CEO Pay Ratio 2020: The Most Challenging Calculation to Date?
June 04, 2020
In a volatile market and economic climate, there is much to think about. Furloughs, reassessing equity award performance goals, award modifications, and participant morale are just some of the touch points we’ve addressed in recent weeks. Another to add to the list is the impact on calculating the CEO pay ratio proxy disclosure.
A recent Willis Towers Watson article does an excellent job at breaking down the concerns and considerations around the CEO pay ratio calculation for 2020.
Key Things to Know about CEO Pay Ratio Calculations for 2020
Let me summarize some of the most significant impacts on this year's calculation (and beyond):
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For some, median employees will need to be determined. 2020 is bound to be the most labor intensive year since the first disclosures were made (2017-2018) when it comes to identifying the median employee. This is likely to be greatly affected by changes in employee pay and headcounts.
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The calculation is not likely to be easy-peasy. For companies that relied on the three year rule, which allowed them to use the same median employee for 2017, 2018, and 2019, a new determination of median employee is due in 2020. With so many changes in 2020 – and many uncertainties (status of furloughed employees? further changes in pay?) still looming, careful evaluation and consideration is needed in approaching the median employee determination.
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The three-year rule may not be practically feasible to apply during the next few years. Companies facing significant changes in employee populations and pay structures may come to recognize 2020 and/or 2021 as anomaly years. It will be hard to rely on the same median employee used in 2020 for the next few years.
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Furloughed employees bring complexity to both the headcount and annualized pay components of the pay ratio calculation. Are they added into headcounts? Is their pay considered in looking at the annualized employee pay if they were furloughed for part of the year? The SEC has basically left these questions to be addressed by the employer, so companies need to be thinking about how to proceed in analyzing the impact of furloughs.