Dodd-Frank Executive Compensation Rules: SEC Proposes Rules for CEO/Employee Pay Ratio Disclosure

by Reed Smith
Contact

On September 18, 2013, the Securities and Exchange Commission voted 3-2 to propose a new rule implementing section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This rule, requiring a public company to disclose the ratio of the median annual total compensation of all employees to the annual total compensation of the chief executive officer (the "Proposed Rule"), has been highly controversial. There has been significant concern over the practicality and administrative burden that could be imposed on companies by a requirement to calculate the median annual total compensation of all employees.

The Proposed Rule would amend Item 402 of Regulation S-K, but would not affect the 2014 proxy season and would not apply to smaller reporting companies, foreign private issuers, or "emerging growth companies" under the Jumpstart Our Business Startups ("JOBS") Act. If the final rule becomes effective in 2014, a company will be first required to make the pay ratio disclosure in its 2016 proxy statement (based on 2015 compensation data).

Pay Ratio Disclosure Requirements

The Proposed Rule would require certain public companies to disclose under Item 402 of Regulation S-K: (i) the median annual total compensation of all employees (other than the CEO), (ii) the annual total compensation of the CEO, and (iii) the ratio of the two amounts. It does, however, include some flexibility to address some of the concerns raised over its application. The key terms of the Proposed Rule are set forth below.

  • Applicable Employees. For purposes of determining median annual total compensation, "all employees" must be considered, including all part-time, temporary, seasonal and non-U.S. employees of a company and its subsidiaries who are employed as of the last day of the company’s fiscal year. Companies are permitted (but not required) to annualize the total pay for a permanent employee who did not work a full year (e.g., new hires). However, companies are not permitted to make full-time equivalent adjustments for part-time employees, annualizing adjustments for temporary and seasonal employees, or cost-of-living adjustments for non-U.S. workers.
  • Determination of Median Annual Total Compensation and Disclosure of Methodology. The Proposed Rule does not require a calculation of the annual total compensation of a company’s entire workforce under the Item 402 rules; instead, in response to concerns, the Proposed Rule requires a comparison of the compensation of a "median employee" to the compensation of the company’s CEO. The Proposed Rule does not specify any required calculation methodologies for identifying this median employee in terms of total compensation for all employees. Each company has the flexibility to select a reasonable methodology that is appropriate to the size and structure of its own businesses and compensation practices, such as through examination of payroll or tax records of its entire employee population or through statistical sampling, and may use annual total compensation under Regulation S-K or another consistent measure. Companies are required to disclose their methodology for determining median annual total compensation of their employees, including any material assumptions, adjustments or estimates used to identify the median or to determine total annual compensation.
  • Disclosure of Pay Ratio. Once the median employee is identified, both the annual total compensation of such median employee and the total annual compensation of the CEO must be disclosed based on the Item 402 proxy disclosure rules used to calculate CEO pay. The ratio of median annual total compensation of all employees to the annual total compensation of the CEO must be disclosed either as a ratio (where the median employee compensation equals one) or narratively in terms of the multiple that CEO compensation bears to median employee compensation.

There is a 60-day comment period with respect to the Proposed Rule. Disclosure will be required for the first fiscal year commencing on or after the effective date of any final rule. However, a company will be permitted to omit the disclosure until the filing of its 10-K relating to that fiscal year or the proxy statement for its next annual meeting of shareholders following the end of such year.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Reed Smith | Attorney Advertising

Written by:

Reed Smith
Contact
more
less

Reed Smith on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.