CEO Pay Ratio: the Costs of Compliance Table of Contents

CEO Pay Ratio: The Costs of Compliance Table of Contents

. Introduction 4 . Key Findings 5 . Analysis and Recommendations 6 . Centralized Payroll Systems 8 . Number of Individuals Working Internally on CEO Pay Ratio 9 . Hours of Work by Internal Staff 10 . Approximate Cost of Internal Hours of Work 11 . Number of Outside Advisors 12 . Actual or Anticipated Cost of Outside Advisors 13 . Total Aggregate Cost by Organization Size 14 . Anticipated Costs in Subsequent Years 15 . Use of Exclusions 16 . Incremental Costs of Exclusions 17 . Use of Statistical Sampling 18 . Ambiguity in Identifying Median Employee 19 . Helpfulness to Investors 20 . Effect of Disclosure on Employees 21

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 2 Table of Contents Continued

. Characteristics of 125 Surveyed Companies 22 . About the Survey 23 . Primary Industry 24 . Organization Size 25 . Workforce Demographics 26 . About Pearl Meyer 28

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 3 Introduction

Under the Dodd-Frank Act (the “Act”), public companies will be required to disclose their CEO’s and the median employee’s pay, the ratio of the two, and an explanation as to how those results were derived.

While the Act did not provide an implementation deadline, the Securities and Exchange Commission (SEC) required that companies comply beginning with proxies filed in 2018. Recently however, Acting SEC Commissioner Michael Piwowar issued a public request for further comments as to the costs and burdens of the rule as written.

In response, Pearl Meyer solicited its clients to participate in an anonymous survey describing the impact of compliance with the rule to date. Some of the results of this survey were included in our letter to the SEC on March 23, 2017.

This summary includes key findings and broad analysis from the survey, as well as demographic details on the participating companies.

If you have any questions or are interested in discussing these findings, please contact:

Deb Lifshey Managing Director [email protected] 212-407-9519

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 4 Key Findings

. At median, it will cost companies an estimated $12,000 in internal costs in the initial year of the CEO Pay Ratio reporting (ranging from $5,000 to $40,000). • Roughly 40% of companies did not anticipate costs would be reduced in subsequent years, and about 40% anticipated only marginal reductions. . Many companies anticipate the need to hire outside experts and advisors to help complete the task. . Most companies will not seek exemptions for overseas employees, nor will they use statistical sampling. . The vast majority (79%) of companies do not think the disclosure will provide any useful information to investors. . Fifty-seven percent of companies believe that the information to be disclosed will have a negative impact on their workforce.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 5 Analysis and Recommendations

. What are companies doing? • Most companies have already spent or anticipate spending many hours internally computing and disclosing the CEO Pay Ratio and almost a third of companies are hiring more than one outside advisor to assist. • Most companies are not planning to take advantage of offered exclusions. - Action: Make sure a team is in place to collect and analyze data, as any repeal or delay of implementation is unclear at this point. - Action: Carefully consider whether the exemptions are worth the work. . What is the cost? • The estimated dollar range for internal costs is between $5,000 and $40,000, with more than 40% of companies expecting over 100 hours to be spent on the calculation. • At median, companies expecting to hire one or more outside advisors expect to spend an additional $10,000. . What is the expected impact? • Fifty-seven percent of companies are anticipating a negative impact of the disclosure on their workforce, while only 2% believe the disclosure will be at all helpful to shareholders or investors. - Action: Ensure internal communications and PR plans are carefully thought through, and that tactical messaging about the proxy disclosure is presented to employees beyond the language of the proxy document. (See expanded set of communications-based recommendations that follow.)

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 6 Analysis and Recommendations – Communications

. Who: Determine who your audiences are that will care about the ratio (e.g., investors, media, employees, etc.) . What: Determine what (and how much) the company is going to say in the proxy statement • Key messages about the number • Methodology behind the calculation • Rationale for the median employee pay, how it relates to the business, and why all other employees can’t compare themselves to that person . Where: Does the relevant narrative belong in the CD&A or in an alternative section? . Prepare • Who internally (HR and non HR) needs to be educated about the disclosure prior to filing and why? • Who will be accountable for addressing questions from employees or other stakeholders? • What communication collateral materials (beyond the disclosure narrative) are needed (e.g., presentation, internal Q&A document, etc.) • What is the timeline?

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 7 Do you have a centralized payroll/HR system that tracks all of your different types of workers, including overseas, temps, seasonal workers, and independent contractors?

No, 32%

Yes, 68%

Most companies surveyed (68%) have a centralized payroll/HR system.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 8 How many individuals (internally) were/are working on your pay ratio project?

16 to 20, 0% 11 to 15, 3% 21+, 1%

6 to 10, 13%

Up to 5, 83%

Most companies (83%) have up to five internal individuals working on their pay ratio project.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 9 How many hours of work by internal staff will it take to complete the initial year of your pay ratio project?

45% 43%

40% 36% 35%

30%

25% 21% 20%

15%

10%

0% Under 50 50 to 100 100+

Forty-three percent of companies will require more than 100 hours of internal staff time to complete the initial year of their pay ratio project.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 10 What is the approximate cost in the aggregate of your internal hours required in the initial year?

Pctl. $ 25th $5,000 50th $12,000 75th $40,000

At median, it will cost companies $12,000 in the aggregate of internal hours to complete the initial year of the pay ratio project.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 11 How many outside advisors did you or were you going to hire to help on the pay ratio project?

