CEO Pay Ratio - Radford · Key Components of Disclosure •Pay Ratio •Median of the annual total...

CEO Pay Ratio:

Building On What We

Have Learned (So Far)

Stephen Popowski, CEP

Aon Equity Services

Housekeeping - Wednesday

CPE Credit Requirements

• Complete a sign in/sign out card - drop with room monitor at the end of the session

• Complete an evaluation form – drop with room monitor at the end of the session

Presentation Slides in the New Experience Help System

• Help > Resources > Summit 2018

Do More Game!

• Collect your Do More Game stickers by visiting the exhibit tables and completing the activities

• The first 30 to show a completed card at the registration desk win an instant prize

• All completed cards will be entered to win an iPad Mini and other great prizes on Friday morning by 8:15am.

Reminders

• Still need to sign up for a 1:1 consulting session? Pick up a sign up form at the Information Desk

• Welcome Reception kicks-off tonight at 5:30pm in the Empress room

• Customer Appreciation Event | May 31st 6-10pm - Main Beach- Hotel del Coronado

• Rise Against Hunger | June 1st 8:15am – Regent Room

June 6, 2018 | © 2018 Certent. | #DoMoreWithCertent | 2

Learning Objectives

This presentation will review:

• A brief history of the CEO Pay Ratio rule – framed as both a data and compliance exercise

• A review of the 6 high-level steps needed to complete and disclose your CEO Pay Ratio

• Common market practices related to median employee selection

• Considerations related to re-identifying the median again in FY 2018 (or 2019)

• Common market practices related to disclosure

• Communication strategies for different stakeholders

June 6, 2018 3 | © 2018 Certent. | #DoMoreWithCertent |

(Brief) History of the Rule

CEO Pay Ratio Timeline and Background

• July 21, 2010 – Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law. Includes

Section 953(b), requiring firms to disclose the ratio of their principal executive officer to the annual total

compensation of their median employee.

• September 18, 2013 – SEC issues proposed rule

• August 5, 2015 – SEC adopts CEO pay ratio rule

• February 6, 2017 – Acting Chairman Piwowar issues reconsideration of implementation

• September 21, 2017 – SEC issues updated guidance – 10 days prior to the first Determination Date for

calendar-year filers

• January 12, 2018 – First proxy containing new CEO pay ratio filed


CEO Pay Ratio Process

From July 21, 2010 to May 30, 2018


The CEO Pay Ratio Process

Procedurally, 6 steps:

• Determine the measurement date (“Determination Date”)

• Determine the employee pool as of the Determination Date

• Determine the “Consistently Applied Compensation Measure” (“CACM”)

• Identify the median employee (and similar “alternates” that you might want to track”)

• Identify median employee’s total annual compensation

• Communicate!

• Proxy statement disclosure

• External communication

• Internal communication

• Repeat* (if necessary)


Step #1 – Determine Employee Population

Select a Determination Date

• A single date (point in time) on which you take a slice of your employee population

• Must be within 3 calendar months of fiscal year end

• October 1 through December 31 for calendar-year filers

• Strategy decisions should be considered in selection of date

• Limit temporary/seasonal employees

• Market converging on end of payroll period or other pertinent date

Key Go-Forward Considerations

• Review challenges of data acquisition

• Have staff document process and procedures for next time the firm elects to re-identify the median employee (combats learning loss)

• In subsequent re-identification years, plan to use the same date

• No disclosure is required for date rationale

• BUT will be required to disclose “why” if the date is ever changed


Step #2 – Determine Employee Population &

De Minimis Considerations

Determine Employee Population

• U.S. and non-U.S.; full-time and part-time; temporary, interns, intermittent, seasonal; all employees on leave

(FMLA, LTD, STD); expatriates

• Includes consolidated subsidiaries

• Excludes:

• Principal Executive Officer on Determination Date

• Contractors (including independent contractors)

• Employees with data privacy (if opinion of counsel obtained – exceedingly rare)

Opportunities

• Opportunity to employ business combination exceptions (the so-called “merger exception”)

• Will need to re-identify median employee if firm has relied on the merger exception in subsequent fiscal year

• Opportunity to employ de minimis exemptions


Step #2 – Determine Employee Population &

De Minimis Considerations

De minimis exemptions allow for exclusion of non-U.S. employees provided that:

• Overall percentage of removed employees does not exceed 5%

• If one (1) employee is excluded from a given country, then all employees must be excluded

• No U.S. employees can be excluded

• Will need to track headcount for disclosure purposes. Seemingly innocuous requirement, but:

