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By Mary Hughes
June 20 — If the Securities and Exchange Commission adopts the proposed pay-ratio disclosure rule in October, as is likely, companies will be required to disclose the ratio in their 2016 proxies, using 2015 pay statistics, according to speakers at a June 19 law conference.
The SEC isn't likely to hold back, even though comment letters have asked for longer transition periods and the U.S. Chamber of Commerce has taken issue with the commission's cost-benefit analysis for the proposed rule, said Steven A. Seelig, senior executive compensation counsel at Towers Watson's Center for Research and Innovation in Arlington, Va., and Mark Borges, principal with California-based Compensia Inc.
The speakers appeared at the “Executive Compensation: Strategy, Design and Implementation” conference sponsored by American Law Institute Continuing Legal Education.
Borges said the commission is under pressure to complete executive compensation and corporate governance rulemaking projects mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. That pressure, combined with substantial skepticism that the costs and burdens associated with compliance are going to be as great as critics allege, are driving the commission to act, he said.
Disclosure made under the pay ratio rule must be filed with the commission, which will bring it under the liability provisions of the securities laws. Many comment letters took issue with that requirement, Seelig said.
The comments say that the proposed rule allows a flexible approach and even statistical sampling in determining the pay ratio, yet this is a number that has to be certified by the chief executive officer and chief financial officer, he said. It shouldn't be a filed document, according to the commenters, because by definition, “it's your best guess, a good guess, but a guess nonetheless,” he said.
The SEC may take a look at this issue and may “let folks go ahead and simply furnish” this disclosure, he said. Borges agreed that the SEC is likely to make this change.
Dodd-Frank §953(b) directed the SEC to require companies to disclose the ratio of the median total annual income for all employees and the annual income of the CEO. An employee's total compensation is determined in accordance with the summary compensation table (SCT) rules applicable to executive officers.
A divided SEC adopted the proposed rulemaking in September.
The SEC said in May in its semiannual regulatory agenda that its target date for finalizing the pay ratio rule was October.
The median total annual income for all employees includes the entire workforce, Seelig said. By including part-time, temporary and seasonal employees of a company and its subsidiaries, the rule makes compliance difficult for global companies that may not have a global human resources accounting system, he said, echoing many of the comment letters. For many companies, the data may be there, but not in the form needed to comply with the pay ratio rule, he continued.
The rule doesn't require determining the SCT compensation for every employee, Seelig explained. A company can choose a definition of compensation—for example, W-2 compensation for companies that have only domestic employees—and then calculate SCT compensation for that one employee.
A company also may use statistical sampling or any other methodology as long as it is consistently applied, Borges said. As part of the disclosure requirement, the company simply must describe the approach it took to calculate the ratio, Seelig said.
Regarding proxy statement disclosure, Borges opined that, initially, larger companies will say more than is required by the rule about what they've done in terms of coming up with the ratio number, as a precautionary approach. Over time, if the ratio doesn't generate reactionary publicity, companies will begin to scale back disclosures to what is mandated by the rule itself, he said.
In preparing for implementation, Seelig said the pay ratio should be calculated so that it is:
Of these three, defensible is the most important, he said. Other considerations are how much is the company willing to spend—does it want the cheapest and fastest method or does it want to “get the best ratio possible?” Seelig said.
Moreover, companies should be setting their compliance strategy by:
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