SEC releases Pay Ratio Disclosure Proposal
On September 18, 2013, the SEC released the proposed rule addressing the CEO pay ratio disclosure requirement mandated under Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposal was approved by a 3-2 vote and will not affect the 2014 proxy season. Below is a brief overview of the highlights of this proposed rule, which we will consider in greater depth in our upcoming Client Alert.
Under this proposed rule, the required disclosure would include:
(A) The median of the annual total compensation for all employees of the registrant, except the principal executive officer of the registrant;
(B) The annual total compensation of the principal executive officer of the registrant; and
(C) The ratio of the amount in (A) to the amount in (B), presented as a ratio in which the amount in (A) equals one or, alternatively, expressed narratively in terms of the multiple that the amount in (B) bears to the amount in (A).
According to the release, all employees means all employees. The release clarifies that all employees employed as of the fiscal year end must be considered when identifying the median annual total compensation, including full-time, part-time, seasonal and/or temporary workers employed by the company or any of its subsidiaries within the U.S. and abroad.
The proposed rule does not specify any required calculation methodologies for identifying the median; instead a company may select the methodology most appropriate given the company’s size, structure and compensation practices. It appears that the SEC Staff took to heart concerns regarding the costs associated with calculating this ratio and has explicitly opted for flexibility in determining the median employee as a way to mitigate costs while preserving the intent of the rule. The Staff explains that there are alternative methods that would be acceptable approaches to identifying the median employee, including the use of reasonable estimates and statistical sampling. Additionally, although the pay ratio must ultimately be calculated using the same methodology used to disclose total compensation in the Summary Compensation Table, companies need not determine the median employee using this calculation. Instead, companies can use any “consistently applied compensation measure” to determine the median employee, for whom total compensation as defined in the Summary Compensation Table would then need to be calculated. We note that without a specific selection methodology, it will be difficult (if not impossible) to compare the pay ratio from one company to another, a fact that the SEC Staff explicitly acknowledges but that may frustrate interested parties.
Comments letters are due 60 days after the proposal is published in the Federal Register. Comments can be submitted on the SEC website.