Executive Compensation News and Views – 3Q 2015
Dodd-Frank Update: The SEC Finalizes the Pay-Ratio Rule
In August 2015, the SEC finalized the Pay-Ratio Rule in response to the Dodd Frank Act. All publicly-traded companies (with the exception of select smaller issuers, foreign issuers and emerging growth companies) will be required to disclose the following:
- Annual total compensation of the chief executive officer (“CEO”);
- Median annual compensation of all employees of the company, excluding the CEO; and
- Ratio of the two amounts above.
The pay ratio will be required for fiscal years beginning on or after January 1, 2017, which means most REITs will first disclose this amount in the 2018 proxy statements.
Identifying the Median Employee
Companies will need to identify the median employee once every three years. The determination of the median employee will include anyone who works for the company inside or outside of the U.S. and will be based on amounts calculated in accordance with the Summary Compensation Table rules. In order to determine the median there are some nuances, including the following highlights:
- A company may use its total employee population or a statistical sampling of that population and/or other reasonable methods.
- Companies are permitted to annualize compensation for a permanent employee who did not work the entire year, such as a new hire.
- Companies are prohibited from adjusting part-time, temporary and seasonal workers pay to the full time equivalents.
- Companies may apply a cost-of-living adjustment for employees outside of the CEO’s location but will also need to disclose the pay ratio without the cost-of-living adjustment.
- Companies that are in the midst of an acquisition may choose to omit employees obtained in a business combination or acquisition for the fiscal year in which the transaction took place if the deal is disclosed with approximate number of employees omitted.
- Companies may exclude up to 5% of its non-U.S. employees, as well as exclude employees in non-U.S. locations where such a disclosure would violate data privacy laws (which would ultimately need to be substantiated with a legal opinion.)