july 2017 2018 ceo pay ratio disclosure is approaching · 2018 ceo pay ratio disclosure is...
TRANSCRIPT
July 2017
2018 CEO PAY RATIO DISCLOSURE IS APPROACHINGPublic companies should get ready NOW for the disclosure of their CEO pay ratios in 2018
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Under the SEC’s final rules, most U.S. publicly-listed companies must determine and disclose the ratio between the total annual compensation of its median-paid employee and of its CEO regarding fiscal years beginning on or after January 1, 2017. The SEC’s rules on this “CEO pay ratio” have been maligned by many as imposing significant time and cost burdens (as well as employee relations challenges) on employers and being of little use to investors. However, efforts to repeal, modify or delay its requirements appear unlikely to be achieved before the first disclosures are due in 2018.
Background
Section 953(b) of the 2010 Dodd-Frank legislation directed the SEC to require publicly-listed companies to disclose their CEO pay ratios. Following the release of proposed rules in 2013, the SEC ultimately adopted final rules in August 2015 under which the first disclosures would not be necessary until 2018. (See our August 2015 Alert “SEC Adopts Final Rules on CEO Pay Ratio Disclosures”) Although some limited interpretative guidance was furnished in October 2016 by the SEC’s Division of Corporation Finance, the requirements for compliance have not otherwise been modified.
Nevertheless, the election of President Trump and Republican control of both houses of Congress caused some companies to place a hold on their compliance efforts to avoid unneeded work and expense in case the new President was able to achieve his promised dismantling of Dodd-Frank. The repeal of CEO pay ratio disclosures was included in the Financial CHOICE Act which ultimately was passed by the U.S. House of Representatives on an essentially party-line vote in early June 2017. However, the lack of any support for the bill from Democrat legislators make its approval by the Senate most unlikely before compliance is
required beginning in 2018.
Alternatively, an administrative delay or modification of the SEC’s rules may occur, although both are subject to practical and procedural hurdles that limit how fast any such action can occur. Thus, we recommend that companies proceed on the assumption that the currently applicable rules will still be in effect at the start of the 2018 proxy season. The priorities of new SEC Chair Jay Clayton are only being developed, the SEC (as of the date of this Alert) has two commissioner vacancies (thereby requiring the attendance of the Democrat appointee for a quorum), and administrative notice procedures must be followed in the reconsideration of rules previously adopted. Also, other Dodd-Frank rules (such as those focused on concerns of financial organizations) seemingly have a higher priority for the SEC.
What companies should do now
Now is the time for companies to consider various issues that may affect how they determine and disclose their CEO pay ratios. From a big picture standpoint, necessary actions involve (1) the determination of the median-compensated employee and his/her total compensation (which can be quite complicated and time-consuming for many companies), (2) the total compensation of the CEO, (3) the calculation of the ratio, and (4) the development of proxy disclosure language regarding the ratio which, at a minimum, will summarize the process in determining the ratio and any assumptions, alternatives and special rules used. However, at some firms, the most important issue will be the handling of internal communications with employees explaining the meaning of the ratio reported; some employees may be upset upon finding that they are paid in the bottom half of the workforce. At
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companies with unionized employees, high ratios may trigger union demands for increases in employee wages.
The effort needed for compliance with the SEC’s rules regarding the CEO pay ratio can vary greatly depending on the particular facts concerning the company’s workforce and pay structure. A firm with few non-U.S. employees and a single payroll system may find the determination of its median-compensated employee to be a relatively straightforward process that need not make use of permitted alternatives. However, multinational organizations with a large portion of their employees in non-U.S. jurisdictions and/or with different payroll systems may find the process to be especially time-consuming; a series of choices may be required as the team proceeds through a “decision tree” in determining the median employee.
Suggested basic steps
Last summer we surveyed the readiness of companies for compliance, and areas of concern, with the SEC’s rules on the determination and disclosure of their CEO pay ratios. (See “CEO Pay Ratio Study: How companies are approaching the upcoming disclosure”) At that time we found a wide range of preparedness and potential issues. Regardless of where a company now stands, it generally would be helpful to consider whether the organization has already taken, or will now take, the following basic steps.
1. Identify the team responsible for gathering the necessary information and making the necessary determinations. Both internal personnel (e.g., HR, IT, payroll, legal, finance, communications) and external advisors (legal, compensation consulting, data privacy, communications) are typically needed.
2. Determine the employee population, by country and in the aggregate. A de minimis rule may permit the exclusion of some or even all non-U.S. employees.
3. Evaluate the company’s goals (in addition to regulatory compliance) in determining the median-paid employee; it may not necessarily be to calculate a low ratio. Some companies may want to determine the ratio as inexpensively as possible (after considering the cost in time of internal personnel and the fees of external advisors). Since different compliant approaches (including permitted assumptions, exclusions, and compensation definitions) may yield materially different results, the team should consider how various groups (e.g., employees in various locations, unions, the media, proxy advisors) may react to the ratio reported. For example, an approach that identifies a median employee with lower pay than other permissible methods can reduce the number of employees whose pay is below the median and lessen an HR issue.
4. Choose the date within the last three months of the company’s last completed fiscal year to be used for determining the employees who need to be considered. For companies that hire a substantial number of seasonal or temporary employees (e.g., many retailers), this can eliminate the need to consider a large group of generally lower paid employees.
5. Review the company’s payroll system(s) in all relevant countries and determine the ease or difficulty of obtaining needed compensation data.
Once these basic steps have been completed, a company can make the remaining necessary decisions for a “dry run” calculation using 2016 employee and compensation data to obtain an advance look on how its pay ratio is likely to appear. Then the appropriate individuals should begin to draft disclosure language to include in the annual proxy statement and other filings. In addition to summarizing how the ratio was determined, the disclosure should provide contextual information for readers. The message communicated here can be a critical component of the overall process and address potential concerns with the ratio reported.
For more information, please contact:
Irv Becker [email protected]
Bill Gerek [email protected]
Chris Fischer [email protected]
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