On August 5, the Securities and Exchange Commission adopted the final rule regarding pay ratio disclosure that amends Item 402 of Regulation S-K to implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rule is generally consistent with the September 2013 proposed rule, which was highlighted in the Corporate & Financial Weekly Digest edition of September 20, 2013, and requires an issuer to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of all of its employees. The pay ratio disclosure will be required in an issuer’s annual reports on Form 10-K, registration statements and proxy and information statements to the extent that such filings require the disclosure of a summary compensation table pursuant to Item 402(c) of Regulation S-K.
To identify the median employee, the rule allows an issuer to use its total employee population, a statistical sampling of that population or any other reasonable method. An issuer may further use, for example, annual total compensation under existing executive compensation rules or any consistently applied compensation measure from amounts reported in the issuer’s payroll or tax records. The rule requires an issuer to calculate “annual total compensation” for its median employee in the same manner as its CEO’s compensation, pursuant to existing executive compensation rules. The rule also requires an issuer to describe the methodology used to identify the median employee and any material assumptions, adjustments or estimates used in its calculations.
In light of the many comment letters the SEC received with respect to the proposed rule, including specific suggestions on mitigating compliance costs and practical difficulties associated with the proposed rule’s disclosure requirements, the SEC adopted a number of revisions to the proposal in the final rule. In particular, the final rule provides that:
- In determining its median employee, although an issuer must include US and non-US, full-time, part-time, temporary and seasonal employees of the issuer and its consolidated subsidiaries, it may exclude (1) non-US employees employed in jurisdictions with data privacy laws that would make the issuer’s compliance with the pay ratio disclosure violate such laws and (2) up to 5 percent of its non-US employees, including any employees already excluded under the data privacy exception.
- Whereas the proposed rule defined “employee” as an individual employed on the last day of the issuer’s last completed fiscal year, the final rule permits issuers to use any date within the three months preceding the last day of its last completed fiscal year.
- Issuers may identify the median employee every three years, instead of every year, unless there has been a change in its employee population or employee compensation arrangements that the issuer reasonably believes would result in a significant change in the pay ratio disclosure.
The pay ratio disclosure requirements will be effective with respect to compensation paid in fiscal years beginning on or after January 1, 2017 (which would be, for calendar year end issuers, an issuer’s proxy statement for its 2018 annual meeting of stockholders), and apply to all issuers except smaller reporting companies, emerging growth companies, foreign private issuers, multijurisdictional disclosure system filers and registered investment companies.
To view the complete text of the final rule, click here.