Controversy over executive pay is nothing new and probably not going away anytime soon. It is, however, about to change.
While companies have long had to share what their CEOs make, financial information about the everyday employee is less readily available. This, of course, has made it difficult to determine the CEO-employee pay ratio and, subsequently, to identify just what kind of gaps exist.
But in August, the Securities and Exchange Commission (SEC) approved a rule requiring companies to regularly reveal the pay ratio between CEOs and employees, starting in 2017. The idea isn’t to embarrass or shame CEOs, but to provide shareholders with valuable financial insights for comparing compensation between similar or competing companies.
Steven Seelig, a senior regulatory adviser for executive compensation consultancy firm Towers Watson, recently explained the predicted numbers in an interview with NPR. He said the ratio of CEO pay to median employee pay is likely to be about 300 to 1. “For any company out there, this number’s going to be huge.”
For many CEOs, the concern is less about the numerical value of that ratio and more about employees’ perceptions once they find out what it is. The unveiling might risk damaging employees’ relationships not just with CEOs, but with their entire organizations, especially when they can draw comparisons with competitors. Needless to say, that makes for a considerable leadership challenge for CEOs. Here are three things executives can do to prepare for when the news breaks:
It can be hard for employees to make sense of a CEO-employee pay ratio of 1,951 to 1 but, according to a new Glassdoor study, ratios this high are not uncommon.
To help your employees understand the pay ratio, consider becoming more transparent about the salaries within your organization. Buffer is one example, if an extreme one. The company–renowned for its transparency–shares its exact pay formula with employees, which takes job type, seniority, experience, and other factors into consideration.
By sharing this formula, or any other salary determinants your company uses to set compensation, you may be able to head off concerns about unfairness and spark a healthy, open dialogue before the change takes effect.
Employees will be able to ask questions and have a meaningful discussion at all levels of the business, not just about why CEOs and other leaders make what they do, but about their own compensation packages, too.
As with any big reveal, you can expect it to spark passions, questions, and tempers. Your employees are going to want an explanation. They might want a raise. Perhaps more than anything, though, they’re going to want to be heard.
Give your employees an opportunity to express their concerns and ask questions. CEOs themselves will want to be responsive, honest, and forthright. Listen to employees, put yourself in their shoes, and understand their needs. The modern CEO can no longer afford to be a distant and intimidating authority figure. Executives need to be present and approachable leaders, and–at times like this, especially–they need to act like it.
Choose whatever form of communication about the pay ratio that seems most appropriate to your organization–and most likely to elicit meaningful feedback–whether that’s a company-wide email, a town hall meeting, an internal webcast, or via the company’s internal blog, social network, or other such communication platforms. Just be sure that it isn’t a one-sided announcement, but an invitation to a substantive and sustained conversation.
A salary pay gap is only one piece of the compensation puzzle. While it’s impractical for every employee to earn salaries as high as everyone in the C-suite, of course, there are still ways to ensure every employee’s compensation is complete.
Don’t dismiss top-of-the-line employee benefits, from extensive employee development opportunities to culture perks to great health care and retirement plan options. Everything should be on the table. Use the occasion to take a close, critical look at the way your organization attracts talented staff, retains them, and invests in them for the long term.
Even if you don’t make changes to your benefits, remind employees of these non-monetary motivators and make sure they’re still motivating them effectively in the first place. After all, employees who are satisfied with their benefits are almost four times as likely to report being very satisfied with their jobs than those who aren’t, according to MetLife’s 2015 U.S. Employee Benefit Trends Study. Compensation isn’t everything, but when the SEC ruling takes effect, it will be more important than ever to work with employees–not against them–to come to an understanding of its proper role in your business and in their lives.