SEC Eases, but Does Not Delay, CEO Pay Ratio Reporting Rule

SEC Eases, but Does Not Delay, CEO Pay Ratio Reporting Rule

The rule adopted by the Securities and Exchange Commission in 2015 requiring public companies to disclose the ratio between the compensation of the CEO and the median annual compensation of every other employee in their proxy statements, starting with the 2017 fiscal year, appears to have survived the presidential changeover and is set to go into effect next year as scheduled. However, new interpretive guidance published by the SEC this week gives companies some additional flexibility in implementing the rule in order to reduce the costs of compliance, with SEC Chairman Jay Clayton saying the guidance “allows companies to use operational data and otherwise readily available information to produce the disclosures.” SHRM’s Stephen Miller details the key takeaways from the new guidance, which does the following:

  • Explains the SEC’s views on the use of reasonable estimates, assumptions and methodologies, and statistical sampling permitted by the rule.
  • Clarifies that a company may use appropriate existing internal records, such as tax or payroll documents, to identify the median employee and to calculate the median employee’s annual total compensation.
  • Clarifies that appropriate internal records also can be used to determine if the company must include non-U.S. workers in pay ratio calculations (the SEC’s final rule allowed companies to exclude non-U.S. employees if these employees account for 5 percent or less of the company’s total workforce).
  • Provides guidelines on when a company may use widely recognized tests to determine whether its workers are employees for purposes of the rule, which will allow employers to exclude independent contractors from pay ratio calculations.

This guidance addresses one of companies’ major complaints about the rule, which is that determining the median employee salary is harder than it looks, especially for large organizations with complex workforces in which it is not always obvious who counts as an employee. The SEC is providing some clarity here as to how companies can calculate that figure and making it a bit easier to do so. Employers’ hopes that the rule would be delayed or repealed before coming into effect appear to have been dashed, however.

Another, less commonly discussed challenge is that calculating and disclosing this “median salary” necessarily entails telling half of your workforce that they are below average, so companies need to be prepared for employee questions regarding not only why the CEO earns what they do, but why they themselves earn less than their colleagues. While employees tend to be OK with senior executives earning much more than they do, this disclosure could create morale problems if it creates perceptions of unfair pay inequities further down on the org chart.

One reason why corporate America has been unsuccessful in convincing the government to reconsider this rule is that many major players in the investor community support it. A group of activist investors urged the commission to uphold the rule earlier this year, and another group of institutional investors is pushing for it to mandate human capital disclosures in shareholder reports as well. Shareholders are also increasingly demanding more regular “say on pay” votes to give them a greater voice in how much companies pay their top executives.

This reflects a trend we’ve been seeing in our recent research at CEB, now Gartner, of investors taking an increasing interest in talent issues: Our Investor Talent Monitor (which CEB Corporate Leadership Council members can read in full here) finds that among the 900 largest companies in US equity markets, the percentage of organizations talking about talent on investor calls increased from 55 percent to 70 percent from 2010 to 2016.