• Strategy decisions – risk associated with showing competitors year-over-year growth in certain countries

• Optics – opens the door to potential discussion as to why a particular country was removed

• Go-forward consideration – the set of countries that you have excluded in FY 2017 exceeds 5% of your employee population

Emergent Themes From Proxy Season

• Firms are opting to exclude countries both for administrative ease and for purposes of decreasing the ratio

• Based on Aon data, expectation is that de minimis will decrease ratio less than 5%

• Behavior of compensation peers


Step #3 – Determine Consistently Applied

Compensation Measure (“CACM”)

Considerations

• Advantages of using target values – annual base salary, target total cash, target total direct compensation

• Will often provide year-over-year consistency

• Will often provide cleaner, more intuitive results

• Avoids issues associated with performing annualizations

• Avoids many issues associated with data collection in non-U.S. regions

• Advantages of using Gross Wage / W-2 data

• Easy to develop and easy to perform data exercises

• Overall Reminders

• FTE adjustments not permitted though some firms are disclosing supplemental ratios that employ this adjustment

• Usage of retirement benefits (defined benefit plan vs defined contribution plan) as part of your firm’s CACM was limited

• Note though that change in pension values often account for a substantial portion of employee compensation developed

pursuant to Regulation S-K Item 402


Step #3 – Determine Consistently Applied

Compensation Measure (“CACM”)

Considerations

• Usage of statistical sampling

• Prevalence is low – 3% as of 5/1/2018

• Example of Hanesbrands, Inc. approach

• Usage of cost-of-living adjustments (“COLA”)

• Prevalence is low – <2% as of 5/1/2018

• The requirement is that a cost-of-living adjusted ratio be

disclosed in addition to a cost-of-living unadjusted ratio

removes much of the impetus to employing


0

100

200

300

400

500

600

700

800

Yes No

Prevalence of Statistical Sampling

0

100

200

300

400

500

600

700

800

900

Yes No

Prevalence of COLA

Step #4 – Determine Median Employee

Determine Median Employee

• Consider appropriate exchange rates at the identification step

• No specific guidance - spot rate, Year-to-Determination Date trailing average, other approaches valid

• Consider Brexit example

• Appropriate handling of data of seasonal workforce, including interns (especially relevant in firms with a large

overseas population)

• Shortcut, but consistently applied, approaches to estimating the fair value of equity granted at the median

identification stage

• Rare cases (e.g., compensation expense associated with Underwater Stock Option Exchanges) relevant

• Rank order median

• Multiple individuals with the same compensation value

• Even number of employees


Triennial Re-Identification

Go-Forward Considerations

• Do you need to re-identify your median for your next proxy?

• Triennial Identification allows firms to identify median employee once every three years and then use that employee’s Item 402

compensation in subsequent proxy disclosures

• Firms with significant workforce change – reduction in force, hiring, acquisition, greater than normal turnover – may be

required to re-identify median employee

• Should you re-identify your median for your next proxy?

• Holistic consideration – is the median employee still employed by the firm? Is the median employee still a reasonable

representation of the median employee?

• Statistical sampling may be useful to see if your employee population has shifted


Full Stop


Step #5 – Determine Median

Employee Compensation

Develop Median Employee Compensation Pursuant to Regulation S-K Item 402

• Similar to Summary Compensation Table compensation, but can include Health & Welfare benefits

• The CEO compensation may not match the Summary Compensation Table

‒ Any potential communications issues associated with making this disclosure should be considered

• Benefits paid to government may be excluded

• Special equity cases (Underwater Stock Option Exchanges)

• Currency conversions

• Is the median employee anomalous?

• 2017 New Hire

• Health and Welfare elections

• Pension Value / 401(k) match


Communications

Disclosure, External Stakeholders, Internal

Stakeholders


Step #6 – Requirements of Disclosure

Key Components of Disclosure

• Pay Ratio

• Median of the annual total compensation of all employees (except the PEO) – A

• Annual total compensation of the PEO (may be adjusted) – B

• Ratio of A:B (or narratively B to A)

• Method Used to Identify the Median Employee

• Any excluded acquired business(es) and estimate of excluded headcount

• Any jurisdictions excluded due to privacy or de minimis rules and headcounts excluded

• Date used for identifying the median compensated employee

• Compensation measure (other than annual total compensation) used to identify median

• Description of cost of living adjustment, if used

• Any adjustments/estimates used in identifying median or in determining total compensation

• Voluntary Supplemental Disclosure

• Description of population

• Discussion of pay-setting practices

• Alternative ratio(s)


What’s a good ratio?

