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Oct. 19 — The corporate community got a little guidance from the Securities and Exchange Commission staff on how to make disclosures required by the agency's controversial pay-ratio rule.
The rule, adopted in August 2015 by a divided Securities and Exchange Commission, requires public companies to disclose in their annual reports and other filings the ratio of their chief executive's pay to the median pay of their other employees (151 SLD, 8/6/15).
The rule gives companies leeway in calculating median pay. Companies will be expected to include the pay ratio disclosure in their annual report or proxy statement for fiscal 2017.
The U.S. Chamber of Commerce has said it won't file a legal challenge to the rule, even though business groups are opposed to the regulation. They say compliance will be costly and the ratio won't be valuable to many investors (204 SLD 204, 10/22/15). House Republicans also are seeking to repeal the Dodd-Frank provision authorizing the rule (13 SLD, 1/21/16).
The agency's Division of Corporation Finance, which periodically offers its interpretation of the agency's rules, said a company doesn't have to calculate annual total compensation to determine median pay as set out in other SEC rules. Instead, it can use any measure that reasonably reflects its employees' annual compensation.
The appropriateness of any measure depends on the company's particular circumstances, the staff said. For example, total cash compensation could be used as a “consistently applied compensation measure”—CACM—unless the company also widely distributed annual equity awards among its employees.
However, the staff said, a company can't exclusively use hourly or annual rates of pay as its CACM. Although a pay rate may be used to determine an employee’s overall compensation, using the pay rate alone generally isn't an appropriate CACM to identify the median pay.
The division's guidance also addressed what time period may be used to identify the median employee, furloughed employees and independent contractors.
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To see the division's Compliance and Disclosure Interpretations, go to https://www.sec.gov/divisions/corpfin/cfguidance.shtml.
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