The SEC has adopted a new rule that will require U.S. companies
to disclose the ratio of their CEO's compensation to the median
compensation of their other employees.
What You Need To Know
Emerging Growth Companies as well as Canadian MJDS issuers and
other foreign private issuers will not be subject to the rule. This
contrasts with the SEC's recently proposed
executive compensation clawback rules, which would apply to all
issuers listed on U.S. stock exchanges.
Median pay. A
particularly contentious element of the rule is the cost and
complexity of calculating median employee compensation. Partly to
help contain compliance costs, the SEC is not mandating a
methodology for calculating median employee pay. Instead, issuers
will be able to adopt a method they believe is reasonable. This may
involve, for example, using a statistical sampling of employees
instead of the entire employee population and using readily
available compensation measures from payroll or tax records.
Median employee compensation will only have to be calculated once
every three years, unless the issuer's employee population or
compensation arrangements have changed significantly.
All types of compensation for all types of
employees—full-time, part-time, temporary and
seasonal—must be included in the calculation of median pay.
Certain non-U.S. employees may be excluded in very limited
Timing. The SEC is
providing a substantial grace period before implementation. Most
issuers will be required to provide the new pay ratio information
as part of their executive compensation disclosure for their 2018
implications. When securities regulators amended
Canada's executive compensation disclosure rules in 2011, they
declined to adopt a pay ratio requirement, on the basis that the
benefits would not outweigh the compliance costs. The regulators
have not subsequently indicated any intention to revisit that view.
Some Canadian issuers, such as those cross-listed issuers who aim
to provide the same disclosure as U.S. issuers, may feel obliged to
provide pay ratio information on a voluntary basis, similar to
their decision to provide shareholders with say-on-pay votes.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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