Pay Ratio: A Missed Opportunity to Explain Material Changes Between Years
Here’s an excerpt from a piece by Deloitte Consulting’s Mike Kesner:
One might have expected to see an explanation of material changes in a company’s CEO pay ratio or median employee’s compensation in this year’s disclosures. However, just a handful of companies have done so. This may be a missed opportunity for companies to be transparent about the drivers of the changes, which in many cases are understandable and appropriate. For example, some companies had a drop in their median employee’s compensation of 20% to 30% due to an interest rate-driven increase in the present value of the employee’s pension in fiscal year 2017.
For fiscal year 2018, the present value of the pension did not increase, as interest rates remained stable between the two years. As noted previously, comparisons to other companies’ CEO pay ratios are not particularly useful; however, comparisons of a company’s pay ratio and median employee compensation over multiple years may be of interest to shareholders and other stakeholders, and companies might consider expanding their disclosures to explain material changes or note trends between years.
In anticipation of the 2019 pay ratio disclosures, all the S&P 500 companies received a letter signed by 48 union and government pension funds and other investors requesting more detailed information about their median employees, such as the median employee’s job and location, and its workforce, such as a country-level breakdown of the company’s entire workforce and the use of temporary or seasonal workers.
The letter suggested that the additional disclosures would “help investors put [the pay ratio] information into the context of your company’s overall approach to human capital management.” It is difficult to determine whether or to what extent this letter impacted disclosures; however, our analysis showed that 26% of companies added details about their median employee compared to 15% last year.
-Broc Romanek, CompensationStanadards.com August 6, 2019
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