There’s No Love for Hard-Won Exemption to Pay Ratio Rule

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Jacob Rund Washington Reporter Fawn Johnson Washington Editor

By Jacob Rund

Few companies are likely to use an exemption that many sought when the SEC put the final touches on its rule requiring disclosure of the gap between CEO and median worker compensation.

Hundreds of publicly traded companies will soon disclose their pay ratios for the first time under the Securities and Exchange Commission’s 2015 rule, required by the 2010 Dodd-Frank Act.

Business advocates pressed the SEC as it drafted the rule to include a way for companies to avert potential privacy violations when collecting information on non-U.S. workers.

The SEC responded to what it called “significant concerns” by placing a partial exemption in the final rule. But the extra legwork and added disclosure required has turned off most companies to its use.

“We don’t have one client who has used it,” Deborah Lifshey, a managing director at pay consultant Pearl Meyer, told Bloomberg Law. “And that’s because there are so many hoops to jump through to use that exemption that it’s virtually impossible.”

Of the 28 firms in the S&P 100 Index that disclosed their 2017 pay ratios as of March 20, none used the data privacy exemption, while 12 used a different exemption for excluding some foreign workers from their ratio calculations.

Employee Data

When computing their pay ratios, companies must analyze their employee compensation data and use it to determine their “median worker,” whose pay is then compared to that of the CEO.

The SEC allows firms to exclude from their median employee calculations workers in foreign jurisdictions, like the EU, where they might find themselves unable to collect pay data without violating privacy laws.

Companies with small, non-U.S. workforces might have a tough time ensuring the data they collect can’t be pegged to specific employees, the American Bar Association’s Federal Regulation of Securities Committee said in a March 2014 letter to the SEC.

Firms “wanted to make sure there would be a carve-out available so they weren’t caught between a rock and a hard place — either violate the pay ratio rule or violate foreign data privacy laws,” Tom Langle, a principal consultant with Mercer, said in an interview.

Too Many Hoops

But the non-U.S. employee exception can only be used if a company makes “reasonable efforts” to obtain the information from the foreign venue without violating its data collection laws and finds it cannot do so.

These efforts “must include using or seeking an exemption or other relief under any governing data privacy laws or regulations,” the rule says.

In addition, companies must explain how complying with the pay ratio rule violates the foreign data privacy law. They also mustprovide their methods for seeking relief, and disclose the number of employees exempted.

Companies must obtain a legal opinion that “opines on the inability of the registrant” to gather the needed employee data without violating foreign laws.

If the company meets all those criteria, it can then omit all workers in that area, but it must name the jurisdiction and the specific law that’s causing the problem.

High Bar

“It’s just too hard to get the exemption, so I don’t think you’ll see anyone using [it],” Lifshey said.

“It’s kind of funny because that’s one that a lot of us who wrote comment letters to the SEC, we all rallied for it,” she added. “So they gave us a data privacy rule, but it’s not really usable.”

“It pretty much has to be a bulletproof legal case that you have to make for using it, which is kind of above and beyond what’s required by any of the other disclosure items,” Langle said.

It may be easier than expected to gather non-U.S. workers’ pay data without violating privacy laws, he added.

Business groups cited privacy laws in the European Union as potential hang-ups for U.S. companies, for example. The EU’s data collection policy is designed to prevent the transfer of personally identifiable information such as names or tax ID numbers.

But calculating a median worker’s pay generally doesn’t require personally identifiable data. A company “can give a list of pay information or anonymous records, and that can pretty much be designed and tailored not to violate foreign privacy laws,” Langle said.

A recent Mercer survey of 144 companies found that about 5 percent of those with non-U.S. workers said they were likely to pursue the data privacy exception.

Langle predicted that some companies in that 5 percent group might choose not to use the exemption because they realize how arduous it is and find a workaround. “I definitely expect it to be under 5 percent,” he said.

To contact the reporter on this story: Jacob Rund in Washington at jrund@bloomberglaw.com

To contact the editor responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com

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