CEO Pay Ratio: Year 2 Planning

The CEO pay ratio disclosure, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires U.S. public companies (excluding newly public companies, emerging growth companies and smaller reporting companies) to disclose the ratio of its CEO pay to that of the median employee. The disclosure became effective in 2018 and most companies have now calculated and disclosed their first CEO pay ratio, generally eliciting relatively muted internal and external reaction. The upcoming second year of pay ratio disclosure provides the challenge of deciding whether the same median employee used in Year 1 can be (or should be) used in Year 2 and assessing the implications of potential year-over-year changes in the ratio.

Year 1 CEO Pay Ratio Recap

Year 1 CEO pay ratio disclosures revealed a wide degree of variability in both results and methodology. The Appendix to this letter presents a summary of key Year 1 pay ratio findings among the “Top 250” companies in the S&P 500.

Preliminary Year 2 Decisions

While there is no restriction on identifying a new median employee each year, the SEC rules permit the 2017 median employee (“M2017”) to be used for up to two additional years (three total years). However, in order to use M2017 in Year 2, the company must reasonably believe that there have been no changes to the company’s employee population or compensation arrangements that would result in a “significant change” to the pay ratio disclosure. Link»