Public companies currently release the pay of their chief executives to the Securities and Exchange Commission, but they’ll soon have to do it a bit differently. Starting at the end of the 2017 fiscal year, public companies will have to report the median total compensation of all employees of the company minus the CEO, along with the CEO’s total compensation and a ratio of the two. The new rule, whose intent and expected results are unclear, is part of the Dodd-Frank Act enacted by the Obama administration following the 2008 financial crisis and recession.
According to Economic Policy Institute, CEOs in top U.S. firms received about 271 times the average pay of a typical worker in 2016; the ratio in 1965 was 20-to-1.
“Something economic is happening that is causing this bifurcation,” said John Marthinsen, professor of economics and international business, who is also distinguished chair in Swiss economics at Babson College.
However, this is more complicated than CEOs simply making more than their employees. Marthinsen said the offshoring of jobs has to do with the depressing of wages at the lower end of the spectrum. When low-skill jobs move to countries with lower salaries, it further depresses the salaries of those workers. Still, managing offshored work requires a lot of skill, thus increasing managers’ salaries.
Although this makes sense in theory, that doesn’t mean it doesn’t ultimately hurt middle class household incomes, many of which have taken a toll in the past decade. If they are working hard and not feeling that they’re getting ahead, while their company’s chief executive’s income continues to rise, workers could become discouraged, Marthinsen said.
Research and advisory firm Willis Towers Watson published the results of a poll in June finding that among 360 corporate executives and compensation professionals, 48 percent had yet to think about how or if they would communicate the published pay ratio with their employees. Nevertheless, half of respondents were most concerned about retorts from employees, more so than media and shareholder reactions.
When these ratios become public, how can companies manage employee morale?
“If employees feel that you are being upfront and you’re having a conversation with them about their pay, they’ll be much more accepting vs. it being more mysterious,” said Jim Kohler, a director of communication and change management at Willis Towers Watson.
Here are four steps to managing employee morale during pay ratio disclosures:
- First, it’s beneficial to understand employee knowledge of how the company determines their pay, Kohler said. Surveys and focus groups can be a start to this. Then, gather the information and structure the communication strategy that will follow.
- While building a communication plan, consider the audience. Communication with employees isn’t the same as with shareholders, said Steve Seelig, executive compensation counsel at Willis Towers Watson. “The messaging is really diametrically opposed.” While messages to shareholders usually contain methods for keeping costs down and offshoring jobs, that won’t go over as well with employees. “Companies need to be very, very thoughtful about who their target audience is in all of their communications, including those that are included in the proxy.”
- Then, get out in front of the announcements. The employee reactions to the pay ratio will only be worse if they’re reading about it for the first time in the newspaper or on social media, Kohler said. Talking points should include philosophies around pay and market competition, as well as the employee value proposition beyond pay.
- Also, equip managers to discuss the ratio with their employees. They’re often the first stop when employees have questions about salary, Kohler said. And if employees begin to request raises, managers should be able to say what it takes to get a raise, including how to move forward and develop oneself within the organization.
Although this is a general guide for communication, “there is no one single solution for all organizations,” Kohler noted.
Results of the Ratio Report
Experts are also unsure of the results from reporting these ratios, though time spent on the process could invite trouble.
“More and more of a board agenda is being devoted to compliance issues,” said Mike Magsig, managing partner of the global board and CEO practice at DHR International, an executive search firm based in Chicago. As a result, maybe opportunities are being missed or not captured because of the amount of time spent on compliance. “This dynamic really results in fewer quality people being enthused about being on boards.”
It also could impact the supply of leadership talent, Magsig said. If the U.S. begins to cap or compress pay levels as a result of these reports, then some of our talent could potentially move to other countries or regions where such practices are not in place.
“The impact of those losses at a time when the demand for really high-caliber leadership talent exceeds supply is only going to exacerbate a problem that could lead to slower economic growth in the country,” he said.
Lauren Dixon is an associate editor at Talent Economy. To comment, email email@example.com.