SEC Issues Pay Ratio Guidance

by Shearman & Sterling LLP

With the first required pay ratio disclosures only a few months away, the Commission, on September 21, 2017, issued an interpretative release intended to assist registrants in their compliance efforts.[1] The guidance in the interpretive release is both welcome and helpful.

The key elements of the interpretive release include:

  • Using reasonable estimates, assumptions or methodologies would not provide the basis for an enforcement action unless disclosures were made or reaffirmed without a reasonable basis or not done so in good faith

  • A company can use existing internal records that reasonably reflect annual compensation to identify the median employee, even if those records do not include every element of compensation

  • A company is permitted to use any “widely recognized test” that is otherwise used to determine whether its workers are “employees” for purposes of identifying the median employee

In addition, on that same day, the Staff of the SEC’s Division of Corporation Finance published guidance and examples on how to use statistical sampling methodologies to identify the median employee.[2] Finally, in order to conform earlier Division guidance to the new interpretative release, the Division revised the five related Compliance & Disclosure Interpretations (C&DIs) it had issued in October of 2016.

Although the interpretive release and the new guidance provide issuers with increased flexibility and helpful examples, they all but eliminate any hope that the SEC will delay implementation of the pay ratio disclosure rule.[3]

The table below summarizes the key takeaways from the September 21st publications and, where applicable, the conforming changes to the previously released C&DIs.

Pay Ratio Interpretive Guidance


New Guidance

Revised C&DI

Risk of using reasonable estimates, assumptions and methodologies and statistical sampling

The use of reasonable estimates, assumptions and methodologies and statistical sampling will not result in SEC enforcement action unless the disclosure was made or reaffirmed without a reasonable basis or was provided other than in good faith.

(Interpretive Release)

New C&DI 128C.06[4]

This C&DI acknowledges the imprecision in disclosures required by the pay ratio rule and permits companies to state that the pay ratio is a “reasonable estimate calculated in a manner consistent with Item 402(u).”

Use of Internal Records: Non-US Employees

A registrant may use appropriate existing internal records (such as tax or payroll), in determining whether the 5% de minimis exception is available.

(Interpretive Release)

No related change to C&DIs.

Use of Internal Records: Median Employee

In identifying the median employee, registrants may use existing internal records that reasonably reflect annual compensation as a consistently applied compensation measure (CACM), even if those records do not include every element of compensation, such as equity awards widely distributed to employees.

(Interpretive Release)

Revised C&DI 128C.01

This C&DI previously stated that cash compensation alone may not be a CACM if the registrant distributed equity awards widely among its employees.

Independent Contractors

In determining whether a worker is an employee covered by the rule, registrants may apply a widely recognized test under another area of law (such as labor or tax) that the registrant otherwise uses to determine whether its workers are employees.

(Interpretive Release)

Eliminated C&DI 128C.05

This C&DI had provided that all workers must be included unless they are employed by, and their compensation was determined by, an unaffiliated third party.

Statistical Sampling

Clarifies that registrants may use a combination of statistical sampling and other reasonable methods in determining the employees from which the median employee is identified.

  • Provides examples of:
    • Sampling methods, and notes that they can be used either alone or in combination,
    • Situations where registrants may use reasonable estimates,
    • “Other reasonable methodologies” that registrants may use, and
    • Hypothetical uses of reasonable estimates, statistical sampling and “other reasonable methods.”

(Division of Corporation Finance guidance)

No related change to C&DIs.



[1] The Commission’s interpretive release can be found at: The final pay ratio disclosure rule can be found at: For an overview of the final rule, you may wish to refer to our client publication: “The SEC’s Final Pay Ratio Rules: What You Need to Know,” available at:
[2] The guidance issued by the Division of Corporation Finance can be found at:
[3] On September 15, 2017, William Hinman, Director of the SEC’s Division of Corporation Finance, told attendees at an ABA meeting that the rule will go into effect on time.
[4] The new C&DI is available at:


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.

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