United States: SEC Issues Pay Ratio CDIs

On October 18, 2016, the SEC issued five new CDIs (Questions 128C.01 – 128C.05) with respect to its pay ratio disclosure rules (Item 402(u) of Regulation S-K). The new CDIs, which are summarized below, cover the use of compensation measures other than annual total compensation, the period of determination and the identification of employees.

  • In identifying the median employee, registrants must use annual total compensation or another consistently applied compensation measure (CACM). Any measure that reasonably reflects the annual compensation of employees could serve as a CACM, depending on the particular facts and circumstances,1 whether or not it identifies the same median employee that would be identified if the registrant used annual total compensation.
  • Although an hourly or annual pay rate may be a component used to determine an employee's overall compensation, the use of the pay rate alone would generally not be appropriate (for example, the registrant would need to account for number of hours actually worked).2 Similarly, using an annual rate without regard to whether the employees worked the entire year and were actually paid that amount during the year would be similar to annualizing pay, which is only permitted in limited circumstances.
  • In applying the CACM to identify the median employee, a registrant is not required to use a period that includes the date on which the employee population is determined, nor is it required to use a full annual period.3 A CACM may also consist of annual total compensation from the registrant's prior fiscal year if there has not been a change in the registrant's employee population or employee compensation arrangements resulting in a significant change in its pay distribution to its workforce.
  • If a registrant has furloughed workers on the date of determination, it must determine whether such workers should be included as employees, based on the facts and circumstances. The compensation of a furloughed worker determined to be an employee should be based on the same method used for a nonfurloughed employee. The registrant must identify the class in which the employee belongs on the relevant date (full-time, part-time, temporary and seasonal) and determine such employee's compensation using annual total compensation or another CACM. The rule permits a registrant to annualize the total compensation for all permanent employees (full-time or part-time) employed by the registrant for less than the full fiscal year or who were on an unpaid leave of absence during the period. However, a registrant may not annualize the total compensation for employees in temporary or seasonal positions, and may not make a full-time equivalent adjustment for any employee.
  • In determining whether a worker is an "employee," a registrant must consider the composition of its workforce and its overall employment and compensation practices, and should include those workers whose compensation is determined by the registrant or one of its consolidated subsidiaries, regardless of whether these workers would be considered "employees" for tax or employment law or other purposes. When a registrant is provided with the services of workers by contracting with an unaffiliated third party that employs such workers, the SEC does not believe the registrant is determining the workers' compensation for purposes of the rule if, for example, the registrant only specifies that those workers receive a minimum level of compensation. In addition, an individual who is an independent contractor may be the "unaffiliated third party" who determines his or her own compensation.

Footnotes

[1] For example, total cash compensation could be a CACM unless the registrant also distributed annual equity awards widely among its employees; Social Security taxes withheld would likely not be a CACM unless all employees earned less than the Social Security wage base.

[2] This would be similar to making a full-time equivalent adjustment for part-time employees, which is not permitted.

[3] To calculate the required ratio, a registrant must first select a date (within three months of fiscal year-end), to determine the population of its employees from which to identify the median.

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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