Pay ratio is back in the picture for companies that have been using the same median employee pay figure for the past three years. A new calculation will be required this year, and COVID-19 workforce impacts could dramatically alter that calculation. However, it is not only these companies that need to consider COVID-19 impacts. If there was a material change in the employee population or compensation arrangements, a recalculation of pay ratio is required. A
recent article from Compensation Advisory Partners provides an overview of pay ratio considerations in the context of COVID-19, including:
Furloughed Employees
- The SEC has directed companies to “determine whether furloughed workers should be included as employees based on the facts and circumstances.” Those facts and consideration should include the timing and duration of the employment actions.
Determination Date
- CEO pay ratio disclosure rules dictate that companies may identify the median employee with an effective date any time within the final three months of the fiscal year. If a company decides to shift the determination date used for 2020, versus what was done in past years, the company must include a rationale for the change in the 2021 disclosure. If workforce populations fluctuated during 2020, companies may consider a later determination date when employment levels were restored or stabilized. However, the rationale for the changed date would need to be included.
Supplemental Ratios
- There may be a significant increase in the prevalence of supplemental CEO pay ratio disclosures (typically used to explain a one-time event such as a CEO transition) in 2021 proxies to reinforce that year-over-year change in the CEO pay ratio (up or down) should not be viewed as an ongoing expectation. Disclosing supplemental CEO pay ratios is allowed under SEC rules but needs to be clearly disclosed as a supplemental ratio.
The article also highlighted that it does not expect major changes in the Consistently Applied Compensation Measure (CACM) or extensive narrative disclosures. Narrative disclosures will likely focus on year-over-year changes on the calculation. Lastly, the article notes that if an extensive narrative on the workforce is warranted, ensure that it lines it up with the required HCM disclosures in the 10-K.
