A potentially embarrassing math calculation employers have long hoped to escape — one that pay experts thought was dead following President Donald Trump’s election — can no longer be avoided.
In recent weeks, a few public companies have begun disclosing a ratio, required for the first time this year, that compares the pay of their chief executive to the pay of their median employee.
At industrial giant Honeywell, the largest company yet to disclose, the ratio was 333 to 1. At Teva Pharmaceuticals, the Israel-based generic pharmaceutical company, it’s 302 to 1. And at the regional bank Umpqua Holdings, it’s about 55 to 1.
As of Wednesday morning, companies had disclosed the figure for only about 20 CEOs, according to the research firm Proxy Insights.
But with corporate America’s annual meeting season getting under way — the majority of public companies release their annual reports and proxy voting documents in the coming months — investors, the public and employees are about to get a much closer look at how their pay compares not only to that of their CEO, but that of their peers.
It’s that last comparison that has employers most concerned, say consultants who work with them on executive pay issues.
“I don’t think companies are as worried about newspaper articles, because they are what they are, and I don’t think they’re worried about shareholders,” said David Wise, a senior client partner at Korn Ferry, as investors are already closely focused on executive pay issues. “I think they’re worried about how their own people will react. How do you communicate to an employee who now knows they’re paid in the bottom half of the company?”
The regulation mandates that companies identify the compensation of the median-paid employee at the firm, compare that to the CEO as a ratio, and disclose it each year.
As part of the Dodd-Frank legislation of 2010 created in the aftermath of the financial crisis, the rule was finalized in 2015 but met resistance along the way from business groups that said it would be onerous and expensive to calculate.
The rule was thought to be a goner after the 2016 election, when a Republican-controlled Congress and a White House whose transition team had promised to “dismantle” Dodd-Frank came to power.
But it has remained unscathed.
“Now that these ratios will be published, companies are laser focused on making sure they get their communications to their employee base right,” said Steve Seelig, a senior regulatory adviser for Willis Towers Watson, a human resources consulting firm.
Pay consultants say employees may be bothered not only by how many multiples higher the chief executive is paid, but by where they fit in with their peers. At most companies, compensation remains pretty opaque, and a company-endorsed median figure would provide some additional transparency.
“At the end of the day, we’re all human. We all want to be above average. When you’re not, that impacts job satisfaction, engagement and performance,” Wise said. “That’s the part companies are worried about the most — and they should be.”
Compounding that concern is timing.
The ratios are being disclosed just after corporations have received a massive windfall in the form of a corporate tax cut, which could add to questions about inequality.
“There may very well be heightened expectations from employees who are paid in the bottom half that incremental tax cut dollars are going to be used to enhance company-wide pay programs,” Wise said. “That would be a very understandable reaction given the timing of everything.”