What to Expect this Proxy Season – the CEO Pay Ratio Disclosure

Spring has sprung, and that means the proxy season is here. Shareholder meetings are just around the corner, and the biggest bullet point on the agenda seems to be the new CEO pay ratio disclosure.

What's in store this proxy season?

The proxy season has come yet again, and with shareholder meetings being held, questions are pressing to be answered. The biggest trend for this year is the new CEO pay ratio disclosure coming into effect, stating that American companies must share CEO compensation compared to the median employee. This regulation is also what’s on the lips of every expert discussing proxy season and shareholder rights at the moment.

According to a study made by Stanford University in 2016, the typical American believes that a CEO earns $1 million yearly, whereas the median reported CEO compensation is actually over $10 million. The common beliefs are a little off point, to say the least… This, however, is not the ordinary person’s fault. An article by Forbes recently stated that companies being transparent with executive pay is worse today than it was 20 years ago.

Pay ratio disclosure – The pulse of the 2018 Proxy Season

According to numerous sources and experts, such as PwC, the CEO pay ratio disclosure is this year’s “talk of the town”. The why and how to it all, however, is far more than just stating a new corporate rule.

What exactly is the CEO pay ratio disclosure? 

  • Starting in 2018, companies will begin making mandatory CEO pay ratio disclosures. This means comparing the total compensation of their chief executive officer with that of their median employee.

Why is the CEO pay ratio disclosure being implemented?

  • This new disclosure has been argued necessary after discussions of corporate disinformation. The matter has become political ammunition for both republicans and democrats, and has therefore gotten a lot of attention. All leading to this Dodd-Frank mandated disclosure.

What will come of this?

  • The hope is that companies will be successful in communicating how much value their CEO creates and how much compensation is required, in order to settle strides between shareholders, executives (and sometimes even employees without stakes in the company).

Why this Proxy Season matters – more

Seeing as investors and shareholders are technically the owners of a company, board members are required to face their shareholders once a year. In these meetings, ANY shareholder is allowed to question top executives. This is also the time when shareholders are able to vote on corporate matters.

Every year, a proxy statement is sent to all shareholders. This is what normally creates a stir, as the statement reveals how much they are paying their top executives. But never has companies compared their top chief to their median employee. There were some voluntary early adopters for the last several years, but the year 2018 will be different with all corporations complying. And it is expected to cause a stir, as larger companies fear how the “main street”-investor and the media will react and respond.

This new pay ratio disclosure will also reveal to the employees if they are paid under the median, which is set to cause some internal disputes.

Board members are supposed to serve as shareholder representatives and encourage the company to do what’s best for shareholders. Even though 87 % of stakeholders think it is important to be transparent with the remuneration figures, it is rare for companies to follow that advice, according to an article by Forbes. So, just how high of CEO compensation is good to keep the chief executive productive and hungry enough to create the best outcome for company investors? That’s to be discovered. And though a board is free to disregard the shareholder’s wishes even after a vote is done, this topic will be discussed broadly in the upcoming months.

“Corporations and their boards need to do a better job explaining and justifying CEO pay arrangements.”

– Nick Donatiello, Lecturer in Corporate Governance at Stanford Graduate School of Business

Also in the Proxy Spotlight

In the shade of the disclosure, there are still other points to consider this year. When predicting this year’s proxy season in late 2017, PwC also had a lot of focus on shareholder’s wishes and board diversity.

  • Shareholder focus

Voting trends and activism campaigns have become a major concern for some corporations. Shareholders do no longer only focus on financial activism campaigns, but in recent years, social responsibility has become a great shareholder focus. And with larger shareholder inclusiveness, companies need to focus on the shareholder proposals.

  • Board diversity

This trend continues to grow from previous years. Now, several large institutional investors are holding companies accountable for gender diversity in the boardroom. Some investors have even gone public with saying they’ll oppose the re-election of directors that do not have any women on their boards.

DiliTrust keeps the Proxy meetings on track

With a Board portal, members of the board will be prepared to answer any questions during a shareholder meeting. The board portal module of the DiliTrust Governance suite permits members of the board to access meeting agendas and board packages anywhere, at any time. With the offline feature, there is even the opportunity to prepare for a meeting on a plane, leaving the members of the board ready to tackle what is to come whenever they want.