The glimmer of hope that the CEO Pay Ratio will be delayed or repealed continues to dim (although it hasn’t been completely snuffed out yet).
The SEC Delay
The comment letters submitted to the SEC about delaying the effective date were overwhelmingly opposed, although most were form letters and not nearly as many were received as on the proposed regs. More importantly, the SEC may not currently have enough commissioners to effect a delay. Although a new chair has been appointed, in his recent Equity Expert Podcast with us, Steve Seelig of Willis Towers Watson explains that three commissioners are needed for a quorum. The SEC currently has only three total commissioners (including the chair); a commissioner could prevent a matter from being voted on just by not showing up for the vote. One of the current commissioners is a Democrat (and even worked with Senator Dodd at one point) and may not be supportive of a delay.
Steve noted, however, that even if a delay can’t be effected, the SEC staff could issue interpretive relief that would make it easier to calculate the ratio). Steve had a lot of insightful things to say about the ratio; the podcast is definitely worth a listen.
The Financial Choice Act
The Financial Choice Act has already passed through the House Financial Services Committee, only a month after it was introduced by Jeb Hensarling (R-TX). This act would dismantle or weaken many provisions of the Dodd-Frank Act, including a full repeal of the CEO Pay Ratio. But even with the quick passage through committee, this act has a ways to go and the odds of it passing are still low.
The bill is close to 600 pages long and does a whole host of other things besides repealing the CEO pay ratio; a memo from Cooley, “It’s baaaack — the Financial CHOICE Act of 2017,” provides a rundown of the scope of the bill.
Back in February, it seemed like repeal of the CEO pay ratio disclosure was only a matter of time and that when it goes, it might take a lot of the rest of Dodd-Frank with it (see “More Challenges to Dodd-Frank,” February 9). But now the GOP’s push for a repeal seems to be losing steam.
Piwowar’s Request for Comments
As I noted on February 9, SEC Chairman Piwowar has requested comments from companies that have encountered unexpected challenges in implementing the CEO pay ratio. Comments are posted to the SEC’s website as they are received: so far, the SEC has received over 60 individual comment letters and a form letter (of which there have been over 3,000 submissions). The overwhelming majority of comments, including the over 3,000 form letters, are opposed to a further delay in the implementation of the rule. Given the veritable wealth of information on executive pay that is included in the proxy, it is surprising to me that anyone feels they need to know the ratio of CEO to median employee pay to figure out that CEOs are overpaid but apparently a lot of people really do want to know this. Go figure.
If you have encountered challenges (expected or unexpected) in preparing for the disclosure, now is a good time to tell the SEC about them. Comments are due by March 23 but, in my experience, most governmental agencies will still consider comments received after the deadline. If you are interested in reading about the challenges other companies have encountered, check out the letters from Borg WarnerFlushing Financial, Stein Mart, and Finish Line.
Not a Priority?
Trump’s executive order requiring review of all “existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies” seemed to target Dodd-Frank along with other legislation (see “Dodd-Frank Under Scrutiny“). But, as reported in an article on Bloomberg (“Dismantling Dodd-Frank May Have to Wait“), repeal of Dodd-Frank was notably absent from Trump’s priority-setting speech to Congress on February 28.
Financial Choice Act a Long Shot
The Bloomberg article also noted that there is significant opposition to the Financial Choice Act. This act would repeal or weaken much of Dodd-Frank, but one analyst quoted in the article gives it only a 10-20% chance of passing.
It’s Not Over Until the Secretary of the Treasury Sings
The Executive Order calling for a review of all existing laws, regulations, etc. also requires the Secretary of Treasury and the Financial Stability Oversight Council to report their findings to the Administration by early June. Until then, there’s still a chance the rule may be delayed or repealed.
As I mentioned in my blog on Tuesday, we are starting to see some movement towards repeal or revision of at least parts of the Dodd-Frank Act. The Administration’s executive order isn’t the only action that has been taken; here are a couple of other developments:
CEO Pay Ratio—The SEC Weighs In
On Monday, February 6, Acting SEC Chair Michael Piwowar issued a statement on the CEO pay ratio disclosure. Piwowar requests comments on “unexpected challenges that issuers have experienced as they prepare for compliance with the rule and whether relief is needed,” and encourages detailed comments to be submitted within 45 days. Piwowar also notes that he has directed the SEC staff to “reconsider the implementation of the rule based on any comments submitted and to determine as promptly as possible whether additional guidance or relief may be appropriate.”
