Managing Communications:The Gap between CEO Pay and Median Employee Compensation

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act[1] includes a provision that requires companies to disclose the ratio between CEO and employee pay. This provision will be implemented upon the issuance of a Rule which is expected to be finalized shortly.  The Rule requires companies to disclose the:

• median annual total compensation of all employees (excluding CEOs);
• annual total compensation of the CEO; and
• ratio between the two.

While the Rule will allow companies to survey a sample of employees, there is little doubt that there will be significant gaps in pay, particularly for industries that employ hourly workers. Companies should take into consideration – and be able to explain in a way that is easy to understand – the following:

• What methodology is a company using to determine the ratio?
• How did the company determine which employees were to be included in the sample?
• Did the company include all full-time and part-time employees?
• Is the employee base for the U.S. only, and if not which countries does it include?
• Does the company have a plan in place to address and narrow the gap (e.g., increase hourly wage, decrease CEO compensation, etc.)?

Companies need to factor into their internal and external communications how this requirement could impact their reputation among key stakeholders and future communications about executive compensation. Therefore, some additional thoughts to consider:

• Should the company release its analysis ahead of the final Rule to mitigate potential issues?
• How might this ruling and the company’s actions impact current reputation-focused positioning and activities?
• How will the company communicate the results (e.g., internal before external, etc.) and what communications vehicles will be used, and focused on which stakeholders?
• Does the company have a plan in place to mitigate potential negative messages or stakeholder perceptions about the pay gap?

The demand for corporate transparency is only going to increase. Being prepared for, and out ahead of the story could be the differentiator.