Our review of the public comment letters to the Securities and Exchange Commission (SEC) on the CEO pay ratio proposal found widespread support for the rules among public pension funds and other activists — and strong opposition from the various business organizations, many of which called for the proposal to be scrapped entirely. This article focuses on the more technical comments received by the SEC to review suggestions that may relieve compliance burdens and costs if adopted. We also offer our take on the odds of these recommendations being adopted, with the caveat that these are purely guesses and reflect no insight into the thought process of the SEC staff or the commissioners.


A number of comments asked the SEC to confirm that using a particular definition of compensation (e.g., base compensation) reflecting unique company circumstances is permitted.

  • Odds: Even — We read the regulations to be extremely expansive as to the alternative compensation definition permitted. As long as such definitions are uniformly applied in identifying the median employee, companies should be able to use measures of compensation that capture the substantial majority of compensation and do not lead to material distortion of the median.

Quite a few comments noted that it would be difficult to apply a uniform definition of compensation across different countries and payrolls, not only because customs and practices differ in different countries, but because of difficulties in applying exchange rates to convert compensation to U.S. dollars. These commenters suggested the SEC permit the use of different definitions of compensation in different countries.

  • Odds: 2:1 — While we don’t see the SEC moving away from the requirement that a uniform definition of compensation be used, we do see the regulators granting some flexibility for companies to use reasonable assumptions in performing currency conversions.


Many comments recommended that the determination of the median employee be based only on full-time employees because of the difficulty of assembling information for part-time, seasonal and temporary employees and that, as a policy matter, their inclusion distorts the calculation.

  • Odds: 10:1 — Public comments from SEC staffers have repeatedly come back to the notion that “all means all” and the SEC has no leeway to change this view under the statute, so we see this as longer odds than the next issue.

Many comments also recommended that the determination of the median employee be limited to a review of only U.S.-based employees, often as an alternative to excluding non-full-time employees from the calculations (although most of these comments asked for both changes). Another potential alternative requested is a safe harbor that would allow companies to use the ratio for domestic employees to estimate a final ratio that includes non-U.S. workers.

  • Odds: 7:1 — We see the odds as slightly better that the SEC would consider this recommendation if it was convinced that the ratio might not vary much if just U.S. employees were considered. Even so, we’re wary of the aforementioned “all means all” statements and see the odds as fairly long. The suggestion to use estimates for overseas payrolls might stand a better chance of being considered. 

Some commenters also recommended that the ratio calculation include only employees in consolidated subsidiaries based on the notion these are the employees over whose compensation the registrant has actual control. Bolstering this argument is the notion that the ratio should relate to the performance of the company as reflected in its consolidated financials and, thus, should not include nonconsolidated entities. Similar points were also made here regarding the difficulty of obtaining accurate data.

  • Odds:  2:1 — This argument would seem most likely to be justified by the SEC while still maintaining its “all means all” position. 


Some commenters suggested that the SEC permit use of the prior fiscal year-end data to give companies more than a year to calculate the median employee. Thus, for the 2016 proxy disclosure, a company would use median employee compensation from the 2014 year end compared to the CEO’s pay for 2015.

In addition, some commenters recommended giving companies the flexibility to choose any date during the year to determine the employee population for calculating the median, while others suggested using a date within a designated time period, such as a date occurring during the 90-day period preceding the fiscal year end.  Companies using an alternative date would be required to briefly explain their reasons for doing so and why it effectively identifies the median employee.

  • Odds: 3:2 — We see nothing in the statute that would preclude the use of an alternative date, and we’ve seen similar snapshot dates permitted by the IRS in the employee benefits realm. The fact that compensation committees might see the median employee pay data before they decide on year-end bonuses may be viewed positively by proponents of CEO pay ratio disclosure on the assumption that it could help temper CEO pay increases.


Some fiscal-year companies noted that having an effective date right before their fiscal year begins would give them insufficient time to comply. For example, if the rule becomes final before July 1, 2014, a company with a June 30 fiscal year end will be required to comply in mid-calendar year 2015 as it prepares its fiscal 2015 proxy statement. One recommendation was to require compliance beginning six months after the effective date of the rule.

  • Odds: Even — We expect the SEC will not adopt the final rules without providing adequate lead time for companies with non-calendar fiscal years.


Several commenters requested clarification that their descriptions of the methodology used in identifying the median employee need not be too detailed, although other companies suggested these disclosures might require extensive detail because of the “filed” status of the disclosure.

  • Odds: Even — We expect the SEC will retain the language in its current proposal, with perhaps some more detail explaining why disclosure of methodology should be limited.


This legal issue received the greatest number of comments, with the commenters agreeing unanimously that the pay ratio information should be “furnished” to the Commission, rather than “filed.” The commenters argued that this treatment would be supported by SEC precedent and would be consistent with a disclosure based on estimates and assumptions as opposed to numbers easily tallied for disclosure on a financial statement. This is a particular concern because it would be difficult for CEOs and CFOs to certify the accuracy of the disclosure, as required under Sarbanes-Oxley. Commenters also noted that the SEC has provided for “furnished” status in other contexts where “filing” the disclosures would have imposed undue liability from lawsuits, as is likely with proxy disclosure matters.

  • Odds: Even — With this being a concern for so many companies, we expect the SEC will take a closer look at its interpretation.


Towers Watson recommended permitting companies to use a group of employees clustered around the median and to calculate Summary Compensation Table (SCT) compensation based on an average. This would smooth out wide swings in the ratio caused by differences in total compensation between benefits-eligible and non-benefits-eligible employees from year to year. This and the following recommendation are designed to address the concern that the median employee would have differing SCT compensation from year to year based on benefit eligibility.

  • Odds: 4:1 — We’re concerned that any mention of using averages is unlikely to be embraced by the SEC because of the statute’s explicit use of the term median.

A number of commenters suggested that the SEC permit use of multiple statistical samples in identifying the median employee. There are variations on this theme, with one commenter recommending that companies be permitted to use a number of statistical samples and then to determine the median employee based on the various median employees of each sample. Our recommendation was to permit a company to use one definition of compensation to statistically sample all employees in isolating the salary band, job level or location where the median employee is found, and then doing a second sample to determine the median employee from that group using SCT compensation.

  • Odds 3:1 — We are hopeful that the use of multiple samplings will be permitted, although we would anticipate that the SEC would impose some limitations on sampling methodologies.


Steve Seelig 

Steve Seelig

Towers Watson Arlington

Steve Seelig is a senior regulatory advisor for executive compensation in Towers Watson’s Research and Innovation Center in Arlington, Virginia. Email steven.seelig@towerswatson.com, or executive.pay.matters@towerswatson.com