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The Pay Ratio Disclosure

The pay ratio disclosure has been a topic of great debate since the passing of the Dodd Frank Act, but it’s seen a particular uptick in coverage over the past few years. While many companies stayed ahead of the curve by instituting clawback policies, due to pressure from institutional advisory firms like ISS, few have attempted to do the same with the CEO pay ratio disclosure.

As most of you are probably aware, the SEC voted on August 5, 2015 to adopt the rule for the CEO’s compensation pay ratio disclosure, defined in Section 953(b) of Dodd Frank, which will require listing companies to disclose the pay ratio of their CEO to the median compensation of its employees. Similar to the vote on clawback policy, it was a divided 3-2 vote, with the dissenting opinions coming from Commissioners Michael Picower and Daniel Gallagher, representatives of the GOP. We think Commissioner Gallagher’s dissent, found here, is particularly interesting. Gallagher makes the argument that, despite the SEC’s efforts to shape the policy as a move to help investors stay informed on the chief executive’s compensation levels, the rule’s true intention is to shame companies to lower CEO pay by forcing them to disclose the pay ratio. Take a look at the quotes he pulls from the rule’s lobbyists at the AFL-CIO. He does an effective job of painting this policy as a politically and socially driven “hijacking” of the SEC’s disclosure regime.

Below we share a succinct highlight of the pay ratio disclosure at this point, as well as some interesting pieces in the market that we think are worth perusing.

  • The rules don’t require companies to disclose CEO pay ratio disclosures until after fiscal years beginning on January 1, 2017.
  •  The selection of the median employee only has to occur once every three years. Companies have to define their employee base within the last three months of their fiscal year. Employees who are not part of the employee base at the time of selection are omitted, and new hire permanent employees are allowed to have their compensation annualized.
  • Part-time employees are not allowed to be “made whole.”
  • Non-U.S. employees may be excluded from the median calculation in two instances:
    • 1. They are employed in a jurisdiction with data privacy laws that inhibit the company from complying with the rule; or
    • 2. Up to 5% of a company’s non-U.S. employees (which counts employees excluded based on the above), provided that if a non-U.S. employee is excluded in a particular jurisdiction then all non-U.S. employees in that jurisdiction must be excluded.
  •  The total compensation calculation for employees utilizes the same methodology as that used in determining CEO pay for the summary compensation table.
  • If companies so choose, they are permitted to include additional narrative discussion or alternative ratios to supplement the required disclosure. Ensure they are clearly identified and not presented more prominently than the required disclosure.

Stay tuned for more information as the market ruminates on this controversial subject. In the meantime, we encourage you to check out the following interesting articles on the topic.

Is the SEC Defying Dodd-Frank Law on Pay-Ratio Rule?
New Executive Compensation Clawback Rules Proposed by SEC; Update on Pay Ratio Disclosure and Pay vs. Performance Rules

As always, our team at Longnecker & Associates will keep you up-to-date on the latest information.

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