A new proposal approved today by the Securities and Exchange Commission (SEC) by a 3-2 vote will require companies to disclose the ratio between the pay of their chief executive and the median for all other employees. For large, U.S.-based companies and those with global workforces, the rules provide welcome flexibility that will permit use of statistical sampling and a simplified definition of pay to determine the organization’s median employee.
As of this writing, the proposal is not yet available, but here’s what we heard based on statements made at the SEC’s meeting today:
Highlights of the Proposal
- Companies need not calculate the precise Summary Compensation Table total compensation (SCT compensation) number for every employee.
- Instead, employers would be able to use a definition of compensation of their choosing (such as W-2 wages) and a statistical sampling methodology that is appropriate for the company’s size to identify the median employee for their company. No particular sampling method is specified as appropriate.
- This would be simpler for a primarily U.S.-based company that can use a single definition of compensation than for a global company that might have to use a different definition in each country.
- Some companies may choose not to use statistical sampling if their payroll systems are robust enough to deliver compensation information for the entire workforce.
- Once the median employee is determined, only then will a Summary Compensation Table calculation need to be done for that particular employee. This is a significant simplification from what could have been proposed if, for example, SCT compensation needed to be calculated for a statistically valid sample or for a company’s entire workforce.
- One negative of the proposal is that the SEC has defined the employee population as the entire global workforce, including part-timers, temporary workers and seasonal employees, so that companies will have to have a handle on compensation information for those groups. A minor plus is that newly hired employees can have their partial-year compensation annualized, which will increase their pay levels.
- Companies must describe how they approached calculating the median and how they consistently applied their chosen compensation measures, but this should not be a dense and overly technical description.
- The proposal exempts foreign private issuers, Canadian issuers and emerging growth companies (as provided in the JOBS Act).
Importantly, the SEC is interested in comments from companies about whether the proposal is workable for them, and how much effort and cost this is likely to take.
We will provide additional details and analysis once the proposal is made available.
Likely Effective Date
There is a 60-day comment period for the proposal. If the final regulations will be adopted before year-end, the proposed effective date for this disclosure would be for the 2015 proxy season, as it pertains to 2014 fiscal year compensation.
To help companies make sense of this complex new requirement, Towers Watson will host a complimentary one-hour webcast on Tuesday, October 1, at 1:00 p.m. ET. Register even if you can’t attend because everyone who registers will receive the webcast slides and a link to a recording of the session that you can access at your convenience and share with others in your organization.
Steve Seelig is a senior regulatory advisor for executive compensation in Towers Watson’s Research and Innovation Center in Arlington, Virginia. Email firstname.lastname@example.org or email@example.com.