Investor Relations (IR) officers may have a new job description: Chief Executive Officer Relations (CEOR). You may have to begin planning to simultaneously communicate the company’s AND the CEO’s financial brand.
In a 3-2 vote, the Securities and Exchange Commission, yesterday, adopted a final rule that requires public companies to disclose the ratio of their CEO’s compensation against the median compensation of its employees.
Beginning with their first fiscal year on or after January 1, 2017, this new element within Dodd-Frank’s say-on-pay mandate, may force IROs to “justify” their CEO value to The Street, employees and even consumers. Coincidently, new research from Harvard Business School shows that customers favor retailers that reign in their CEOs’ salaries. Their research documented that an issuer with an unbalanced CEO-to-employee Yin & Yang must offer a considerable 50% discount to be par with a company that keeps a low ratio.
Time will tell what Wall Street thinks… certainly, activist investors and CSR-minded institutional investors will use the ratio data when it benefits them most. IR and corpcomm’s workload will undoubtingly increase to counterbalance the predicted hype from media and markets’ pundits “naming and shaming” well paid CEOs and the companies that employ them.
Issuers do have some flexibility in calculating their pay ratio:
- Companies will have to include part-time and non-U.S. employees in CEO pay ratio calculation
- Pay ratio will allow issuers to exclude 5% of non-U.S. employees or those in nations with restrictive data privacy laws
- The median employee determination calculation is required only once every three years
- The determination date can be within the last three months of a company’s fiscal year
The ratio disclosure would apply to all companies required to provide executive compensation disclosure under Item 402(c)(2)(x) of Regulation S-K. Smaller reporting companies, foreign private issuers, MJDS filers, emerging growth companies, and registered investment companies would not be subject to the requirement.
For details on Form S-K filings, our free guidebooks are recommended. REQUEST A SET HERE.