August 11, 2015•Calculating...
CEO Compensation vs. Median Employee Pay: New SEC Rule
The SEC has adopted a new rule that will require U.S. companies to disclose the ratio of their CEO’s compensation to the median compensation of their other employees.
What You Need To Know
- Affected issuers. Emerging Growth Companies as well as Canadian MJDS issuers and other foreign private issuers will not be subject to the rule. This contrasts with the SEC’s recently proposed executive compensation clawback rules, which would apply to all issuers listed on U.S. stock exchanges.
- Median pay. A particularly contentious element of the rule is the cost and complexity of calculating median employee compensation. Partly to help contain compliance costs, the SEC is not mandating a methodology for calculating median employee pay. Instead, issuers will be able to adopt a method they believe is reasonable. This may involve, for example, using a statistical sampling of employees instead of the entire employee population and using readily available compensation measures from payroll or tax records.
Median employee compensation will only have to be calculated once every three years, unless the issuer’s employee population or compensation arrangements have changed significantly.
All types of compensation for all types of employees—full-time, part-time, temporary and seasonal—must be included in the calculation of median pay. Certain non-U.S. employees may be excluded in very limited circumstances. - Timing. The SEC is providing a substantial grace period before implementation. Most issuers will be required to provide the new pay ratio information as part of their executive compensation disclosure for their 2018 annual meeting.
- Canadian implications. When securities regulators amended Canada’s executive compensation disclosure rules in 2011, they declined to adopt a pay ratio requirement, on the basis that the benefits would not outweigh the compliance costs. The regulators have not subsequently indicated any intention to revisit that view. Some Canadian issuers, such as those cross-listed issuers who aim to provide the same disclosure as U.S. issuers, may feel obliged to provide pay ratio information on a voluntary basis, similar to their decision to provide shareholders with say-on-pay votes.
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