United States: SEC Narrowly Adopts Contentious CEO Pay-Ratio Rule

On August 5, 2015, in a 3-2 vote, the Securities and Exchange Commission ("SEC") adopted a long-awaited and contentious rule that requires most public companies to disclose the ratio of their CEO's annual pay as compared with the median annual pay of its workers. This so-called "CEO pay ratio rule" was first passed by Congress in 2010 under section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and proposed by the SEC in September 2013.

Even after receiving more than 280,000 comments, concerns remain over the practicality and administrative burden imposed on companies by this final rule. This final rule, which amends Item 402 of Regulation S-K, requires a public company to disclose the median of the annual total compensation of its employees (excluding the CEO), the annual total compensation of its CEO, and the ratio of the median of the annual total compensation of all employees (excluding the CEO) to the annual total compensation of the CEO (the "Final Rule").

Importantly, public companies must comply with the Final Rule for the first fiscal year beginning on or after January 1, 2017, which means, for most companies, reporting in the 2018 proxy statement (based on 2017 compensation data). However, the Final Rule does not apply to smaller reporting companies, foreign private issuers, Multijurisdictional Disclosure System ("MJDS") filers, "emerging growth companies" under the Jumpstart Our Business Startups ("JOBS") Act, or registered investment companies.

Pay Ratio Disclosure Requirements.

As stated above, the Final Rule requires disclosure of (i) the median annual total compensation of all employees (other than the CEO), (ii) the annual total compensation of the CEO, and (iii) the ratio of the two amounts. The key terms of the Final Rule are set forth below:

Determination of Median Annual Total Compensation and Disclosure of Methodology.

The Final Rule does not require a calculation of the annual total compensation of a company's entire workforce under the Item 402 rules; instead, in response to concerns, the Final Rule requires a comparison of the compensation of a "median employee" with the compensation of the company's CEO.

The Final Rule permits a company to identify its median employee once every three years, unless there has been a change in its employee population or employee compensation arrangements that it reasonably believes would result in a significant change in the pay ratio disclosure. If there have been no changes that the company reasonably believes would significantly affect its pay ratio disclosure, the company must disclose that it is using the same median employee in its pay ratio calculation and describe briefly the basis for its reasonable belief.

If the registrant is using the same median employee, it must calculate that median employee's annual total compensation each year and use that figure to update its pay ratio disclosure each year. For example, the company is required to identify the median employee and calculate that median employee's annual total compensation in year one. In years two and three, however, the company may use that same median employee (or an employee whose compensation is substantially similar to the original median employee based on the compensation measure used to select that median employee) to re-calculate the annual total compensation for that employee without re-identifying the median employee as would otherwise be required under the final rule if it satisfies the above conditions.

The Final Rule does not specify any required calculation methodologies for identifying this median employee in terms of total compensation for all employees. Each company has the flexibility to select a reasonable methodology that is appropriate to the size and structure of its own businesses and compensation practices, such as through examination of payroll or tax records of its entire employee population, or through statistical sampling, and may use annual total compensation under Regulation S-K or another consistent measure. Companies are required to disclose their methodology for determining median annual total compensation of their employees, including any material assumptions, adjustments or estimates used to identify the median, or to determine total annual compensation.

Applicable Employees.

For purposes of determining median annual total compensation, "all employees" of the company must be considered, including all U.S. and non-U.S. employees, as well as its part-time, seasonal, and temporary employees. The Final Rule allows a company to select a date within the last three months of its last completed fiscal year on which to determine the employee population for purposes of identifying the median employee. The company does not need to count individuals not employed on that date. Accordingly, companies may avoid fluctuations caused by seasonal employees hired at the end of a year.

The Final Rule provides an exemption to "all employees" for (i) employees in foreign jurisdictions in which it is not possible for a company to obtain or process information necessary to comply with the rule without violating the data privacy laws or regulations of that jurisdiction (the company must obtain a legal opinion to use this exemption); and (ii) a de minimis exemption for up to 5 percent of non-U.S. employees, including any non-U.S. employees excluded using the data privacy exemption. Also, if a company excludes any non-U.S. employee in a particular jurisdiction, it must exclude all non-U.S. employees in that jurisdiction.

Individuals employed by unaffiliated third parties or independent contractors are not considered employees of the company.

Disclosure of Pay Ratio.

Once the median employee is identified, both the annual total compensation of such median employee and the total annual compensation of the CEO must be disclosed based on the Item 402 proxy disclosure rules used to calculate CEO pay. The ratio of median annual total compensation of all employees to the annual total compensation of the CEO must be disclosed either as a ratio (where the median employee compensation equals one) or narratively in terms of the multiple that CEO compensation bears to median employee compensation.

When calculating the required pay ratio, the Final Rule prohibits a company from making full-time equivalent adjustments for part-time workers, or annualizing adjustments for temporary and seasonal workers.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

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