How to engage with investors in the age of the activist: dealing with CEO compensation

Investors have learned that it pays to be aggressive when it comes to boardroom fights. As a result, companies are preparing for activist campaigns well in advance.



QUESTION > Publishing CEO compensation and its ratio to “regular employees” goes into effect next year. What risks – and subsequent mitigation – are you expecting to address?

Lex Suvanto > First of all, CEO compensation already gets a lot of scrutiny. For companies with management teams that are paid high salaries, or salaries that are much higher than peer companies, they get a lot of attention – it’s a big reputational issue. The new rule regarding the ratio of CEO pay to employee pay isn’t going to put CEO compensation into the limelight all of a sudden, because it already is in the limelight. The ratio is going to make it more so, however, and it is going to make it easier to compare companies apples-to-apples. It’s also going to give stakeholder groups and constituents such as employees and labor groups more ammunition for negotiations and generating media attention.

I think CEOs and boards are going to be more sensitive as a result of this rule. They are probably going to use it as an opportunity to think more carefully about how they communicate this information and what the substantiation is for it.

Kai Haakon E. Liekefett > Like many practitioners, I think this rule is a very good example of a well-meant regulation that causes nothing but an enormous amount of work and a significant waste of money.

When you calculate the amount of money that corporate America is going to spend on this, you’d be shocked. Companies will have to determine what a “regular employee” is, and while that’s easy when you have 20 employees, it is much more challenging when you have 30,000 employees worldwide on very different compensation scales. You also need to figure out what you count as compensation, for both the CEO and employees. It’s an enormous calculation that will cost millions for large companies. And the output is an arbitrary number that says 1:30, 1:50, 1:70, something like that, which is going to be used primarily for one reason – for activists to argue that the CEO is overpaid.

Activists are all over this and will use it to undermine the credibility of management in their pursuit of profit.

Chris Ruggieri > One certainty when it comes to the CEO compensation ratio is that there will be some stark differences between industries. If you take an industry like fast food, where you have a lot of entry-level jobs, you’re going to have a much bigger multiple than in certain other industries.

So like any type of data, it has to be interpreted – you have to put the number in context. It will provide additional information in the marketplace, however.  Just like with the “say on pay” rule, people will be looking for outliers and if they see them, it will begin to stimulate some discussion.


I suspect you will have some knee-jerk reactions and outrage over certain multiples that appear to be very high. On the other hand, the board should be asking questions if they observe differences between companies in their industry peer group. It’s like any information – you’re going to analyze it, and if you notice trends or differences, it’s going to cause you to ask questions. I think it is incumbent upon executive management and the board to be mindful of that.

Jason M. Halper > One of the main risks regarding the CEO compensation ratio is the question of whether to provide additional narrative around the disclosure. You are permitted to do so under the SEC rule, but if you do provide additional narrative, you need to be careful not to make any false or misleading statements. You also need to consider whether you’re opening up a further can of worms by devoting more pages to it.

Since the rule is not in effect yet, companies don’t know how they’re going to compare with their peers. So there is a lot of uncertainty regarding whether to put narrative around it – you have to be careful, at least in the first year you do it. Initially, I think any optional disclosure would be on the side of explaining the elements that led to the number. So, for a company that has many seasonal workers, for instance, that may drive the ratio higher. That is a fact-based disclosure that could be made, as opposed to a more qualitative or high-level disclosure.


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