4 Steps to Managing Morale During CEO Pay Disclosure

by Lauren Dixon

Public companies were used to releasing the pay of their CEOs to the Securities and Exchange Commission, but they recently started doing it a bit differently.

At the end of the 2017 fiscal year, public companies had to report the median total compensation of all employees of the company minus the CEO, along with the CEO’s total compensation and a ratio of the two. The new rule, whose intent and expected results are unclear, was part of the Dodd-Frank Act enacted by the Obama administration following the 2008 financial crisis.

According to the Economic Policy Institute, CEOs in top U.S. firms received about 271 times the average pay of a typical worker in 2016; the ratio in 1965 was 20-to-1.

“Something economic is happening that is causing this bifurcation,” said John Marthinsen, professor of economics and international business, who is also distinguished chair in Swiss economics at Babson College.

This is more complicated than CEOs simply making more than their employees. Marthinsen said the offshoring of jobs has to do with the depressing of wages at the lower end of the spectrum. When low-skill jobs move to countries with lower salaries, it further depresses the salaries of those workers. However, managing offshored work requires a lot of skill, thus increasing managers’ salaries.

Although this makes sense in theory, that doesn’t mean it doesn’t ultimately hurt middle class household incomes. If they’re working hard and not feeling that they’re getting ahead — while the chief executive’s income continues to rise — workers could become discouraged, Marthinsen said.

Research and advisory firm Willis Towers Watson published the results of a poll in June 2017 that found that among 360 corporate executives and compensation professionals, 48 percent had yet to think about how or if they would communicate the published pay ratio with their employees. Nevertheless, half of respondents were most concerned about retorts from employees, more so than media and shareholder reactions.

When these ratios become public, how can companies manage employee morale?

Here are four steps to managing employee morale during pay ratio disclosures:

1. It’s beneficial to understand employee knowledge of how the company determines their pay, said Jim Kohler, a director of communication and change management at Willis Towers Watson. Surveys and focus groups can be a start. Then, gather the information and structure the communication strategy that will follow.

2. While building a communication plan, consider the audience. Communication with employees isn’t the same as with shareholders, said Steve Seelig, executive compensation counsel at Willis Towers Watson. While messages to shareholders usually contain methods for keeping costs down and offshoring jobs, that won’t go over as well with employees.

3. Get out in front of the announcements. The employee reactions to the pay ratio will only be worse if they’re reading about it for the first time in the news or on social media, Kohler said. Talking points should include philosophies around pay and market competition, as well as the employee value proposition beyond pay.

4. Equip managers to discuss the ratio with their employees. They’re often the first stop when employees have questions about salary, Kohler said. And if employees begin to request raises, managers should be able to say what it takes to get a raise, including how to move forward and develop oneself within the organization.

Results of the Ratio Report

Experts are also unsure of the results from reporting these ratios, though time spent on the process could invite trouble.

“More and more of a board agenda is being devoted to compliance issues,” said Mike Magsig, managing partner of the global board and CEO practice at DHR International, an executive search firm based in Chicago. As a result, maybe opportunities are being missed because of the amount of time spent on compliance.

It also could impact the supply of leadership talent, Magsig said. If the U.S. begins to cap or compress pay levels as a result of these reports, then some of the country’s talent could potentially move to other countries where such practices are not in place.