The Advisors' Blog

– Liz Dunshee

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.