CEO Pay Ratio Proposed Rules Released

The Commissioners of the SEC voted 3-2 on September 18, 2013 to propose regulations implementing the mandate of Section 953(b) of the Dodd-Frank Act to require disclosure by reporting companies of the median annual total compensation of all their employees and the ratio of that median to the annual total compensation of their chief executive officers.

Disclosure would likely first be required for calendar year companies in 2016 proxy filings relating to 2015 compensation. While that gives most companies substantial lead time before they will need to make public disclosure, and notwithstanding substantial uncertainty about how the mandate will be ultimately implemented, most companies will be well-served over the next few months to upgrade their focus on the disclosure requirement. First, the rules provide companies with areas of substantial flexibility, and many companies will wish to consider alternative approaches to calculating the ratio. For many companies, those considerations will take time. Second, companies may wish to contribute to comments on the proposed rules based on their circumstances and expected compliance issues. Comments on the proposed rules will be due towards the end of November (60 days after publication of the proposed rules in the Federal Register). Third, some companies may wish to consider changing aspects of their business or compensation practices in response to the disclosure requirement. Those changes may take considerable time to think through carefully, and to implement.

We attach a memo that simply summarizes the proposed rules. It is not intended to address other important issues related to the Dodd-Frank Act mandate. In addition to the timing point addressed above, the memorandum notes the following principal aspects of the rules:

Identifying the median employee.

• All employees of the issuer and its subsidiaries, including full time, part time, temporary, seasonal and non-US employees, employed on the last day of the issuer’s fiscal year are required to be taken into account in determining the ratio.
• Compensation is permitted to be annualized in specified circumstances, but not for part time, seasonal or temporary employees. Cost-of-living adjustments for non-US employees is not permitted.
• Issuers will have discretion to use reasonable approaches in identifying the median employee, including statistical sampling of employee populations and estimates and measures of pay, and will not be required to calculate each employee’s total compensation pursuant to the Summary Compensation Table rules.

Reporting the ratio.

• Once the median employee is determined, the amount of that employee’s total annual compensation and the pay ratio must be calculated in the manner dictated for total compensation in the Summary Compensation Table. However, any compensation permitted to be excluded from annual total compensation for that purpose, such as benefits under plans available to all employees, may be added back into the ratio calculation in order to capture benefits that may comprise an important part of a rank-and-file employee’s compensation.

We look forward to sharing with you our further thoughts on how to navigate these rules.