CEO Pay Ratio: The Costs of Compliance

CEO Pay Ratio: The Costs of Compliance

Table of Contents Introduction Key Findings Analysis and Recommendations Centralized Payroll Systems Number of Individuals Working Internally on CEO Pay Ratio Hours of Work by Internal Staff Approximate Cost of Internal Hours of Work Number of Outside Advisors Actual or Anticipated Cost of Outside Advisors Total Aggregate Cost by Organization Size Anticipated Costs in Subsequent Years Use of Exclusions Incremental Costs of Exclusions Use of Statistical Sampling Ambiguity in Identifying Median Employee Helpfulness to Investors Effect of Disclosure on Employees 4 5 6 8 9 10 11 12 13 14 15 16 17 18 19 20 21 2

Table of Contents Continued Characteristics of 125 Surveyed Companies About the Survey Primary Industry Organization Size Workforce Demographics About Pearl Meyer 22 23 24 25 26 28 3

Introduction Under the Dodd-Frank Act (the Act ), public companies will be required to disclose their CEO s and the median employee s pay, the ratio of the two, and an explanation as to how those results were derived. While the Act did not provide an implementation deadline, the Securities and Exchange Commission (SEC) required that companies comply beginning with proxies filed in 2018. Recently however, Acting SEC Commissioner Michael Piwowar issued a public request for further comments as to the costs and burdens of the rule as written. In response, Pearl Meyer solicited its clients to participate in an anonymous survey describing the impact of compliance with the rule to date. Some of the results of this survey were included in our letter to the SEC on March 23, 2017. This summary includes key findings and broad analysis from the survey, as well as demographic details on the participating companies. If you have any questions or are interested in discussing these findings, please contact: Deb Lifshey Managing Director deborah.lifshey@pearlmeyer.com 212-407-9519 4

Key Findings At median, it will cost companies an estimated $12,000 in internal costs in the initial year of the CEO Pay Ratio reporting (ranging from $5,000 to $40,000). Roughly 40% of companies did not anticipate costs would be reduced in subsequent years, and about 40% anticipated only marginal reductions. Many companies anticipate the need to hire outside experts and advisors to help complete the task. Most companies will not seek exemptions for overseas employees, nor will they use statistical sampling. The vast majority (79%) of companies do not think the disclosure will provide any useful information to investors. Fifty-seven percent of companies believe that the information to be disclosed will have a negative impact on their workforce. 5

Analysis and Recommendations What are companies doing? Most companies have already spent or anticipate spending many hours internally computing and disclosing the CEO Pay Ratio and almost a third of companies are hiring more than one outside advisor to assist. Most companies are not planning to take advantage of offered exclusions. - Action: Make sure a team is in place to collect and analyze data, as any repeal or delay of implementation is unclear at this point. - Action: Carefully consider whether the exemptions are worth the work. What is the cost? The estimated dollar range for internal costs is between $5,000 and $40,000, with more than 40% of companies expecting over 100 hours to be spent on the calculation. At median, companies expecting to hire one or more outside advisors expect to spend an additional $10,000. What is the expected impact? Fifty-seven percent of companies are anticipating a negative impact of the disclosure on their workforce, while only 2% believe the disclosure will be at all helpful to shareholders or investors. - Action: Ensure internal communications and PR plans are carefully thought through, and that tactical messaging about the proxy disclosure is presented to employees beyond the language of the proxy document. (See expanded set of communications-based recommendations that follow.) 6

Analysis and Recommendations Communications Who: Determine who your audiences are that will care about the ratio (e.g., investors, media, employees, etc.) What: Determine what (and how much) the company is going to say in the proxy statement Key messages about the number Methodology behind the calculation Rationale for the median employee pay, how it relates to the business, and why all other employees can t compare themselves to that person Where: Does the relevant narrative belong in the CD&A or in an alternative section? Prepare Who internally (HR and non HR) needs to be educated about the disclosure prior to filing and why? Who will be accountable for addressing questions from employees or other stakeholders? What communication collateral materials (beyond the disclosure narrative) are needed (e.g., presentation, internal Q&A document, etc.) What is the timeline? 7

Do you have a centralized payroll/hr system that tracks all of your different types of workers, including overseas, temps, seasonal workers, and independent contractors? No, 32% Yes, 68% Most companies surveyed (68%) have a centralized payroll/hr system. 8

How many individuals (internally) were/are working on your pay ratio project? 6 to 10, 13% 11 to 15, 3% 16 to 20, 0% 21+, 1% Up to 5, 83% Most companies (83%) have up to five internal individuals working on their pay ratio project. 9

How many hours of work by internal staff will it take to complete the initial year of your pay ratio project? 45% 43% 40% 35% 36% 30% 25% 20% 21% 15% 10% 5% 0% Under 50 50 to 100 100+ Forty-three percent of companies will require more than 100 hours of internal staff time to complete the initial year of their pay ratio project. 10

What is the approximate cost in the aggregate of your internal hours required in the initial year? Pctl. $ 25th $5,000 50th $12,000 75th $40,000 At median, it will cost companies $12,000 in the aggregate of internal hours to complete the initial year of the pay ratio project. 11

How many outside advisors did you or were you going to hire to help on the pay ratio project? 2 to 5, 37% 1, 63% More than a third of companies expect to hire more than one outside advisor. 12

