Pay Ratio Disclosure at the S&P 500

Maureen O’Brien is Vice President and Corporate Governance Director at Segal Marco Advisors. This post is based on her Segal Marco memorandum. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here).

A coalition of institutional investors with $3.3 trillion in assets under management and advisement identified best practices for pay ratio disclosure in a letter to S&P 500 index companies. 2018 is the first year in which publicly traded U.S. companies are required to report the ratio of pay between the CEO and the median worker. As explained by the letter, pay ratio disclosure provides key insights for investors on companies’ approaches to human capital management and for casting advisory proxy votes on executive compensation plans (“say-on-pay”).

The first year of pay ratio reporting revealed a range of approaches to disclosure of pay ratio information by firms, including discussion of companies’ overall employee compensation philosophy. The letter notes: “We believe that a company’s workforce is an asset to be invested in, not a cost to be minimized. Investments in employee compensation can motivate employees to be more productive and engaged in their work.”

Say-on-pay votes going forward may be informed by changes to the ratio year to year at a company, which is one indicator whether the CEO’s pay is internally aligned with the rest of the workforce. The investor group reviewed the year’s pay ratio disclosures and found 12 examples of supplemental disclosure that provide useful context for investors to assess the ratio. Item 402(u) of Regulation S-K and applicable SEC guidance to the pay ratio disclosure rule permit companies to provide supplemental disclosure.

The categories of useful supplemental disclosures are:

  • 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

The letter does not ask companies to take any action other than to consider areas for enhanced supplemental pay ratio disclosure in 2019. A copy of the letter can be found here.

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