Begin Search for Pay Ratio's Median Employee, Panel Says

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By Che Odom

Nov. 20 — When it comes to pay ratio disclosures under the Securities and Exchange Commission's new rule, the search for the median employee, and thinking about how to break the news of how much that person is paid, should begin now, attorneys said Nov. 20.

“This is really the people's pay disclosure,” Steve Seelig, executive compensation counsel at Towers Watson & Co., said. “This is the first time that folks out there are really getting a flavor of how CEO pay relates to the common worker, and I'm sure many will look to see if they are paid fairly compared to the CEO.”

Seelig and other executive compensation attorneys spoke at the American Bar Association Business Law Section's fall meeting in Washington. He and the other panelists agreed that in addition to the complex task of developing a method of finding a median and determining which day to make calculations, management and directors must consider how to explain the numbers to shareholders, the public and—perhaps the most interested audience—their employees.

The pay ratio disclosure rule, which was adopted Aug. 5 by the SEC, allows some flexibility in making calculations, but that means companies must be careful when coming up with a methodology that could be challenged by various stakeholders, Seelig said.

Companies will be required to disclose, in a wide range of filings, the median of the annual total compensation of all employees of the company, except the chief executive officer; the annual total compensation of the CEO; and the ratio of the two.

Who's Covered

When determining the median employee, include all employees of the company and its consolidated subsidiaries, including non-U.S., part-time, temporary and seasonal workers employed on any date within the last three months of the last fiscal year, John Fieldsend, special counsel in the SEC's Division of Corporation Finance, said at the panel.

When it comes to identifying the median employee, companies may search from the entire employee population, use a statistical sample or apply another reasonable method that must be explained in their SEC filings, Seelig said.

In addition, companies may use annual total compensation or any other consistently applied compensation measure, he said. To ensure consistency, companies may need to make certain adjustments to the compensation of employees paid in foreign jurisdictions that may not use common definitions for compensation terms, he added.

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