5 Hidden Cost of Inaccurate Compensation

Questions, few answers, and a heated debate over CEO Pay-Ratio

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Everyone today is talking about pay, whether it’s at the gym, in the break room, the boardroom or on ESPN during free agency, everyone seems concerned with the amount of money people make.  Even the Bible talks about money, pay, and finances – a lot.  In fact, you will find about 800 scripture verses that pertain to money throughout its text.

But why are we so consumed with knowing what others make from a compensation perspective?  Today, we turn the conversation to buzz words like Pay Ratios, Fairness, Averages, Disclosure, Transparency, and want to know every detail about the contract for the new quarterback of the Houston Texans and what the total compensation with bonuses and incentives will be for the CEO of Apple this year. We’re always interested in knowing what the people at the very top of their professions are making.  

The questions I tend to ask after I have those numbers are:

  1. Why is the total compensation number so important?
  2. How does it compare to others in the same field?
  3. What are all the factors that go into providing that type of income?
  4. Is that a fair wage for the work they are doing?

These are questions that apply to any person’s compensation package, not just celebrities and CEOs. The CEO Pay Ratio Disclosure is supposed to shine light on how much the difference is between top-ranked CEO’s in the U.S. vs. the total compensation of the median worker in their organization. Will these calculations and ratios, once published, provide us with answers to the questions above or fuel more questions that will certainly arise, like:

  1. Will we see a gender pay gap in the ratios?
  2. How does this policy help with Diversity initiatives my company has in place?
  3. Will it cause a ripple effect and increase the median worker’s take home pay?

What will be required in 2017?

CEO pay has been on the rise in the U.S. since the 1970’s and for some individuals, it has been escalating out of control.1 In July 2010 the Dodd-Frank Act took effect in the U.S. and with it started a debate that has lasted for five long years.  The debate over CEO compensation in relation to the median worker pay took five years and a few revisions to actually come to reality on August 6, 2015 with the CEO Pay Ratio Disclosure.

Public companies (with exception of emerging growth companies, smaller reporting companies, foreign private issuers, registered investment companies, and registrants filing under the U.S. – Canadian Multijurisdictional Disclosure System) will be required to report the CEO Pay Ratio for their first fiscal year beginning on or after January 1, 2017.  The pay ratio is intended to provide employees, board of directors, and compensation committees with another piece of information to consider; it will be especially useful for investors when they exercise their Say on Pay votes, which provides a firms shareholders with the right to vote on the remuneration of executives.  Compliance with the ruling will require HR and Compensation departments to file the following information with the SEC:

  • The median of the annual total compensation of all its employees, except the CEO;
  • The annual total compensation of its CEO; and
  • The ratio of those two amounts.

The questions above make for a good case to forge full speed ahead and find out exactly how much each CEO in the U.S. makes in comparison to the median worker, But what are you going to do with that information?  We live in a society where everyone thinks they want full disclosure of everything.  We tend to think we can use the answers to the questions as data or information to make better decisions and help shape a better, more transparent world where everything is fair and equal. 

Once you get the data, is it really going to change anything with the way you go about your daily lives?  Will it change your spending habits or cause you to think of one company differently than another?  In a recent Wall Street Journal article the debate continues as to whether Congress should rescind the pay-ratio rule.  Both sides make valid points about the time spent calculating and reporting vs. the amount of information gained with respect to unbalanced pay ratios that fuel poor performance indicators.

For most public companies, calculating the total compensation of the CEO is a formality, especially for certain reports and forms required on an annual basis. Calculating the compensation of the median employee shouldn’t present overwhelming challenges. In the end, HR, Procurement, Payroll, and Compensation professionals should see this as just another calculation to comply with government forms and regulations.

With these facts in place, it is important to choose a compensation solution that simplifies complex calculations and provides you the visibility needed to comply and communicate internally and externally with ease.

 

1. http://www.epi.org/publication/ceo-pay-continues-to-rise/

 

 

 

 

 

 

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