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 Employers’ hopes that the rule would be delayed or repealed before coming into effect appear to have been dashed, however.