While that’s pretty vague, is does indicate that, in addition to the Secretary of the Treasury and the Financial Stability Oversight Council, the SEC is also looking at the CEO pay ratio rule. Even so, it’s hard to say what this means. As we all know, and as an article in the Wall Street Journal notes (“GOP-Led SEC Considers Easing Pay-Gap Disclosure Rule of Dodd-Frank“), it is difficult for the SEC to move quickly on matters like this:
Republicans on the SEC could be stymied by the commission’s own procedures on the pay-ratio rule because undoing a regulation is handled by an often lengthy process that is similar to creating one. It also is difficult for the SEC to delay it outright, because of the commission’s depleted ranks. There are just two sitting commissioners—Mr. Piwowar and Kara Stein, a Democrat—meaning the SEC is politically deadlocked on most matters. Ms. Stein on Monday signaled opposition to efforts to ease the pay rule. “It’s problematic for a chair to create uncertainty about which laws will be enforced,” she said.
And Then There’s Congress
An article in Bloomberg/BNA reports that the Financial Choice Act is likely to be reintroduced into Congress this year (“Dodd-Frank Rollback Bill Expected in February, Duffy Says“). Originally introduced last year, this bill would repeal or restrict major parts of the Dodd-Frank Act, including reducing the frequency of Say-on-Pay votes, limiting application of the clawback provisions, and repealing the CEO pay ratio and hedging disclosures. Jenn Namazi blogged on the Act last year (see “Post Election: Things to Watch – Part I” and “Part 2“).
The Financial Choice Act is bigger than Dodd-Frank. The bill would also require a joint resolution of Congress before any “major” rulemaking by the SEC and a number of other agencies could go into effect. Mark Borges notes in his blog on CompensationStandards.com (“Acting SEC Chair Weighs in on CEO Pay Ratio Rule“) that the bill is expected to require the major proxy advisory firms to register with the SEC and, among other things, disclose potential conflicts of interest.
Poll: What Are You Doing?
It’s hard to know what to do in response to all this. Preparing for the CEO pay ratio disclosure requires a lot of time and resources, which most on the corporate side would view as wasted if the disclosure is eliminated. But if the disclosure isn’t eliminated, stalling preparations now could result in an implementation time crunch.
In his blog on CompensationStandards.com (“As Predicted—Hitting the Pause Button on the CEO Pay Ratio Rule“), Mike Melbinger says: “Postponement and revision of the rule seems likely. Now might be a good time to stop spending time and money on this calculation.” Take our poll to tell us what your company is doing (click here if the poll doesn’t display below).
Since last Friday, there’s been a lot of talk from regulators relating to Dodd-Frank. There’s been no definitive action yet on the law, but we’re officially on notice that things are likely to change in the future. Here’s a quick run-down of what happened.
Review of Dodd-Frank
Last Friday, February 3, the Administration issued an executive order that purportedly calls for a review of the Dodd-Frank Act, albeit without mentioning Dodd-Frank by name. The order establishes the following “Core Principles”:
(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
(b) prevent taxpayer-funded bailouts;
(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;
(e) advance American interests in international financial regulatory negotiations and meetings;
(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.
The order then gives the Secretary of the Treasury and the Financial Stability Oversight Council 120 days to report on the extent to which “existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies” adhere to these principles and to identify any of said laws, treaties, et. al., that inhibit regulation in a manner consistent with the Core Principles.
That sounds bigger than Dodd-Frank and perhaps it is. According to an article by Bloomberg (“Trump to Order Dodd-Frank Review, Halt Obama Fiduciary Rule,” the order is intended to target the Fiduciary Rule (which requires advisors on retirement accounts to act in the best interest of the clients), as well as Dodd-Frank.
It’s all very general in nature, but within the next four months (presumably sometime around the end of May) the Treasury Department will be delivering its report and (again presumably) it will address whether (and to what extent) the Dodd-Frank Act promotes or does not promote the Core Principles. I expect that this report will cover the various executive compensation-related provisions of the Act, including the CEO pay ratio disclosure requirement. While it’s still too early to know what this all means – or how it will play out, the Order clearly signals the start of the long-promised re-working of the law. This will likely include the repeal of some provisions, the modification and amendment of others, and, possibly, the survival of some provisions intact.
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.
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.
Last week, the SEC adopted the final CEO pay ratio disclosure rules. I’ve been on vacation, so I don’t have a lot to say about them, but Broc Romanek’s blog on ten things to know about the rules is better than anything I could have written anyway, so I’m just going to repeat that here:
1. Effective Date is Not Imminent (But You Still Need to Gear Up Now): We can look forward to new “Top 10″ Lists in a couple years. Highest and lowest pay ratios. Although the rules aren’t effective until the 2018 proxy statements for calendar end companies, you still need to start gearing up, considering the optics of your ultimate disclosures. The rules do not require companies to report pay ratio disclosures until fiscal years beginning after January 1, 2017.
