In prior news we have covered research that the absence of an equitable distribution of pay at executive levels can reflect higher corporate risk.

Reasons why boards should apply internal pay equity could also include:

1. It is fair
2. It is economical
3. It mitigates market biases
4. It leads to better employee relations and a stronger company

To start the internal pay process, boards should review all the components of remuneration. It is particularly important to break out the equity and post employment components, because at many companies it is these forms of compensation that are creating the greatest disparities.

Note that to fully understand and appreciate disparities in equity grants, boards will need to compare not just the current year’s grants but amounts accumulated from past grants – including special grants made to the CEO.  This is rarely done.

Boards should choose a relevant time period for the internal pay analysis to cover. In some cases, companies may choose to go back 10 years. (This won’t be possible for all companies, since some companies and managers have not been around since the mid-90s; in addition, some business models have changed so dramatically that too far a look-back may not be sufficiently relevant).

It is important to choose a time frame that will allow a good understanding of how the current pay program and pay for particular executives came to be, and the changes that have evolved over time. For companies that are already looking at multi-year wealth accumulation charts, this already collected data will be useful.

Once a company has conducted an internal pay equity audit, management and the board should determine whether they feel comfortable both with the internal pay equity relationships that exist today and with the changes in those relationships that have taken place over time. Where disparities and unintended outcomes are revealed, the directors – as well as the affected CEO – may be vulnerable to claims for failing to meet their fiduciary obligations, if corrective actions are not taken.

A last word: While this is an exercise that must be undertaken internally, guidance from experienced consultants can help guide you through the process.

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