Ahead of today’s webcast that will help you figure out how to do the math behind the SEC’s pay ratio proposals, take time to digest the numerous memos that I have posted – as well as this set of FAQs from this Davis Polk blog:
As companies begin digesting the SEC’s proposed pay ratio rule (which we discuss here) and analyzing its impact, here are answers to some frequently asked questions. Final rules may affect the responses.
Is there a safe harbor for the use of any particular method to identify the median employee?
No, the SEC specifically declined to establish any “safe harbor methodologies” or a “menu of alternatives” for determining the median employee.
Do the compensation measures used to identify the median employee need to meet any requirements?
The proposal requires the use of “any consistently applied compensation measure” and mentions several possibilities, such as total direct compensation (salary or wages and performance-based pay); annual cash compensation; or amounts reported in payroll or tax records such as W-2s. The compensation measure can be for a different time period than the company’s fiscal year.
How should different elements of compensation be calculated to arrive at the median employee’s total compensation?
The rule permits the use of “reasonable estimates” that are disclosed, and companies must have a “reasonable” basis to conclude that the estimate for any compensation component, or total compensation, approximates the actual amount of compensation. This includes benefits provided to non-U.S. employees that are not provided to U.S. employees. Personal benefits that are less than $10,000 in the aggregate may be excluded.
When can a full-time employee’s pay be annualized?
A full-time employee’s pay may, at the company’s option, be annualized if that employee did not work the entire fiscal year. This might apply to an employee who was hired during the course of the year, or who was on unpaid leave during part of the year.
When can a part-time employee’s pay be annualized?
A permanent part-time employee’s pay, may at the company’s option, be annualized if that employee only worked part of the fiscal year. However, companies cannot adjust the part-time schedule to a full-time equivalent schedule.
What other adjustments are not permitted?
Companies cannot annualize pay for temporary or seasonal employees or make cost-of-living adjustments for non-U.S. workers.
What if more than one CEO is reported in the summary compensation table?
As a technical matter, the proposed rule requires a ratio using “principal executive officer” as defined in Item 402(a)(3) of Regulation S-K, which could be more than one individual.
Are directors included as employees for purposes of calculating the ratio?
No, directors are not included. Neither are independent contractors or leased employees.
Can we disclose more than one pay ratio?
Yes. As with the non-GAAP disclosure rules, the required ratio must be the most prominent. Companies can disclose one or more other ratios as supplemental information if they are clearly identified and not misleading. For example, if the supplemental ratio excludes the effect of non-U.S. employees, it should be explained as such.
Tune in tomorrow to this webcast at noon eastern – “Doing Your Pay Ratio Homework Now: A Roadmap” – to hear Compensia’s Mark Borges, Deloitte Consulting’s Mike Kesner and Towers Watson’s James Davies, Paul Platten, Steve Seelig and Dave Suchsland get into the nitty gritty of how to do the math in the SEC’s pay ratio proposal. Here’s a set of Course Materials that you should print in advance.
This program will not be an overview of the SEC’s new proposal on pay ratio disclosures–we have posted plenty of memos to get you up-to-speed. Rather, this program will drill down to see where you stand if the proposal was adopted–and to help you decide whether you should consider submitting a comment letter to the SEC using hard facts. So this program will help you evaluate how to choose a compensation definition; how to conduct statistical sampling in this area; how to access the right data and calculate the median.
Had a blast at our week of conferences last week! The speakers did a great job. Interviewing Congressman Mike Oxley was a career highlight (and luckily, my days as ‘Billy Broc’ Oxley never came up). I’m particularly thankful to Faruqi & Faruqi’s Juan Monteverde for coming and being willing to answer many direct questions about the motivations and nature of his proxy disclosure lawsuits (stay tuned for more from Juan). Juan is a character and definitely added spice to the conference (next year’s conference? Vegas in late September!). Here is a pic of us together:
Squeezed in just before the government shutdown – the Federal Register site indicates they are now severely restricting what is being published – the SEC’s pay ratio disclosure proposal was published on Tuesday in the Fed Reg. So the comment period has officially started – even though a number of comments have already been submitted. It ends in 62 days – on December 2nd.