2 to 5, 37%

1, 63%

More than a third of companies expect to hire more than one outside advisor.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 12 What was the actual or anticipated cost of hiring outside advisors in the initial year?

Pctl. $ 25th $6,000 50th $10,000 75th $50,000

At median, it will cost companies $10,000 to hire an outside advisor(s) in the initial year.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 13 Total aggregate cost (internal + external) according to organization size

<$1B $1B-$3B >$3B 25th $4,750 $11,250 $15,000 50th $10,000 $50,000 $25,000 75th $21,250 $103,500 $112,500 Average $21,990 $89,056 $64,513

At median and on average, companies in the $1B to $3B range appear to have the highest costs in determining the CEO Pay Ratio.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 14 Do you anticipate subsequent years to cost less? If yes, what approximate % cost of the initial year do expect to decrease in subsequent years?

>40% decrease, 19%

No, same cost, 38%

30% decrease, 11%

20% decrease, 14%

10% decrease, 18%

Most companies (56%) expect costs to stay the same, or decrease by 10% or less in subsequent years.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 15 Do you intend to take advantage of any exclusion offered under the final rule (Data Privacy or Overseas De Minimis Rule)?

Yes, 39%

No, 61%

A majority (61%) of companies do not intend to take advantage of exclusions.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 16 What incremental costs (internal and external) do you expect as a result of taking advantage of exclusions?

Pctl. $ 25th $5,000 50th $5,500 75th $12,500 Max $50,000

At median, companies expect it to cost $5,500 to take advantage of exclusions.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 17 Will you be using statistical sampling to exclude certain employees from the calculation?

Yes, 21%

No, 79%

Most companies (79%) will not be using statistical sampling to exclude employees.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 18 On a scale from 1-5, how much ambiguity have you encountered in trying to pinpoint the median employee (e.g., making decisions about what forms of compensation to include/exclude on a consistent basis)?

1 = low ambiguity; 5 = high ambiguity

5 15%

4 19%

3 39%

2 16% Level Level ofAmbiguity

1 12%

0% 10% 20% 30% 40% 50%

% of Cos.

Most companies (73%) report significant levels of ambiguity when attempting to pinpoint the median employee.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 19 On a scale from 1-5, how helpful do you think the resulting disclosures will be to your shareholders and potential investors?

1 = not at all helpful; 5 = very helpful

5 1%

4 1%

3 3%

2 16% Level Level ofHelpfulness 1 79%

0% 20% 40% 60% 80% 100%

% of Cos.

The vast majority (79%) of companies think the resulting disclosures will not be at all helpful.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 20 On a scale from 1-5, what do you think the resulting disclosure will be on your own workforce?

1 = negative; 5 = positive

5 1%

4 4%

3 37%

2 24% Level Level ofPositivity

1 33%

0% 5% 10% 15% 20% 25% 30% 35% 40%

% of Cos.

Most companies (57%) think the resulting disclosures will have a negative effect on their own workforce.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 21 Characteristics of 125 Surveyed Companies

. Median number of employees = 2,800 (range from 370-10,000) . Respondents = 21% board members; 79% management . More than 12 industries participated; the largest sectors covered include financial services (25%), technology (15%), and health care (11%) . At median, 5% of employees were part-time and 8% were international . At median, companies had a workforce in four countries (range from 1-18) . Most of the respondents (69%) represented organizations of between $300M and $10B . Most of the respondents (68%) have a centralized payroll system

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 22 About the Survey

Board or Management?

Board, 21%

Mgmt. Team, 79%

This online survey, conducted in March 2017, queried management team members and directors. Survey results are based on data from more than 125 participants. The majority of respondents are in management.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 23 Primary Industry

Business Svcs., 1% Other, 15% Consumer, 5% Energy, 9%

Utilities, 2% Transportation, 1%

Technology, 15% Financial, 25%

Real Estate, 4%

Materials, 5% Industrial, 8% Health Care, 11%

A wide variety of industries is represented in the survey, with strong representation from financial services, technology, healthcare, and energy.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 24 Organization Size

>$30B, 4% <$100M, 8% $20B-$30B, 6%

$10B-$20B, 6% $100M-$300M, 8%

$300M-$1B, 16%

$3B-$10B, 27%

$1B-$3B, 26%

The revenue, assets, or operational budget of these companies ranges from under $100 million to greater than $30 billion and 53% are between $1B and $10B in size.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 25 Workforce Demographics

% of Employees that are Full-Time % of Employees that are (Median) National/International (Median)

Not Full-Time, 5% International , 8%

Full-Time, 95% National, 92%

At median, a strong majority of companies’ workforces are composed of full-time, U.S.-based employees.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 26 Workforce Demographics (cont.)

Number of Employees Number of Countries in Worldwide which Employees Work Pctl. # Pctl. # 25th 370 25th 1 50th 2,800 50th 4 75th 10,000 75th 18

At median, the responding companies have 2,800 employees worldwide and employ individuals in 4 countries.

Pearl Meyer Quick Poll | CEO Pay Ratio: The Costs of Compliance 27 About Pearl Meyer

Pearl Meyer is the leading advisor to boards and senior management on the alignment of executive compensation with business and leadership strategy, making pay programs a powerful catalyst for value creation and competitive advantage. Pearl Meyer’s global clients stand at the forefront of their industries and range from emerging high-growth, not-for-profit, and private companies to the Fortune 500 and FTSE 350. The firm has offices in New York, Atlanta, Boston, Charlotte, Chicago, Houston, London, Los Angeles, and San Francisco.

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