2. You Don’t Need to Identify a New Median Employee Every Year! This is the BIG Kahuna in the rules! A big cost-saver as the rules permit companies to identify its median employee only once every three years (unless there’s a change in employee population or employee compensation arrangements). Your still need to disclose a pay ratio every year—but you don’t have to go through the hassle of conducting a median employee cost analysis every year. During those two years when you rely on a prior-calculated median employee, your CEO pay is the variable.
3. Pick Your Employee Base Within Three Months of FYE: The rules allow companies to select a date within the last three months of its last completed fiscal year to determine their employee population for purposes of identifying the median employee (so you don’t count folks not yet employed by that date—but you can annualize the total compensation for a permanent employee who did not work for the entire year, such as a new hire).
4. Independent Contractors Aren’t Employees: Duh.
5. Part-Time Employees Can’t Be Equivalized: The rules prohibit companies from full-time equivalent adjustments for part-time workers—or annualizing adjustments for temporary and seasonal workers—when calculating pay ratios.
6. Non-US Employees & the Whole 5% Thing: For some reason, the mass media is in love with this part of the rules. The rules allow companies to exclude non-U.S. employees from the determination of its median employee in two circumstances:
– Non-U.S. employees that 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 require a company to obtain a legal opinion on this issue—can you say “cottage industry”!
– Up to 5% of the company’s non-U.S. employees, including any non-U.S. employees excluded using the data privacy exemption, provided that, if a company excludes any non-U.S. employee in a particular jurisdiction, it must exclude all non-U.S. employees in that jurisdiction.
7. Don’t Count New Employees From Deals (This Year): The rules allow companies to omit employees obtained in a business combination or acquisition for the fiscal year in which the transaction took place (so long as the deal is disclosed with approximate number of employees omitted.)
8. Total Comp Calculation for Employees Same as Summary Comp Table for CEO Pay: The rules state that companies must calculate the annual total compensation for its median employee using the same rules that apply to CEO compensation in the Summary Compensation Table (you may use reasonable estimates when calculating any elements of the annual total compensation for employees other than the CEO (with disclosure)).
9. Alternative Ratios & Supplemental Disclosure Permitted: Companies are permitted to supplement required disclosure with a narrative discussion or additional ratios (so long as they’re clearly identified, not misleading nor presented with greater prominence than the required ratio).
10. Register NOW for the Proxy Disclosure Preconference and August 25 Pay Ratio Workshop:Register now before the discount ends next Friday, August 21. The Proxy Disclosure Preconference will be held on October 27, in advance of the NASPP Conference in San Diego. Registration for the Proxy Disclosure Preconference also includes access to a special online Pay Ratio Workshop that will be offered on August 25. The Course Materials will include model disclosures and more. Act by Friday, August 21 to save!
Last Wednesday, the SEC proposed the last set of compensation-related rules required under Dodd-Frank: clawback policies. This is one of those things where the SEC can’t directly require companies to implement clawback provisions, so instead, they are proposing rules that would require the NYSE and NASDAQ to add the requirement to their listing standards for exchange-traded companies.
Clawback Policies
The requirements for clawback policies under Dodd-Frank are much broader than under SOX (which required misconduct and applied only to the CEO and CFO). Here’s the gist of the SEC’s Dodd-Frank proposal:
Applies to all officers (generally the same group subject to Section 16) and former officers
Clawback is triggered by any material noncompliance with financial reporting standards, regardless of whether intent, fraud, or misconduct is involved
Applies only to incentive compensation contingent on the financial results that are subject to the restatement (interestingly, this includes awards in which vesting is contingent on TSR or stock price targets)
Recoverable Amount
The amount of compensation that would be recovered is the excess of the amount paid over what the officer is entitled to based on the restated financials.
In the case of awards in which vesting is contingent on TSR or stock price targets, the company would have to estimate the impact of the error on the stock price. Which seems a little crazy to me. But I didn’t take a single math, science, economic, or business course in college so my understanding of what drives stock price performance is most charitably described as “rudimentary.” Perhaps this is more straightforward than I think.
