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In Discussing CEO Pay Ratios, Context Is Everything

New disclosure rule presents an “apples and oranges” problem

Sharon Merrill Associates Investor RelationsAs any communication veteran knows, every corporate “happening” creates a messaging opportunity. That is certainly the case with the impending round of pay-ratio disclosures. Starting this year, under an SEC amendment to Regulation S-K, which stemmed from a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act, most U.S. public companies will need to disclose the total annual compensation of their “median” employees, along with the ratio of that figure to the total compensation of their chief executive officers. Based on preliminary estimates, the highest ratios could exceed 350 to 1.

The resulting challenge for corporate spokespersons, including IR practitioners, media specialists and even HR representatives, will be twofold: 1) given the inherent lack of context, pay ratios will leave much to interpretation, and 2) such interpretation could differ considerably among a company’s key audiences, including investors, media and employees. Leaving such audiences to take the new data at face value would risk having one’s organization painted with a broad brush regarding a range of management issues. By addressing the ratios head-on, however, and providing color regarding the underlying data, spokespersons can simultaneously reinforce key messages in the company’s broader narrative.

The fact that companies are allowed “substantial flexibility to determine the pay ratio,” and may use “reasonable estimates both in the methodology used to identify the median employee and in calculating the annual total compensation,” complicates the matter from a communication perspective and will make meaningful comparisons—even within a single industry—all the more difficult, really an “apples and oranges” comparison. This difficulty will be compounded in situations, for example, where a company has large numbers of part-time workers or extensive international operations, as the new rule requires a single median figure representing “all” employees.

In any case, such data-gathering technicalities are unlikely to deter key opinion leaders, be they politicians, news editors, or labor activists, from drawing inferences as to what the ratios might “mean” in any given context, be it tax policy, corporate social responsibility (CSR), or globalization. Once a company’s ratio is determined, IROs and other spokespersons should apply the same strategic rigor they would use in communicating specific messages across any channel.

Investor Relations
Here’s the good news: seasoned investors are unlikely to be fazed by the new data. As “Say on Pay” became a proxy-season reality in 2011, the investor community is already attuned to matters of executive compensation. The focus for IR practitioners will be to assess the pay ratios in light of company performance and returns to investors. Pay-ratio outliers who also lag their peers in terms of key financial or operational metrics might face tougher questions, particularly from public pension funds and environmental, social and governance (ESG) minded investors. Outliers can speak to the unique factors behind their own pay-ratio methodologies, but companies that are in line with their industry averages can look to reinforce the longer-term, strategic messages that should already be a part of their quarterly earnings announcements.

But while pay-ratios might fundamentally be an IR issue, they affect so many other stakeholders that dealing with them can enable IROs to expand their spheres of influence within their organizations by developing comprehensive messaging strategies that include public relations and human resources elements.

Media Engagement
The “shock value” of a high ratio is not something most journalists will be able to resist and could be used to flavor a range of news reports during proxy season, providing a new angle on such topics as taxation, wage statistics and other employment data. Such a focus on corporate trends is likely to be all the more intense in the run-up to the mid-term elections. Also, given the rule’s Dodd-Frank pedigree, journalists might use the ratios as a benchmark in evaluating what progress has been made since the financial crisis, when corporate excess was widely considered to be a root cause.

As such, company spokespersons must be on guard that as media opinions start to take shape, they are based on relevant data. One way to do so is to provide more than the SEC requires. While the new rule requires a single ratio based on a median value for all employees, it does not prohibit companies from providing additional metrics, for example a ratio based only on full-time U.S. employees. In the words of the SEC, “reasonableness” and “good faith” must control, but companies should not hesitate to provide as much clarity as possible in discussing numbers that otherwise seem prone to misinterpretation. Making geographic and industry-specific distinctions will be key in this regard, particularly where a company’s peers lack uniformity in size or organizational structure.

Internal Communications
Companies that treat the HR implications of their pay-ratio disclosures as merely an afterthought will do so at risk to their employee retention rates and morale. HR departments could face difficult questions from employees who unexpectedly find themselves on the “wrong” side of the company’s median pay figure. For multinational corporations, that could even lead to employee discontent among their overseas teams.

Earning and maintaining employee trust starts with proactive HR engagement and education regarding corporate programs and benefits that employees might not automatically associate with their total compensation, such as training and opportunities for professional development. Such engagement is particularly important for companies with large numbers of non-salaried and part-time employees, such as in the retail industry, which is expected to have above-average pay ratios.

In sum, communication professionals should address pay ratios in all messaging contexts. Moreover, they must be ready to respond whenever and however the issue develops, for example when the U.S. proxy advisory firms ultimately weigh in, or if executive compensation becomes a hot-button campaign issue later this year.

In all cases, providing context will be the key to mitigating audience misperceptions.

 

To discuss concrete steps your company can take in these areas, please contact David Calusdian at Sharon Merrill Associates at dcalusdian@investorrelations.com.

David Calusdian is President at Sharon Merrill Associates. He oversees the implementation of crisis communications plans and proactive investor relations programs. He also coaches the C-Suite in executive presence, presentation delivery and media proficiency, and provides strategic counsel to clients on numerous communications issues such as corporate disclosure, proxy proposals, shareholder activism and earnings guidance.

crisis communication plan, executive comp, executive compensation, CEO pay ratio, compensation, internal communications, Investor Relations

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