Relativity Is Key

• SEC acknowledges that your ratio may not be comparable across firms

• “[T]he final pay ratio rule should be designed to allow shareholders to better understand and assess a particular registrant’s compensation practices and pay

ratio disclosures rather than to facilitate a comparison of this information from one registrant to another.” (Adopting Release, p.12)


0

20

40

60

80

100

120

140

0 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 500 525 550 575 600 625 650 675 700 725 750 775 800 825 850 875 900 925 950 975 1000

Frequency of Ratios

90th Percentile 362

75th Percentile 199

Median 106

25th Percentile 58

10th Percentile 33

https://www.sec.gov/rules/final/2015/33-9877.pdf

What’s a good ratio?

Relativity Is Key

• SEC acknowledges that your ratio may not be comparable across firms

• “[T]he final pay ratio rule should be designed to allow shareholders to better understand and assess a particular registrant’s compensation practices and pay

ratio disclosures rather than to facilitate a comparison of this information from one registrant to another.” (Adopting Release, p.12)


Average Average

4-Digit GICS Ratio 4-Digit GICS Ratio

2030- Transportation 78 3520- Pharmaceuticals, Biotechnology 188

5510- Utilities 81 4530- Semiconductors & Semiconductor 218

4010- Banks 88 2020- Commercial & Professional Services 243

6010- Real Estate 94 3510- Health Care Equipment & Services 243

1010- Energy 110 3020- Food Beverage & Tobacco 268

4510- Software & Services 123 2510- Automobiles & Components 336

4030- Insurance 134 3010- Food & Staples Retailing 349

5010- Telecommunication Services 135 2540- Media 414

4020- Diversified Financials 138 2520- Consumer Durables & Apparel 447

1510- Materials 140 2550- Retailing 460

2010- Capital Goods 144 3030- Household & Personal Products 575

4520- Technology Hardware & Equipment 173 2530- Consumer Services 771

https://www.sec.gov/rules/final/2015/33-9877.pdf

Step #6 – Key Communication Stakeholders

(External)

Who is your audience?

• 1) Proxy Advisory Firms (i.e., Institutional Shareholder Services, Glass Lewis)

• ISS will be tracking the ratio, though likely that they will not make any say-on-pay recommendations based on disclosed ratio

• Go-forward approach likely to focus on year-over-year ratio movement

• 2) Institutional Investors

• For the large institutional investors Fidelity, Vanguard, BlackRock, etc. – largely met with a shrug

• Public sector pension funds and select investors – tend to be firm-specific

• 3) Media and Unions

• Unions (i.e., AFL-CIO) were instrumental in bringing about this rule but have largely been quiet so far

• Media content may be geography-focused

Disclosure Decisions

• Compensation Discussion and Analysis best place to justify existing pay design

• Multiple, supplemental ratios may appear reactive – they require specificity and establish precedent

• Avoid defensive language – the SEC acknowledges that direct comparisons are likely not appropriate

• Placement of ratio – avoid more prominence then it deserves

• Underscore that compensation decisions are not made based on the ratio

• May be included as part of proxy disclosure



(Internal)


• 4) Internal Audience

• For the first time, an employee can see whether they are above or below median

• High Potential / High Performer messaging may differ

• Recruiting tool, especially in non-U.S. regions

Potential Strategies

• Comparisons have the capacity to be misleading and should be avoided

• High level discussion of firm culture and mission

• Maintain consistency with previous communications

• Has this topic come up among employees – is there a designated individual who has handled communication?

• Preparation on how the firm seeks to reward value creation

• What is the firm’s total rewards strategy

• Relative to competitors for which you

• Use of Bureau of Labor Statistics data

• Geographic and firm-specific data worthwhile to consider in crafting messaging



(Internal)



0

50

100

150

200

250

300

350

400

$5 $30 $55 $80 $105 $130 $155 $180 $205 $230 $255 $280 $305 $330 $355 $380 $405 $430 $455 $480

Em

plo

ye

e C

ou

nt

Compensation Value ($000)

Em

plo

ye

e C

ou

nt

Compensation Value ($000)

Represents temporary/seasonal employees with prorated salary

Location of the median employee

Questions? Contact Information:

Stephen Popowski, CEP

Senior Associate

Aon Equity Services

[email protected]

(312) 381-1546

mailto:[email protected]

CEO Pay Ratio - Radford · Key Components of Disclosure •Pay Ratio •Median of the annual total...

Documents

Transcript of CEO Pay Ratio - Radford · Key Components of Disclosure •Pay Ratio •Median of the annual total...