March 1, 2021
Furloughed Employees: CEO Pay Ratio Considerations
– Lynn Jokela
It’s been a while since we’ve blogged about the potential impact of Covid-19 related complications for CEO pay ratio calculations and disclosures. A Freshfields blog provides several compensation-related considerations for the 2021 proxy season, including discussion about revisiting the CEO pay ratio calculation in light of Covid-19.
When preparing this year’s pay ratio calculation, many companies will need re-identify the median employee. The blog notes that even companies that identified a new median employee in the last two years need to evaluate whether referencing last year’s median employee is still appropriate – this is especially true for companies that faced significant workforce changes in the last year. This year, one complexity some companies will encounter is whether and how to factor furloughed employees into the pay ratio calculation, here’s an excerpt:
The rules themselves do not however address the treatment of furloughed populations. Subsequent guidance released by the SEC acknowledges that the concept of a “furlough” may have different meanings for different employers and leaves it up to companies to determine whether furloughed populations will be regarded as employees depending on the facts and circumstances (CD&I 128C.04). In making these determinations, companies with furloughed populations should consider factors such as whether the furloughed individuals are still acting as employees (albeit on reduced workweek schedules) or if they have been on leave for several months with no clear prospect of return. If a furloughed individual is identified as an employee, the company must take the additional step of determining the appropriate subset of classifications and calculate total compensation accordingly.
Although the pay ratio rules do not require narrative explanations of the resulting figure, companies that experience significant change in the year-over-year ratio may nonetheless elect to offer disclosure to provide additional context around the unique circumstances brought to bear this year.
Remember, we have a reference available that can help – check out the “Pay Ratio” Chapter in Lynn & Borges’ Executive Compensation Disclosure Treatise.” We also post memos about real-time disclosure issues in our “Pay Ratio” Practice Area.