United States: SEC Proposes Rules for Pay Ratio Disclosure

Summary: At an open meeting on September 18, 2013, by a 3-2 vote, the Securities and Exchange Commission proposed a new rule,1 as mandated by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, to require companies to disclose (i) the median of the annual total compensation of all company employees (excluding the company's principal executive officer), (ii) the annual total compensation of the company's principal executive officer and (iii) the ratio between the two. A summary of the proposed rule is set forth below.

Proposal for Pay Ratio Disclosure Rules
 
The SEC proposed an amendment to Item 402 of Regulation S-K and a conforming amendment to Form 8-K under the Securities Exchange Act of 1934 to implement the pay ratio disclosure requirements mandated by Section 953(b) of the Dodd-Frank Act.
 
The proposal would amend Item 402 of Regulation S-K by adding a new paragraph (u) to Item 402 requiring companies to disclose:

  • the median of the annual total compensation of all company employees except the company's principal executive officer;  
  •  the annual total compensation of the company's principal executive officer; and   
  • the ratio of the median of the annual total compensation of all company employees (except the company's principal executive officer) to the annual total compensation of the company's principal executive officer. 

Under current SEC rules, companies are required to provide extensive information about the compensation of their principal executive officer and other named executive officers identified pursuant to Item 402(a) of Regulation S-K, but are generally not required to calculate or disclose detailed compensation information regarding other employees. The proposing release stated that the proposed rule is designed to lower the potential costs of compliance with the pay ratio disclosure requirements while remaining consistent with the statutory mandate in Section 953(b) of the Dodd-Frank Act.
 
Methodology for Identifying the Median Employee 
 
The proposed rule would not require companies to adhere to a particular methodology or specific computation parameters to identify the median employee, but rather companies would have the flexibility to choose from several options, including using reasonable estimates of annual total compensation or any other compensation measure that is consistently applied to all employees included in the calculation (such as amounts derived from company payroll or tax records). Companies would be permitted to identify the median employee by using their full employee population or a statistical sample of the full employee population appropriate to the size and structure of the company's business and the company's method for employee compensation or other reasonable methods.
 
When a compensation measure other than annual total compensation is used to identify the median employee, the proposed rule would require companies to calculate the annual total compensation for the median employee. For instance, the proposed rule would permit companies to use the same annual period that is used in their payroll or tax records from which the compensation amounts are derived to identify the median employee, so long as the total compensation of the median employee so identified is ultimately calculated and disclosed pursuant to Item 402(c)(2)(x) of Regulation S-K. The proposing release acknowledged that the identification of a median employee through sampling does not necessarily require a determination of exact compensation amounts for every employee paid more or less than the median employee included in a sample and that the proposed rule would only require companies to actually calculate and disclose total compensation pursuant to Item 402(c)(2)(x) of Regulation S-K for its median employee. The proposed rule would not prescribe specific estimation techniques, confidence levels for an estimated median or what constitutes reasonable estimates or appropriate compensation measures. Rather, these determinations would depend on the company's particular facts and circumstances, which, as stated in the proposing release, may vary depending on the size and nature of the company's workforce, the complexity of the company's organization, the stratification of pay levels across the company's workforce, the types of compensation the company's employees receive, the extent that different currencies are involved, the number of tax and accounting regimes involved, the number of payroll systems the company has and the degree of difficulty involved in integrating payroll systems to readily compile total compensation information for all company employees.
 
Determination of Covered Employees
 
For purposes of the proposed rule, "employee" would include an individual employed by the company or any of its subsidiaries as of the last day of the company's last completed fiscal year, including full-time, part-time, seasonal or temporary workers employed by the company or any of its subsidiaries on that day (including officers other than the principal executive officer). Workers who are not employed by the company or its subsidiaries, such as independent contractors or "leased" workers or other temporary workers who are employed by a third party, would not be considered "employees" under the proposed rule. 
 
Determination of Total Compensation
 
As mandated by Section 953(b) of the Dodd-Frank Act, the proposed rule would require the "total compensation" of the median employee (identified in the manner described above) to be determined according to Item 402(c)(2)(x) of Regulation S-K. "Annual total compensation" would mean the total compensation for the company's last completed fiscal year, consistent with the calculation date used for determining the three most highly compensated executive officers under current Item 402(a)(3)(iii) of Regulation S-K.
 
