CEO pay ratio reporting for 2018
Starting in January 2018, public employers must disclose the ratio of CEO pay to median employee pay to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act. Near the end of September, the U.S. Securities and Exchange Commission [SEC] published interpretive guidance in the Federal Register explaining the flexibility employers have when implementing CEO pay ratio reporting. Remember that public employers must begin reporting the ratio of CEO pay to median employee pay in their 2018 proxy statements.
The SEC provided the guidance, which can be found here, in an effort to address the unexpected challenges companies have been facing as they prepare to comply with the pay ratio rule. In general, the new guidance eases compliance and allows companies to use readily available information to produce the disclosures.
In particular, the new guidance:
- Clarifies the use of reasonable estimates, assumptions, and methodologies, and statistical sampling permitted by the rule.
- Clarifies that a company may use appropriate existing internal records, such as tax statements or payroll documents, to identify and calculate the median employee’s annual total compensation.
- Clarifies that appropriate interval records can also be used to determine if the company must include non-U.S. workers in pay ratio calculations. However, the SEC allows companies to exclude non-U.S. employees if they account for 5 percent or less of the company’s total workforce.
- Provides additional guidelines on determining whether its workers are employees for purposes of the rule, allowing employers to exclude independent contractors from pay ratio calculations.
The additional guidance also includes examples which illustrate how reasonable estimates may be used in finding the pay ratio. Finally, we encourage public employers to do their due diligence and document all assumptions and methodologies when computing the ratio to reduce the risk of an SEC enforcement action.