- SEC Proposes New Pay Ratios Rules
- September 23, 2013 | Authors: David J. Lavan; Mary K. Newman
- Law Firms: Dinsmore & Shohl LLP - Washington Office ; Dinsmore & Shohl LLP - Cincinnati Office
The Securities and Exchange Commission (the “Commission”), by a 3-2 vote, proposed rules to require companies to disclose the median annual total compensation of all employees and the ratio of that median to the annual total compensation of the company’s chief executive officer. These proposals are designed to implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank’). As proposed, the new rules provide flexibility in calculating median annual compensation for employees to reduce costs.
The proposed rules from the Commission would require yearly disclosure in annual reports, proxy statements and registration statements, of a company’s “pay ratio.” The SEC did not propose any date of effectiveness for the rule, however the compliance period would begin in the first fiscal year beginning after the effective date of the rule, and disclosures would be required in the annual reports or proxy statements filed with respect to that fiscal year. In our view, for a calendar year-end company, the earliest pay ratio disclosure will be required will be in proxy materials or information statements relating to its 2016 annual shareholders meeting and will relate to compensation paid in the 2015 fiscal year.
In determining the median annual total compensation of its employees, a company will be required to consider all full-time, part-time, seasonal and temporary workers employed as of the last day of the relevant fiscal year by the company and any of its subsidiaries, whether located within, or outside of, the United States. The median compensation measurement does not include independent contractors, “leased” workers or other temporary workers employed by a third party. Companies will be permitted to annualize the compensation of permanent employees that did not work for the entire fiscal year (such as a new hire), but will not be permitted to annualize the compensation of seasonal or other temporary employees.
Flexibility in method
To reduce the cost of compliance with the proposed rule, the Commission provided companies with the flexibility to choose an appropriate methodology for identifying median annual total employee compensation. For this purpose, companies that elect not to use their entire employee population may rely on statistical sampling and reasonable estimates, and can use any consistently applied compensation measure (e.g., W-2 wages or cash compensation) to identify the median employee. Once identified, though, the median employee’s annual compensation must be calculated according to Item 402(c)(2)(x), though reasonable estimates may be used in determining the annual total compensation. The determination of the annual total compensation of the company’s chief executive officer, will continue to be determined in accordance with Item 402(c)(2)(x) of Regulation S-K.
Companies must consistently apply and disclose the methodology, assumptions, adjustments and estimates used in calculating their pay ratio, and must clearly identify any estimated amounts.
The pay ratio disclosure requirements will apply to companies that are otherwise required to provide a summary compensation table under Item 402(c) of Reg. S-K.
Smaller reporting companies, foreign private issuers, MJDS (Canadian) filers that file on Form 40-F and emerging growth companies under the JOBS Act are not subject to the pay ratio disclosure requirements.
The proposal would provide a transition period for newly public companies. For these companies, initial compliance would be required with respect to compensation for the first fiscal year commencing on or after the date the company becomes subject to the reporting requirements of the Securities and Exchange Act of 1934 (the “Exchange Act”).
Location of Disclosure
As proposed, the pay ratio disclosure will be required in any annual report, proxy statement or registration statement that requires executive compensation disclosure under Item 402 of Reg. S-K. The pay ratio disclosure must be updated annually through a company’s annual report or proxy statement, not later than 120 days after the end of the fiscal year.
The pay ratio disclosure will be considered “filed” not furnished, and is therefore subject to potential liability under the Securities Act of 1933, when included in registration statements and the Exchange Act, when included in annual reports or proxy statements.