Benefits and Compensation

What Is the Biggest Challenge to the CEO Pay Ratio Disclosure Rule?

One half of U.S. companies say their biggest challenge in complying with the forthcoming pay ratio disclosure rule is forecasting how their employees will react, according to a poll by Willis Towers Watson, a leading global advisory, broking, and solutions company. The poll also found nearly half of respondents haven’t considered how, or if, they will communicate the pay ratio even though employees’ reaction to the disclosure is their greatest concern.CEO

“With the Securities and Exchange Commission issuing very helpful guidance … to help companies manage their data issues using statistical sampling, the clock is now ticking for companies to comply with the disclosure requirement,” said Steve Seelig, Senior Regulatory Advisor for Executive Compensation at Willis Towers Watson—in a press release. “Under the rule, companies are required to begin making CEO pay-to-worker ratio disclosures in early 2018. Interestingly, the bigger challenge for most companies is not how to determine the ratio itself, but rather how employees will respond to the pay ratio disclosure.”

Indeed, roughly half of the respondents polled (49%) cited forecasting how their employees will react to the ratio disclosure as their number one challenge, but that other challenges still loom. About four in 10 (39%) said determining the consistently applied compensation measure (CACM) is their great challenge followed by getting accurate pay data (38%), deciding how to craft their required disclosure (37%), and determining where their pay ratio stands compared with that of their peers, their industry, and the market (35%).

Seelig noted companies might now want to consider using statistical sampling to help determine the pay ratio given that the SEC guidance should virtually eliminate data challenges for companies that choose this method. According to the poll, only four in 10 companies were thinking about using statistical sampling. The poll of nearly 360 corporate executives and compensation professionals was conducted September 14, 2017, during the Willis Towers Watson webcast on the CEO pay ratio disclosure requirement.

The poll also found that almost half of respondents (48%) have yet to think about how or even if they will communicate the pay ratio to employees. About four in 10 (39%), however, are preparing leadership to respond to employees’ questions. Less than two in 10 respondents (16%) are prepping managers to have discussions with employees, while 14% created a detailed communication plan to educate employees. A similar number are not planning to say anything to employees.

When asked whose reaction to the pay ratio disclosure brings the most concern, one half cited their employees. Twenty percent said they were most concerned about media reaction, followed by their shareholders (16%). Very few were concerned over the reaction of customers or CEOs.

“It’s somewhat surprising that so many companies haven’t considered how or if they will communicate the ratio to their employees, given that so many are concerned about how they will react,” said Jim Kohler, director, Communication and Change Management at Willis Towers Watson. “We believe this is a golden opportunity for employers to begin a dialogue with not only employees but also customers, investors and the media about pay positioning and pay transparency. In fact, we are working with several companies on developing a communication road map to guide them through the process.”