect the ISS peer group & pay-for-performance analysis. And although ISS has now issued FAQs on the changes, there’s still some anxiety about how it’ll play out.
In this blog, Pearl Meyer’s Jim Heim says that since proxy advisor assessments don’t drive company performance, they shouldn’t drive pay arrangements – and we should take a deep breath before worrying about those types of external factors. Here’s an excerpt:
To be clear, nothing that is under the control of either management or boards has changed here. And it is extremely difficult at this early stage to predict how an individual company’s scoring will be impacted, because:
– Most ISS assessments are multi-factor
– Many of these assessments are subject to additional changes in methodology as ISS course-corrects to better reflect input from its customers
– Both financial and pay data (for the company being assessed as well as the companies it is benchmarked against) will be refreshed by the time the actual ISS assessment takes place
Jim recommends that advisors guide clients by monitoring ISS FAQs – which have already clarified the impact of this change for some companies – as well as policy changes. In addition, a key “value-add” is to understand what levers are available to the company if the GICS shuffle actually increases the risk of an “against” recommendation from ISS on pay-related items.
When it comes to pay for performance, CalPERS isn’t messing around. In its recent “Corporate Governance Program Update,” the pension fund reports that it voted “against” 43% of executive compensation proposals this year – up from a prior 5-year average of 16%, and 18% last year.
Any way you slice it, that’s a huge increase. CalPERS says that its enhanced voting practices (pg. 21) – implemented in January 2018 – are driving the change. Here’s more detail:
– Failure to align pay with performance was the primary reason to vote “against”
– Other problematic features driving “against” votes included: short-term performance periods for long-term incentive awards (i.e. less than 5 years), poor disclosure, short vesting periods for equity grants, discretionary awards, and similar metrics used for short- & long-term incentive plans
The report also notes that CalPERS conducted 121 shareholder campaigns last year and voted against 438 directors where diversity engagements didn’t result in constructive outcomes. Diversity – as well as environmental and other human capital issues – will remain a big focus next year.