The proposed rule would allow companies to use reasonable estimates when calculating the annual total compensation or any element of annual total compensation for the median employee. In using an estimate for annual total compensation or for an element of total compensation, the company should have a reasonable basis to conclude that the estimate approximates the actual amount of compensation under Item 402(c)(2). For instance, a company would be permitted to use reasonable estimates in determining an amount that reasonably approximates the aggregate change in actuarial present value of an employee's defined pension benefit under a union members' multi-employer defined benefit pension plan for purposes of Item 402(c)(2)(viii), since employers generally do not have sufficient access to information from the plan administrator to calculate the aggregate change in actuarial present value of the accumulated benefit of an individual employee under such a plan. A reasonable basis would depend on the facts and circumstances of the company. Where companies determining the pay ratio choose to include certain personal benefits and perquisites in the calculation of total compensation for employees that would ordinarily be excluded from the calculation of a principal executive officer's total compensation, companies would be required to use the same approach to such items when calculating the principal executive officer's total compensation for the pay ratio disclosure. Any difference between the principal executive officer's total compensation used in the pay ratio disclosure and the total compensation amounts reflected in the summary compensation table would need to be explained.
 
Companies would be permitted, but not required, to annualize the total compensation for all permanent employees (other than temporary or seasonal employees) that were employed by the company for less than the full fiscal year, such as new hires or permanent employees on an unpaid leave of absence. If a company elects to annualize the total compensation for employees, it must do so for all eligible employees. In contrast, the proposed rule would not permit full-time equivalent adjustments for part-time workers, annualizing adjustments for temporary and seasonal workers or cost-of-living or other adjustments for non-US workers.
 
Disclosure of Ratio, Methodology, Assumptions, Adjustments and Estimations
 
Under the proposed rule, the appropriate form of disclosure for the pay ratio would be as a ratio in which the median of the annual total compensation of all employees except the principal executive officer is equal to one or, alternatively, the ratio may be expressed narratively as the multiple that the amount the annual total compensation of the company's principal executive officer bears to the median of the annual total compensation of all company employees. The proposing release provided an example of a company with an annual total compensation of $45,790 and $12,260,000 for its median employee and principal executive officer, respectively. In this instance, the pay ratio disclosed would be "1 to 268" or, as expressed narratively, "the principal executive officer's annual total compensation is 268 times that of the median of the annual total compensation of all employees."
 
In addition, the proposed rule would require companies to briefly disclose the methodology used to identify the median and any material assumptions, adjustments or estimates used to identify the median or to determine total compensation or any elements of total compensation. In addition, companies would be required to consistently apply such methodology, assumptions, adjustments or estimates and to clearly identify any estimated amounts in their disclosure. Such disclosure should consist of a brief overview containing sufficient information for a reader to be able to evaluate the appropriateness of the methodology, assumptions, adjustments or estimates, but does not need to provide technical analyses or formulas.
 
The proposing release provided an example of appropriate disclosure where statistical sampling is used. Companies using statistical sampling should disclose the size of both the sample and the estimated whole population, any material assumptions used in determining the sample size, which sampling methods are used and, if applicable, how the sampling method deals with separate payrolls such as geographically separated employee populations or other issues arising from multiple business or geographic segments. Also, if a company changes the methodology, material assumptions, adjustments or estimates used for the prior fiscal year and the effects of any such change are material, the company must provide a brief description of the change, the reasons for the change and an estimate of the impact of the change on the median and the ratio.
 
Voluntary Additional Disclosure
 
Other than the required brief description of methodology, material assumptions, adjustments or estimates and the expression of the pay ratio described above, the proposed rule would not require companies to provide a narrative discussion of the ratio, the median or any supplemental information. However, companies would be permitted to voluntarily supplement the required disclosure with a narrative discussion or additional ratios so long as any additional ratios are clearly identified, are not misleading and are not presented with greater prominence than the required ratio.
 
