How to communicate CEO compensation: A looming challenge

With the new year will come a mandate to disclose the ratio between your head honcho’s remuneration and that of the average worker. Got a plan in place? Here’s how to get started.

Compensation is a dicey communication issue. It’s also an important one.

A 2014 survey found that up to 66 percent of employees were thinking about quitting their jobs over dissatisfaction with pay. In the same survey, more than 25 percent of respondents said they hadn’t been offered a pay increase in the previous 12 months.

Employees frequently learn about their colleagues’ salaries through a variety of channels, from the rumor mill to Glassdoor.com. Yet few companies clearly communicate how compensation is determined and the philosophy that underlies it.

Even less frequently do organizations address executive compensation with the rank-and-file. Employees of public companies can, of course, find out what the CEO makes. Federal securities laws require disclosure, which then finds its way into a multitude of reports like this, this and this.

The easy access to these lists doesn’t mean your employees will find your CEO there. After all, there are more than 7,300 publicly traded companies in the U.S., fewer than 3 percent of which appear on a top-200 list. For most employees, it would require analyzing reporting documents to get that information, something only higher-ranking staff are inclined to do.

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A recent PayScale/Equilar study “those at higher levels within the organization tend to be more aware of their CEO’s compensation in the first place,” according to PayScale Senior Editorial Director Lydia Frank (quoted in a FastCompany article).

Of the 21 percent of employees who disapprove of the CEO’s pay, it adversely affects their view of the company for 57 percent, and 26 percent plan to seek another job because of it. That’s not a large number, though some top performers could be included in the group.

Dodd-Frank will change the game

The sum of the CEO’s pay comes without much context; that’s about to change. A new Dodd-Frank rule, which goes into effect on Jan. 1, will require public companies to disclose the CEO-employee compensation ratio. That is, what does the CEO make as a ratio of the median pay of other employees?

Suddenly, a CEO no longer needs to be in the rarefied air of his top-paid peers in order to find himself on a widely read list. 21st Century Fox CEO James Murdoch is nowhere to be found on The New York Times list of the 200 highest-paid CEOs, yet he ranks fifth on the list of companies with the biggest CEO-to-worker pay ratios at 311:1.

The CEO-to-worker metric is gaining wider awareness thanks to the heightened discussion of income inequality. Employees who might shrug off interest in the total dollars the CEO makes could have tremendous interest in the gap as a means of assessing the fairness of the company’s compensation practices.

With companies facing a reporting requirement that goes into effect in less than four months, communicators should be ramping up their efforts to explain the ratio. External communication could be important, but clear, transparent, candid communication to employees is vital.

Some basic facts are bound to surface as media, activist groups and others discover this new treasure trove of corporate data. For example, the average ratio is 70:1. If your organization’s is lower than that, you have a great story to tell; if it’s higher, you have some explaining to do.

Why you have to explain CEO pay

According to PayScale’s Frank: “Employees are likely more accepting of high CEO pay when they understand the logic behind it. If the logic is perceived as sound, then there’s not necessarily an issue. If it’s perceived as flawed, well, I suspect that’s part of the reason the SEC put this rule into place to begin with.”

Indeed. When corporate-governance research firm MSCI released the results of a study showing that many of the highest-paid CEOs oversee some of the worst-performing companies, media coverage was high. This increased scrutiny on executive compensation can have a direct impact on employee engagement. Not only will some be inclined to seek greener (and fairer) pastures elsewhere, those who stay could suffer a dip in their levels of engagement.

It’s not how much employees are paid that affects engagement; it’s the perception that pay is fair or unfair.

According to the 2014 IBM WorkTrends Survey, the belief that pay is fair comes from:

  • Knowing how pay is determined
  • Knowing how to maximize pay
  • Believing pay is related to performance
  • Believing pay is tied to goal achievement

Now imagine a top-performing lower-ranked employee who hasn’t received a pay increase in more than a year discovers the CEO is making 200 times what the average employee earns despite weak corporate performance over the prior several years. Next, imagine the cafeteria chatter as that information is reported by news organizations and spread through social media.

The IBM WorkTrends report also notes that understanding of compensation aligns with the employee’s place on the org chart: 90 percent of executive or senior leaders understand it, 81 percent of mid-level managers, 79 percent of front-line supervisors, but only 77 percent of front-line workers.

How to communicate the CEO-to-worker pay ratio

Those internal communicators who haven’t yet started planning to communicate the CEO-to-worker ratio—most, I suspect—are already late to the game. Waiting longer could prove to be disastrous. How do you go about it?

  • Assess what kind of communication you’re already conveying about compensation, including anything undertaken independently by HR. Is it candid, or just so much corporate blather? What’s missing?
  • Assess current employee attitudes about pay, both their own and executive compensation. If it’s mostly positive, you’ll undertake this task differently from your approach if it’s negative.
  • Get a firm handle on the compensation philosophy and formulas. Share and explain those formulas before the deadline for reporting the ratio.
  • Determine the best channels for communicating about the CEO/worker ratio.
  • Don’t wait for an employee to share an article link on the enterprise social network (or Facebook). Plan to communicate the day the data is disclosed in reports to the SEC.
  • Make sure your communications aren’t one-way. Establish channels that allow for a dialogue, and play a strong role in how employee questions and concerns are addressed in these channels to avoid making the situation worse.
  • Your CEO is the one making those many multiples of what the average employee earns. She should be directly involved in these conversations.
  • An interview with the chairman of your board of directors’ compensation committee would be a welcome bit of content, providing insight that most employees rarely get into how these decisions are made.
  • If the ratio is particularly high, explain why. CVS Health CEO Larry Merlo tops one current list with a 434:1 ratio, but that’s because so many CVS employees work retail jobs that pay at or near minimum wage, resulting in lower average worker pay than some other companies report. These kinds of explanations can head off some employee dismay.
  • If the ratio is hard to explain, you have bigger problems. This is the time to raise the issue at the highest levels and explain the consequences of an unjustifiably big gap, especially among the millennials who are the biggest demographic in the workforce and who, in general, demand transparency and expect organizations behave ethically more than other generations.
  • If plans are in the works to shrink the gap, share them and even solicit employee input to include them in process.

Compensation communication isn’t sexy, by any means, and isn’t at the top of the list of topics most internal communicators are anxious to dive into. With the looming Jan. 1 implementation of the Dodd-Frank CEO-to-worker ratio rule, though, it is crucial.

A version of this article first appeared on Shel Holtz’s blog .

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