What was the actual or anticipated cost of hiring outside advisors in the initial year? Pctl. $ 25th $6,000 50th $10,000 75th $50,000 At median, it will cost companies $10,000 to hire an outside advisor(s) in the initial year. 13

Total aggregate cost (internal + external) according to organization size <$1B $1B-$3B >$3B 25th $4,750 $11,250 $15,000 50th $10,000 $50,000 $25,000 75th $21,250 $103,500 $112,500 Average $21,990 $89,056 $64,513 At median and on average, companies in the $1B to $3B range appear to have the highest costs in determining the CEO Pay Ratio. 14

Do you anticipate subsequent years to cost less? If yes, what approximate % cost of the initial year do expect to decrease in subsequent years? >40% decrease, 19% No, same cost, 38% 30% decrease, 11% 20% decrease, 14% 10% decrease, 18% Most companies (56%) expect costs to stay the same, or decrease by 10% or less in subsequent years. 15

Do you intend to take advantage of any exclusion offered under the final rule (Data Privacy or Overseas De Minimis Rule)? Yes, 39% No, 61% A majority (61%) of companies do not intend to take advantage of exclusions. 16

What incremental costs (internal and external) do you expect as a result of taking advantage of exclusions? Pctl. $ 25th $5,000 50th $5,500 75th $12,500 Max $50,000 At median, companies expect it to cost $5,500 to take advantage of exclusions. 17

Will you be using statistical sampling to exclude certain employees from the calculation? Yes, 21% No, 79% Most companies (79%) will not be using statistical sampling to exclude employees. 18

On a scale from 1-5, how much ambiguity have you encountered in trying to pinpoint the median employee (e.g., making decisions about what forms of compensation to include/exclude on a consistent basis)? Level of Ambiguity 1 = low ambiguity; 5 = high ambiguity 5 15% 4 19% 3 39% 2 16% 1 12% 0% 10% 20% 30% 40% 50% % of Cos. Most companies (73%) report significant levels of ambiguity when attempting to pinpoint the median employee. 19

Level of Helpfulness On a scale from 1-5, how helpful do you think the resulting disclosures will be to your shareholders and potential investors? 1 = not at all helpful; 5 = very helpful 5 1% 4 1% 3 3% 2 16% 1 79% 0% 20% 40% 60% 80% 100% % of Cos. The vast majority (79%) of companies think the resulting disclosures will not be at all helpful. 20

Level of Positivity On a scale from 1-5, what do you think the resulting disclosure will be on your own workforce? 1 = negative; 5 = positive 5 1% 4 4% 3 37% 2 24% 1 33% 0% 5% 10% 15% 20% 25% 30% 35% 40% % of Cos. Most companies (57%) think the resulting disclosures will have a negative effect on their own workforce. 21

Characteristics of 125 Surveyed Companies Median number of employees = 2,800 (range from 370-10,000) Respondents = 21% board members; 79% management More than 12 industries participated; the largest sectors covered include financial services (25%), technology (15%), and health care (11%) At median, 5% of employees were part-time and 8% were international At median, companies had a workforce in four countries (range from 1-18) Most of the respondents (69%) represented organizations of between $300M and $10B Most of the respondents (68%) have a centralized payroll system 22

About the Survey Board or Management? Board, 21% Mgmt. Team, 79% This online survey, conducted in March 2017, queried management team members and directors. Survey results are based on data from more than 125 participants. The majority of respondents are in management. 23

Primary Industry Other, 15% Business Svcs., 1% Consumer, 5% Energy, 9% Utilities, 2% Transportation, 1% Technology, 15% Financial, 25% Real Estate, 4% Materials, 5% Industrial, 8% Health Care, 11% A wide variety of industries is represented in the survey, with strong representation from financial services, technology, healthcare, and energy. 24

Organization Size >$30B, 4% $20B-$30B, 6% <$100M, 8% $10B-$20B, 6% $100M-$300M, 8% $300M-$1B, 16% $3B-$10B, 27% $1B-$3B, 26% The revenue, assets, or operational budget of these companies ranges from under $100 million to greater than $30 billion and 53% are between $1B and $10B in size. 25

Workforce Demographics % of Employees that are Full-Time (Median) Not Full-Time, 5% % of Employees that are National/International (Median) International, 8% Full-Time, 95% National, 92% At median, a strong majority of companies workforces are composed of full-time, U.S.-based employees. 26

Workforce Demographics (cont.) Number of Employees Worldwide Pctl. # 25th 370 50th 2,800 75th 10,000 Number of Countries in which Employees Work Pctl. # 25th 1 50th 4 75th 18 At median, the responding companies have 2,800 employees worldwide and employ individuals in 4 countries. 27

About Pearl Meyer Pearl Meyer is the leading advisor to boards and senior management on the alignment of executive compensation with business and leadership strategy, making pay programs a powerful catalyst for value creation and competitive advantage. Pearl Meyer s global clients stand at the forefront of their industries and range from emerging high-growth, not-for-profit, and private companies to the Fortune 500 and FTSE 350. The firm has offices in New York, Atlanta, Boston, Charlotte, Chicago, Houston, London, Los Angeles, and San Francisco. 28

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