Stay current on changes and developments in corporate law with a wide variety of resources and tools.
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:
To contact the reporter on this story: Mary Hughes in Washington at email@example.com
To contact the editor responsible for this story: Phil Kushin at firstname.lastname@example.org
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)