SEC Chair Mary Jo White, speaking Sept. 26 at the Council of Institutional Investors’ fall conference, told attendees the commission was pushing forward on governance-related rulemaking despite challenges faced by the resource-strained agency. In a question and answer session following a speech to attendees touting the agency’s enforcement record, White was noncommittal on when draft rules on clawbacks, pay-for-performance disclosures, and hedging and pledging of shares by executive–as mandated by the Dodd-Frank Act–would be put out, though stressed the agency’s commitment to deliver as quickly as possible.
Telling attendees the biggest surprise she faced upon assuming the chairmanship this spring was the “massive obligations and responsibilities” engendered by Dodd-Frank and the JOBS Act, which, she said, necessitated the creation of “parallel workstreams” to allow for the staggered and timelier roll out of draft rules. Speaking about specific rulemaking, White said she couldn’t predict when commissioners would approve a final rule on pay disparity ratio disclosures, now out for public comment, noting the agency “took seriously” all comments and reviewed them in “real time,” while cautioning that many comments are filed close to the end of 60 day rulemaking deadlines, which would draw out the process.
White also said the agency was focused on investors’ call for stronger clawback policies though noted the complexity of related rules “takes more bandwidth,” suggesting SEC staff remain months away from providing a draft rule to commissioners for consideration.
Notably, White also told attendees the agency was focused on and planned to “effect change” on mandatory arbitration provisions adopted by a growing number of companies. According to White, resolution of the issue would be dictated to some extent by state law, but the SEC does have authority to examine limits placed on the rights of shareholders through such provisions and would explore avenues for redress.
On matters related to ESG reporting, White told the largely public and labor pension fund delegates that Division of Corporation Finance staff are now focused on what may lie ahead for non-financial reporting, in response to a question regarding how the agency will address the matter as ESG reporting gains momentum.
“I worry about whether we’re doing the right disclosures,” White said. “One of things we must do is [ensure] for meaningful disclosures.” White also acknowledged questions over corporate political spending disclosures, pointing to a petition for rulemaking on the matter that at one point appeared close to being ready in draft rule form. “Given all of our mandated rulemakings, we don’t have bandwidth” to address issues beyond that which are Congressionally decreed, White suggested, noting the staff had yet to provide for any recommendations on the matter.
I’ve just put together this webcast for next Wednesday, October 9th (noon eastern) – “Doing Your Pay Ratio Homework Now: A Roadmap” – so you can hear Compensia’s Mark Borges, Deloitte Consulting’s Mike Kesner and Towers Watson’s James Davies, Steve Seelig and Dave Suchsland get into the nitty gritty about how to do the math in the SEC’s pay ratio proposal.
This program will not be an overview of the SEC’s new proposal on pay ratio disclosures–we have posted plenty of memos to get you up-to-speed. Rather, this program will drill down to see where you stand if the proposal was adopted–and to help you decide whether you should consider submitting a comment letter to the SEC using hard facts. So this program will help you evaluate how to choose a compensation definition; how to conduct statistical sampling in this area; how to access the right data and calculate the median.
In this blog, Allen Matkin’s Keith Bishop gives us the updated news about the Dennis v. Hart case since a panel of the California Court of Appeal recently affirmed that case’s dismissal. Here’s the appeal court’s opinion.
As Keith notes, some may be surprised that this case, which involves a Delaware corporation, was in the California courts of all, but the Ninth Circuit has held that the Dodd-Frank Act’s say-on-pay mandate did not by itself confer jurisdiction on the federal courts…
Our conference finally ended yesterday and I’m now digging out. Here are what others have said about the debate over the SEC’s pay disparity disclosure proposal: