Boards of directors have been facing more new and difficult pressures than ever before. The most recent issue has come to light with the requirement for companies to disclose the CEO pay ratio in 2018. Boards have long struggled with the best ways to set appropriate compensation policies amid their responsibilities to shape the company’s strategy and maintain a healthy corporate culture.
While the new requirement to disclose the CEO pay ratio sits directly in the spotlight, vigilant boards will also keep a pulse on gender pay equity, race pay equity and median employee pay equity. All eyes are on the board, including regulators, state and federal legislators, shareholders, the public, and their employees. Board directors won’t be able to let their guard down anytime soon, as the issue of pay equity is bound to increase as time goes on.
Here’s a look at some of the changes we’ve already seen along the pay equity lines and what we may see in the future. We’ll also look at some innovative ways for boards to approach pay equity and how board management software can provide a secure planning platform for all boards.
The Board’s Role in Gender Equity
Boards have been under much pressure to enhance their board compositions by taking a stronger look at board diversity, especially in the area of gender diversity. With pressure continuing to rise, boards are increasingly taking gender into consideration with board recruitment and succession planning. Every year, boards carve out spots for women on their boards or expand their boards to accommodate one or more women. Groups like 2020 Women on Boards are also placing external pressure on boards to increase the number of women board directors.
With the addition of women on so many boards and the new pressures around CEO remuneration and CEO pay ratio, it stands to reason that the focus on women in the corporate world will shine a light on pay equity for women.
It helps that several major corporations have come out of the gate with a commitment to gender and/or race equity and transparency around their approaches to pay equity. Amazon, Apple and Facebook have chosen to voluntarily disclose gender pay ratios.
Starbucks has also stepped out and worked toward pay equity. In 2008, it set out on a companywide compensation study that ended up taking ten years to conduct and analyze the results. The end of the study culminated in developing new evaluation and pay processes to help them achieve 100% pay equity for men and women and all races that perform similar work in the United States.
The work that Starbucks did required much innovation and reworking of tools and procedures for the entire company to net a formula for unconscious bias in every role, from hiring to baristas and promotions. Some of the organizations that inspired Starbucks in their efforts were Billie Jean King and her Leadership Initiative, the National Partnership for Women & Families, the American Association of University Women and other national women’s organizations.
The Board’s Role in CEO Compensation and Pay Ratio
Boards have obviously held long-standing responsibility for CEO compensation. The 2018 requirement to include CEO pay ratios on statements has created several additional related issues for board discussions. Boards must now also be concerned with median employee pay rates and how shareholders and stakeholders view the board’s decisions. These issues are so new that no norms have yet been set.
Before the dust on CEO pay ratios settles, boards should be continuing to monitor the national conversation about pending regulations in the United States in reporting for gender and race pay equity. Future legislation may require companies with more than 100 employees to report gender and race pay equity statistics to the Equal Employment Opportunity Commission. One such example is the California Equal Pay Act that was passed in 2015.
What Issues and Factors Should Boards Be Discussing Now?
Additional changes could come at any time. If boards have not already done so, they need to get education on how to comply with the CEO pay ratio reporting requirements. With issues for gender pay equity and race pay equity looming, boards should be adding these issues to their agendas so they can keep pace with emerging issues in the marketplace.
While part of the board’s responsibility is to follow through with submitting CEO pay ratio disclosures, they also need to be working with their management teams to discuss the analysis of the pay ratio and form a consensus on the best communications strategy for all interested parties, including the media, shareholders, customers, constituencies and employees.
Rather than focus solely on CEO compensation issues, boards need to be looking at monetary rewards as well as other rewards based on recognition. Just as boards need to oversee the current and future needs of the company, they also need to address the current and future of equity in pay. One of the ways to do this is to review how employees are advancing through the company and compensating them as they gain new skills or take on new challenges.
Boards will need to take a true long view of compensation beyond three years. This will entail developing a compensation mix that allows room for necessary risks while developing pay equity for all. Boards might consider offering shareholders a say in how to appropriately structure compensation.
Board Management Software Provides the Necessary Secure Platform for Compensation Planning
Compensation and equity pay discussions can be sensitive issues, which when made public prematurely can have negative impacts on corporations. A secure board portal by Diligent is the most effective way to ensure the strictest confidentiality as boards navigate the difficult forthcoming challenges. The board portal provides a secure way to share files, communicate and store documents in the cloud. Board directors can easily access board and committee documents using any electronic device of their choosing. A board portal, along with the other board governance software solutions that comprise Governance Cloud, will form the innovative solutions that take boards successfully from the present to the future.