Companies Subject to the Proposed Rule
 
The pay ratio disclosure requirements proposed by the SEC would apply to only those companies that are required to provide summary compensation table disclosure pursuant to Item 402(c) of Regulation S-K. Consistent with Section 102(a)(3) of the Jumpstart Our Business Startups Act, the proposed rule would not apply to emerging growth companies. In addition, the proposed rule would not apply to smaller reporting companies, since such companies are not required to calculate compensation in accordance with Item 402(c)(2)(x) or to include all of the types of compensation required to be included in total compensation under Item 402(c)(2). Foreign private issuers that file annual reports and registration statements on Form 20-F and US-Canadian Multijurisdictional Disclosure System filers that file annual reports and registration statements on Form 40-F would also not be subject to the proposed rule since Forms 20-F and 40-F do not require Item 402 disclosure. Foreign private issuers that file annual reports on Form 10-K would also not be subject to the proposed rule and would continue to be able to satisfy Item 402 requirements by following the requirements of Items 6.B and 6.E.2 of Form 20-F.
 
Filings Where Disclosure Is Required and Proposed Compliance Date
 
The proposed rule would require companies subject to the rule to include pay ratio disclosure in any filing described in Item 10(a) of Regulation S-K to the extent such filing requires executive compensation disclosure under Item 402 of Regulation S-K. This includes registration statements under the Securities Act of 1933 and the Exchange Act, proxy and information statements and annual reports on Form 10-K.
 
A company subject to the proposed rule would first be required to report the pay ratio disclosure with respect to compensation for its first fiscal year commencing on or after the effective date of the final rule. If the final rule were to become effective in 2014, a company with a fiscal year ending on December 31 would be first required to include pay ratio disclosure relating to the 2015 fiscal year in its proxy or information statement for its 2016 annual meeting of shareholders (or written consents in lieu of such a meeting). In the event the company does not file its proxy or information statement within 120 days of the end of 2015, it would be required to file its initial pay ratio disclosure in its Form 10-K for fiscal year 2015 or an amendment to that Form 10-K. A company with a fiscal year ending on December 31 that is not subject to the proxy rules or does not file a proxy or information statement in connection with an annual meeting of shareholders would also be required to include pay ratio disclosure relating to the 2015 fiscal year in its Form 10-K for fiscal year 2015, which would be due in the first quarter of 2016.
 
The proposed rule would provide a transition period for newly public companies, requiring initial compliance with respect to compensation for the first fiscal year commencing on or after the date the company becomes subject to the requirements of Section 13(a) or 15(d) of the Exchange Act (pay ratio disclosure would not be required in a registration statement on Form S-1 or S-11 for an initial public offering or a registration statement on Form 10). Companies would be permitted to begin compliance earlier on a voluntary basis. The proposed rule would not contain any additional transition period for compliance after a company ceases to qualify as an emerging growth company.
 
For both companies that would be subject to the proposed rule and newly public companies, the company would not be required to disclose its pay ratio disclosure for a particular fiscal year in any filing until the filing of its annual report on Form 10-K for such fiscal year or, if later, the filing of a definitive proxy or information statement relating to its next annual meeting of shareholders (or written consents in lieu of such a meeting) following the end of such fiscal year so long as such pay ratio disclosure is filed not later than 120 days after the end of such fiscal year.
 
A company that makes a filing after the end of its last completed fiscal year and before the filing of its Form 10-K or proxy or information statement must include or incorporate by reference the pay ratio disclosure for the fiscal year prior to the last completed fiscal year in such filing. In addition, the proposed rule would provide that where a company omits summary compensation table disclosure of the salary or bonus of the principal executive officer because such information is not calculable as of the latest practicable date, the company must also omit pay ratio disclosure until those elements of the principal executive officer's total compensation are determined and provide the pay ratio disclosure in the same filing under Item 5.02(f) of Form 8-K in which the principal executive officer's salary or bonus is later disclosed. In such a case, the company must disclose that the pay ratio disclosure is being omitted because the principal executive officer's total compensation is not calculable until the principal executive officer's salary or bonus is determined and disclose the expected date that the total compensation for the principal executive officer is expected to be determined. The Form 8-K disclosure regarding pay ratio would only be triggered once the salary or bonus of the principal executive officer becomes calculable in whole, not in part.
 
Consistent with other Item 402 information, the pay ratio disclosure would be considered "filed" for purposes of the Securities Act and Exchange Act and, as such, would be subject to potential liability under both Acts.
 
The comment period for the proposed rule will be open for 60 days from publication of the proposing release in the Federal Register. 


1

Release Nos. 33-9452; 34-70443; File No. S7-07-13 (hereinafter “proposed rule”) available at http://www.sec.gov/rules/proposed/2013/33-9452.pdf.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Proskauer Rose LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Proskauer Rose LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions