The NASPP Blog

There’s a lot being said about the new CEO pay ratio disclosure rules, most of it far better than anything I could write myself, so today, as a fill in for Jenn Namazi who is on vacation, I continue my new tradition of “borrowing” other blog entries on this topic.

Today’s entry is a nifty “to do” list for preparing for the CEO pay ratio disclosure that Mike Melbinger of Winston & Strawn posted in his August 6 blog on CompensationStandards.com.  Given that the disclosure isn’t required until 2018 proxy statements, you might have been lulled into thinking that this isn’t something you have to worry about yet. While it’s true that there’s no need to panic, there is a lot to do between now and 2018 and it is a good idea to start putting together a project plan now to get it all done.  Don’t let this turn into another fire that you to put out.  Here are Mike’s thoughts on how to get started:

1.  Brief the Board and/or the Compensation Committee as to the final rules and the action steps.  Press coverage of the rules has been extensive.  They are likely to ask.

2.  Each company may select a methodology to identify its median employee based on the company’s facts and circumstances, including total employee population, a statistical sampling of that population, or other reasonable methods.  We expect that the executive compensation professionals in the accounting and consulting firms very soon will be rolling out available methodologies (they began this process when the rules were proposed, two years ago).  The company will be required to describe the methodology it used to identify the median employee, and any material assumptions, adjustments (including cost-of-living adjustments), or estimates used to identify the median employee or to determine annual total compensation.

3.  As I noted yesterday, the rules confirm that companies may use reasonable estimates when calculating any elements of the annual total compensation for employees other than the CEO (with disclosure).  Assess your ability to calculate precisely all items of compensation or whether reasonable estimates may be appropriate for some elements.  The company will be required to identify clearly any estimates it uses.

4.  Begin to evaluate possible testing dates.  The final rules allow 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 would not need to count individuals not employed on that date.

5.  Consider tweaking the structure of your work-force (in connection with the selection of a testing date).  The rules allow a company to omit from its calculation any employees (i) individuals employed by unaffiliated third parties, (ii) independent contractors, (iii) employees obtained in a business combination or acquisition for the fiscal year in which the transaction becomes effective.  Finally, the rule allows companies to annualize the total compensation for a permanent employee who did not work for the entire year, such as a new hire.  The rules prohibit companies from full-time equivalent adjustments for part-time workers or annualizing adjustments for temporary and seasonal workers when calculating the required pay ratio.

As I noted yesterday, the rules permit the 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 would result in a significant change in the pay ratio disclosure.

6.  Determine whether any of your non-U.S. employees are employed in a jurisdiction with data privacy laws that make the company unable to comply with the rule without violating those laws.  The rules only allow a company to exclude employees in these countries.  (The rules require a company to obtain a legal opinion on this issue.)

7.  The rules only allow a company to exclude up to 5% of the company’s non-U.S. employees (including any non-U.S. employees excluded using the data privacy exemption).  Consider which non-U.S. employees to exclude.

8.  The rules allow companies to supplement the required disclosure with a narrative discussion or additional ratios.  Any additional discussion and/or ratios would need to be clearly identified, not misleading, and not presented with greater prominence than the required pay ratio.

Mike noted one additional action item in his blog on August 7:

The rules explicitly allow companies to apply a cost-of-living adjustment to the compensation measure used to identify the median employee.  The SEC acknowledged that differences in the underlying economic conditions of the countries in which companies operate will have an effect on the compensation paid to employees in those jurisdictions, and requiring companies to determine their median employee and calculate the pay ratio without permitting them to adjust for these different underlying economic conditions could result in a statistic that does not appropriately reflect the value of the compensation paid to individuals in those countries.  The rules, therefore, allow companies the option to make cost-of-living adjustments to the compensation of their employees in jurisdictions other than the jurisdiction in which the CEO resides when identifying the median employee (whether using annual total compensation or any other consistently applied compensation measure), provided that the adjustment is applied to all such employees included in the calculation.

If the company chooses this option, it must describe the cost-of-living adjustments as part of its description of the methodology the company used to identify the median employee, and any material assumptions, adjustments, or estimates used to identify the median employee or to determine annual total compensation.

Companies with a substantial number of non-US employees should seriously consider the ability of apply a cost-of-living adjustment to the compensation measure used to identify the median employee.

Finally, don’t forget that registering for the Proxy Disclosure Preconference at this year’s NASPP Conference also entitles you to attend the online Pay Ratio Workshop on August 25.  Don’t wait–discounted pricing is only available until next Friday, August 21.

The Proxy Disclosure Preconference will be held on October 27, in advance of the NASPP Conference in San Diego.

– Barbara