On September 18th, the SEC held an open meeting to discuss the pay ratio requirement under Section 953(b) of the Dodd-Frank Act (requiring companies to disclose total annual median employee pay, CEO total annual compensation, and the ratio between the two). The proposal was adopted by a vote of 3 to 2, with 2 of the Commissioners (Messrs. Piwowar and Gallagher) vehemently opposed to the rule and issuance of the regulations. The SEC emphasized how important it will be to comment on the proposed rules. Depending on the speed of the rulemaking process, pay ratio disclosure will be effective no earlier than the 2015 proxy season.
Pearl Meyer Observation: The good news is that the SEC has adopted a flexible approach that will allow all companies to establish the most appropriate means for determining median employee pay. The bad news is that no accommodation/exclusion was offered for those companies with international, seasonal or part-time employees.
Below is a very high level summary of information released at the meeting. A more detailed Client Alert is forthcoming.
DFA Mandate: The Staff recognized that it had a mandate to issue regulations under 953(b), and after considering approximately 20,000 comment letters, has tried to draft the most flexible approach possible to both comply with the DFA mandate and keep costs and complexity of enforcement as low as possible
Flexibility: There is no specific methodology proposed – companies will use what is best fitted to their specific facts and circumstances
Population Covered: In determining median employee pay, companies may either use the full population or a “statistical sample” of the population
No methodology for statistical sampling is required: Companies can use what is most appropriate for their facts and circumstances.
- The SEC suggested that for those companies with low wage variances, sample size could be as low as 100 employees, but if there are high wage variances or complex businesses with many units or global enterprises, it could exceed 1,000.
- The SEC believes that 50% of companies have a structure that has a compensation distribution that would allow for simple random sampling. The other 50% will be more challenging and require complex assumptions.
No exclusions for part-time or international employees: Companies must include full-time, part-time, seasonal, temporary and international employees
Timing: Only those individuals employed on the last day of the fiscal year at issue will be included
Annualization: Only permitted for full-time permanent workers who worked for part of year in issue; not allowed for seasonal or part-time employees
No COLA/International Equalization: No adjustments for international employees
Compensation Considered: In determining how the statistical sampling will be verified, the SEC suggested that some streamlined “consistently applied compensation measure” may be employed. The SEC suggested that it would allow corporations to use a reasonable method (e.g., W-2 wages), of determining which employee(s) represent the median of the annual total compensation of all employees, but require the corporation to use the Summary Compensation Table method for calculating total compensation for comparison against the CEO.
Disclosure: Companies will be required to explain methodologies and estimates for calculating the ratio (e.g., how they used statistical sampling, how they calculated compensation), but disclosure should only be a brief overview of the methodology used (not extensive details). Disclosure will be annual, covering the last completed FYE. The pay ratio disclosure will be required for any filing that includes compensation data. Companies will be required to update the pay ratio when filing the annual report or the proxy statement, but no later than 120 days after year end.
Exclusions: Emerging growth companies, smaller reporting companies, and foreign private issuers not required to comply
Please look for our Client Alert in the coming days which will contain the specifics released in the proposal.
