On August 5, 2015, the Securities and Exchange Commission ("SEC") adopted final amendments to Regulation S-K to require disclosure by U.S. public companies of: (i) the median of the annual total compensation of all employees of the applicable company (excluding the principal executive officer); (ii) the annual total compensation of that company's principal executive officer; and (iii) the ratio of the median of the annual total compensation of all employees to the annual total compensation of the principal executive officer.
The pay ratio disclosure rules, which were mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, require companies to include pay ratio disclosure in public filings that call for executive compensation disclosure for fiscal years commencing on or after January 1, 2017. Thus, for companies with a fiscal year ending on December 31, this would generally mean that pay ratio disclosure would first be required in the annual report on Form 10-K for the 2017 fiscal year, or in the proxy statement for the 2018 annual meeting of stockholders.
Emerging growth companies, smaller reporting companies, foreign private issuers and registered investment companies will not have to disclose their pay ratios.
With the date to comply with the new disclosure requirements rapidly approaching, the SEC recently issued interpretive guidance to assist companies in their compliance efforts. In particular, the guidance:
- states the SEC's view that if a company uses reasonable estimates, assumptions and methodologies, the pay ratio and related disclosure that results from such use would not provide the basis for SEC enforcement action unless the disclosure was made or reaffirmed without a reasonable basis or was provided other than in good faith;
- clarifies that a company may use appropriate existing internal records, such as tax or payroll records, in determinations about the inclusion of non-U.S. employees for purposes of the median employee determination and in identifying the median employee; and
- provides guidance as to when a company may use widely recognized tests to determine whether its workers are employees for purposes of the pay ratio rules.
At the same time, the SEC also published guidance about the use of statistical sampling to assist registrants in determining their median employee for purposes of the pay ratio disclosure.
In addition to providing helpful guidance on how to prepare pay ratio disclosures, the SEC's statements also serve as a reminder to public companies that the clock is ticking as to when they will have to comply with this disclosure requirement. To the extent that they are not prepared to make these disclosures, they should begin getting ready now.
For a detailed description of the pay ratio disclosure rules, see Pryor Cashman's Legal Update, "Final Pay Ratio Disclosure Rules for Public Companies Adopted by the SEC."
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