A group of institutional investors and advisors, cumulatively representing $3.3 trillion in assets under management and advisement, recently sent a letter to every public company included in the S&P 500 index seeking expanded CEO pay ratio disclosures in proxy statements.
The letter-writing campaign has 48 signatories, including Scott Stringer, the New York City Comptroller, Thomas P. DiNapoli, the New York State Comptroller, and representatives from CalPERS, CalSTRS, and the ALF-CIO.
The group states that the signatories to the letter favor pay ratios that indicate that companies are making investments in their employees and that CEO compensation is set within the parameters of the company’s overall compensation philosophy. The group believes that supplemental disclosure will help investors put the pay ratio information in the context of the company’s overall approach to human capital management.
The group also mentions in its letter that pay ratio disclosure is useful for say-on-pay voting decisions. While that may be true, one recent study by Pearl Meyer and NACD notes that “not one institutional investor has ultimately admitted to using the CEO Pay Ratio outcomes in their voting decisions thus far.”
The letter lists the following as examples of supplemental information that the group found useful in assessing pay ratios:
- Identification of the median employee’s job function
- Breakdown of the workforce by job function and/or business unit
- Geographic location of the median employee
- Country-level breakdown of global employee headcount
- A breakdown of full time vs. part time employment status
- Use of temporary or seasonal employees
- Use (or non-use) of subcontracted workers
- Tenure and experience of the workforce
- Workforce education levels and skillsets
- The company’s overall compensation philosophy
- Employee compensation mix (benefits and incentives)
- Alignment of CEO pay practices with pay practices for other employees
While the group recognized that some of the information is already included in companies’ form 10-K annual reports or sustainability reports, the group asserts that providing the information in the proxy statement as a supplement to the pay ratio disclosure would provide useful context.
In the letter, the group states that it has seen voluntary disclosure of the above examples to varying degrees. We agree that last year some companies voluntarily disclosed a few of the items, and we would not be surprised if a few of these items continue to be disclosed voluntarily.
For example, some companies disclosed job function disclosure (such as the median employee is a locomotive engineer, a help desk technician, or a factory worker). We also have seen companies include the geographical location (such as disclosing that the employee is in a manufacturing facility in China or a store in the United States). Disclosure of the use of temporary or seasonal employees is also fairly common. However, many of the other examples identified by the group in the letter likely have been disclosed in proxy statements by very few companies.
With commentators and advisors often suggesting to companies to “keep it simple” and to stick to the required information as opposed to including supplemental disclosure, it remains to be seen whether companies will heed the request from this group for expanded pay ratio disclosure in the proxy statement.
Many calendar year-end companies are preparing now for their second year of CEO pay ratio disclosure as they evaluate whether under SEC regulations they must use a new median employee in “year two,” or whether they can retain the “year one” median employee. This makes it an opportune time for the compensation committee to discuss with management whether any of the expanded disclosures urged by this coalition of institutional investors and advisors are sensible for their particular company.
To facilitate this discussion, the committee may want to review with management the reactions, if any, from investors, employees, the press, and other constituencies to the company’s year-one disclosures, as well as any subsequent applicable feedback it received from shareholder or employee outreach activities.
This article originally appeared on NACD’s BoardTalk Blog. To view the original, visit here.