Legal Series: How to Balance Transparency with Confidentiality in Executive Compensation

This article is part of an ongoing legal series designed to provide insight and practical guidance on current and emerging workplace compliance issues. These insights shared by lawyers are based on their interpretation of existing regulations and proposed changes, and intended for informational purposes, not to be regarded as legal advice.

Striking the right balance between the need for transparency and maintaining the confidentiality of certain executive compensation details usually requires businesses to take a deliberate and planned approach. This article explores which businesses are subject to compensation disclosure laws, the requirements of these laws, and how a company can effectively execute on its executive compensation planning to strike a balance between transparency and confidentiality.

Benefits of Executive Pay Transparency

Being transparent about the compensation you offer to your executives brings many benefits, such as:

• Compliance with state and federal law;
• Building trust with current employees, candidates, and customers; and
• Attracting talented individuals who want to know what to expect from your company.

Fostering open and transparent communication can earn your business a reputation for honesty and straightforwardness, giving it a powerful competitive edge.

What Is the Role of Confidentiality?

On the other hand, confidentiality allows individuals to remain out of the public eye and avoid public scrutiny. It can also prevent raising distracting questions about compensation differences, which can keep workplaces more harmonious.

Yet, concealing compensation risks violates compensation disclosure laws. It may also inspire suspicion among individuals who conclude that a lack of transparency means you must be hiding something. As a result, balancing transparency and confidentiality can mean walking a fine line.

What Goes into Executive Compensation?

Executive compensation packages may include:

• A salary,
• Bonuses,
• Benefits like health insurance,
• Perks like a company car,
• Equity-like stocks or restricted stock units (RSUs), and
• Retirement benefits and other deferred compensation.

To attract talent, businesses may tailor the benefits they offer to different candidates. The resulting compensation may vary based on the candidate and any job negotiations.

Required Pay Transparency Obligations for Companies

Federal law requires that certain employers clearly and concisely disclose all compensation that certain individuals receive. Your obligations depend on whether your business is public and, if so, its size.

Several states have also passed laws that require the public disclosure of certain details of executive compensation. Depending on where you live, you may also need to ensure compliance with state law.

Public vs. Private Businesses

Generally, publicly traded companies must report executive pay details to the Securities and Exchange Commission (SEC). Privately held companies are exempt from the same compensation reporting requirements. However, a company that has not offered securities for sale on a U.S. stock exchange may fall under the reporting requirements if it has over $10 million in assets and either 2000 or more general shareholders or 500 or more shareholders who are not accredited investors.

Whose Pay You Must Report / Disclose

SEC regulations require companies to disclose compensation paid to the following, regardless of title:

• The principal executive officer,
• The principal financial officer, and
• The next three highest-paid executive officers.

Publicly traded companies should also disclose compensation for up to two individuals who would be covered by the law but for the fact that they did not end the year as an official executive officer.

What You Must Disclose

You also have to disclose details about the compensation you provide and why, including:

• The specific compensation you provided,
• Why you provided the compensation you provided,
• What you base compensation decisions on,
• What you are hoping to achieve through your compensation decisions, and
• How actual compensation relates to the goals you identified.

Publicly traded companies must also disclose the relationship between executive compensation and business performance.

State Pay Transparency Laws

Many states have passed pay transparency laws in the last decade. While laws vary from state to state, those pay transparency laws typically require businesses to include a compensation range on job postings. Some of those states also require businesses to provide salary details to current employees and applicants who request them, while others prohibit employers from inquiring about past compensation.