The SEC recently adopted its final pay ratio disclosure rules. Commencing in early 2018, public companies will have to disclose (i) their CEO’s total annual compensation, (ii) the median total annual compensation of all of their employees (other than the CEO), and (iii) a ratio comparing the two values. This alert explains step-by-step how to comply with the final rules and concludes with a model disclosure.
Foreign Law Exemption: If compliance with the final rules would cause the company to violate foreign data privacy laws or regulations, the employees of that foreign jurisdiction may be excluded. Reasonable efforts must first be made to seek an exemption or other relief under the foreign data privacy laws before relying on this exemption. The company also must obtain a legal opinion from counsel opining on the inability to comply with the final rules without violating foreign laws and file such opinion as an exhibit to the filing in which the pay ratio disclosure is included.
De Minimis Exemption: If the company’s non-U.S. employees account for 5% or less of its global workforce, all of the non-U.S. employees may be excluded. If the non-U.S. employees exceed the 5% threshold, the company may exclude up to 5% of its global workforce who are non-U.S. employees. However, non-U.S. employees excluded under the foreign law exemption will count against this 5% cap.
Identifying Median Employee Once Every Three Years
Three-Month Determination Date Window
Reasonable estimates such as statistical sampling are permitted, but the company must disclose any material assumptions, adjustments or estimates used to identify the median employee and determine the total annual compensation.
The company may annualize the compensation of a permanent employee (full- and part-time) who did not work for the entire year but not the compensation of temporary or seasonal employees. Full-time adjustments for part-time employees is also prohibited.
The company may make cost-of-living adjustments to the compensation paid to employees in jurisdictions other than the jurisdiction where the CEO resides. If the company uses this adjustment, it must use the same cost-of-living adjustment in calculating the median employee’s annual total compensation and disclose (i) the median employee’s jurisdiction, (ii) the median employee’s annual total compensation and the pay ratio, both with and without the cost-of-living adjustment, and (iii) a description of the cost-of-living adjustments used.
The pay ratio must be expressed either (i) as a ratio in which the annual total compensation of the median employee is equal to one (e.g., 100 to 1 or 100:1), or (ii) narratively in terms of the multiple that the CEO’s total annual compensation bears to the annual total compensation of the median employee.
The pay ratio disclosure will have to be provided in all filings in which executive compensation disclosure is required by Item 402 of Regulation S-K (e.g., Form 10-Ks, proxy and information statements and registration statements) but not in periodic filings such as Form 8-Ks or 10-Qs. As with other executive compensation information, the Form 10-K can incorporate this disclosure from a proxy statement that is filed within 120 days after the end of the fiscal year covered by the Form 10-K. After the initial pay ratio disclosure, the company will be able to benchmark how its pay ratio compares to peer group members. We expect there will be more commentary on how companies rank and why the pay ratios are what they are by the 2019 proxy season.
Supplemental Disclosure. The company may supplement its pay ratio disclosure by providing additional pay ratios or a narrative discussion to address any unwarranted conclusions that may be drawn from its disclosure. Any additional ratios must be clearly identified, not misleading and not presented with greater prominence than the required ratio.
Our Compensation Committee reviews the internal pay ratio between the CEO’s total compensation and other named executive officers and the median annual total compensation of all employees (excluding the CEO). We identified the “Median Employee” by taking a statistical sampling of the annual total compensation of all full-time, part-time, seasonal, and temporary employees employed by us on Date. In making this determination, we used a sample size of (x) from a population size of (y). Our CEO had annual total compensation of $10,000,000, and our Median Employee had annual total compensation of $100,000. Therefore, our CEO’s annual total compensation is 100 times that of the median of the annual total compensation of all of our employees.