In the case of equity awards, if the shares haven’t been sold, the company would simply recover the shares. If the shares have been sold, the company would have to recover the sale proceeds (good luck with that). If you weren’t in favor of ownership guidelines and post-vesting holding periods for executives before, this might change your mind, possession being nine-tenths of the law and all. Check out our recent webcasts on these topics (“Stock Ownership Guidelines” and “Post-Vest Holding Periods“)
Disclosures
In addition to requiring a clawback policy, the SEC has also proposed a number of disclosures related to that policy:
The policy itself would be filed with the SEC as an exhibit to Form 10-K.
Companies would be required to disclose whether a restatement that triggered recovery of compensation has occurred in the past year.
If a restatement has occurred, the company must disclose the amount of compensation recoverable as a result of the restatement and the amount of this compensation that remains unrecovered as of the end of the year. For officers for whom recoverable compensation remains outstanding for more the 180 days, the company must disclose their names and the amounts recoverable from them.
For each person for whom the company decides not to pursue recovery of compensation, the company must disclose the name of the person, the amount recoverable, and a brief description of the reason the company decided not to pursue recovery.
More Info
For more information, check out the NASPP alert on this topic. The memos from Ropes & Gray, Jenner & Block, and Covington, as well as Mike Melbinger’s blogs on CompensationStandards.com, were particularly helpful to me in writing this blog (in case you don’t want to read all 198 pages of the SEC’s proposal).
As expected (and as I blogged last week), the SEC has issued a proposal for the pay-for-performance disclosure required under Dodd-Frank. Proxy disclosures aren’t really my gig, so I don’t have a lot more to say about this topic. Luckily, Mike Melbinger of Winston & Strawn provided a great bullet-point summary of the proposed disclosure in his blog on CompensationStandards.com. I’m sure he won’t mind if I “borrow” it.
The proposed rules rely on Total Shareholder Return (TSR) as the basis for reporting the relationship between executive compensation and the company’s financial performance.
Based on the explicit reference to “actually paid” in Section 14(i), the proposed rules exclude unvested stock grants and options, thus continuing the trend to reporting realized pay. Executive compensation professionals will need to sharpen their pencils to explain the relationship between these figures and those shown in the Summary Compensation Table.
For equity-based compensation, companies would use the fair market value on date of vesting, rather than estimated grant date fair market value, as used in the SCT.
The proposed rules also would require the reporting and comparison of cumulative TSR for last 5 fiscal years (with a description of the calculations).
The proposed rules would require a comparison of the company’s TSR against that of a selected peer group.
The proposed rules would require separate reporting for the CEO and the others NEOs—allowing use of an average figure for the other NEOs.
The proposed rules would require disclosure in an interactive data format—XBRL.
Compensation actually paid would not include the actuarial value of pension benefits not earned during the applicable year.
The proposed rules would phase in of the disclosure requirements. For example, in the first year for which the requirements are applicable [2018?], disclosure would be required for the last 3 years only.
The proposed rules exclude foreign private issuers and emerging growth companies, but not smaller reporting companies. However, the proposed rules would phase in the reporting requirements for smaller companies, require only three years of cumulative reporting, and not require reporting amounts attributable to pensions or a comparison to peer group TSR.
A Few More Thoughts
In the NASPP’s last Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting), usage of TSR targets for performance awards increased to 43% of respondents. With this new disclosure requirement, will even more companies jump on the TSR-bandwagon?
At least there’s one bit of good news: the disclosure covers only the NEOs, not a broader group of officers as was originally feared.
More Information
To learn more about the proposed regs, check out our NASPP alert, which includes a number of practitioner memos. The memo from Pay Governance includes a nifty table comparing the SEC’s definition of “actual” pay to the SCT definition of pay, traditional definitions of realized and realizable pay, and the ISS definition of pay.
It’s beginning to look this is going to be the year of Dodd-Frank rulemaking at the SEC. We may have the CEO pay-ratio disclosure rules by the end of the year, the SEC recently proposed rules for hedging policy disclosures, and now the SEC appears poised to propose the pay-for-performance disclosure rules this week.
Readers will recall that Dodd-Frank requires the SEC to promulgate rules requiring public companies to disclose how executive compensation related to company financial performance (see my blog entry, “Beyond Say-on-Pay,” August 5, 2010). In his April 24 blog on TheCorporateCounsel.net, Broc Romanek noted that the SEC has calendared an open Commission meeting for this Wednesday, April 29, to propose the new rules.
Broc’s Eight Cents
Broc offered eight points of analysis on this disclosure:
1. Companies can get the data and crunch the numbers. I don’t think that the actual implementation itself will be difficult.
2. But I think what could be particularly worrisome is having yet another metric to figure out what the CEO got paid and trying to explain all of it.
3. You know how companies have different schemes for granting equity, including type and timing. If the rules tend to try to fit everyone into a narrow bucket in order to try to line everyone up for comparability, and a company’s program doesn’t quite fit neatly into it, then the disclosure can get even more complicated.
4. There are two elements: compensation and financial performance. What is meant by “financial performance” for example? Maybe the SEC will just ask for stock price, maybe they’ll go broader.
5. A tricky part likely will be the explanation of what it all means—and how it works with the Summary Compensation Table.
6. I don’t think it will be difficult to produce the “math” showing the relationship of realized/realizable pay relative to TSR and other financial metrics, so long as:
– There’s a tight definition of realized pay
– We know what period to measure TSR (and if multiple periods can be used)
– We know what other performance measures can be included (if any) and if they can be as prominent in the disclosure as TSR
7. Another area of potential difficulty is explaining why there is not a tight or tighter correlation with TSR (“we use metrics other than TSR to drive our compensation; thus, the correlation is not very strong; on the other hand, our compensation is based on Revenue Growth and EBITDA Margin, and as Exhibit II demonstrates, the correlation is very significant”).
In addition, Dodd-Frank has no requirement for a relative ranking, and companies will need to decide if TSR and Pay should be put in some type of relative context (“relative to our peers, our realizable pay was well below the peers; so even though compensation is not tightly aligned with stock price performance the last 3 years, we did not pay our bums very much).
8. I think what may be the most difficult to address is a requirement to discuss what the Compensation Committee plans to change—and why is it now that it has performed the analysis?
Let’s Make It a Dime; Here’s My Two Cents
I’m not sure that the problem with executive compensation is that companies aren’t disclosing enough information about it. Isn’t this what the CD&A is for? Isn’t this why the stock performance graph is included with the executive compensation disclosures?
Moreover, does anyone think that any company will just come out and say that their executive compensation is not based on or tied to company performance in any way? I’m just not sure that public companies need one more disclosure to try to convince their shareholders that the amount of compensation they are paying to their executives is justified by the company’s performance.
On September 18, the SEC proposed highly anticipated rules governing the ratio of CEO to median employee pay that public companies will be required to disclose in their proxy statements. In today’s blog, I provide a summary of the proposed rules.
Background
We’ve known this was coming since the Dodd-Frank Act was signed into law. The Act requires the SEC to adopt rules mandating that public companies disclose the ratio of CEO pay to that of the median pay of all other employees (see my blog entry “Beyond Say-on-Pay,” August 5, 2010). It’s taken a while for the SEC to propose the rules because, well, it’s a complicated topic and the SEC has a lot on its plate these days, including a host of other rulemaking projects under Dodd-Frank and the Jobs Act, not to mention investigating Rule 10b5-1 plans.
You Win Some
The Act requires that the ratio of CEO pay to median employee pay be based on “compensation” as defined for purposes of the Summary Compensation Table. So, in a worst case scenario, you could have had to prepare an SCT for all employees just to figure out the median employee compensation.
And, if you want, you can certainly still do that. But, for most companies, it’s about all they can do to put together the SCT for the 5+ execs for whom disclosure is required. So, instead, the proposed rules allow companies to figure out which employee represents the median based on any consistent, systematic method (e.g., based on W-2 income), then determine only that employee’s compensation as per the SCT. The pay ratio disclosure would then simply be the CEO’s pay as compared to the pay of the one employee that represents the median.
You Lose Some
That was the good news. The bad news is that the SEC has interpreted “all employees” to be literally all employees. That includes part-timers, seasonal, and temporary employees, and both US and non-US employees employed as of the last day of the company’s fiscal year. Pay for employees that were hired during the year can be annualized, but annualization is not permitted for seasonal or temporary employees. Likewise, location-based cost-of-living adjustments or full-time adjustments for part-time employees are not permitted.
More Information
For more information, see the NASPP Alert “SEC Proposes CEO Pay Ratio Disclosure Rules.” The proposed rules were issued just days before the NASPP Conference, so speakers at the Conference were able to address them during their presentations. In particular, Keith Higgins, the Director of Corporation Finance at the SEC, discussed the proposed rules in his keynote during the Proxy Disclosure Conference, and Mike Kesner of Deloitte provided a tutorial on the proposed rules in the session “Pay Disparity Workshop & How to Ensure Your Pay Practices Pass.” You can purchase the video of the Proxy Disclosure Conference or purchase the audio for Mike’s session.
Comments on the proposed rules can be submitted to the SEC until December 2, 2013.