As noted in this McGuireWoods alert, the SEC recently finalized the CEO pay ratio disclosure requirements under Section 953(b) of the Dodd Frank Act. The biggest piece of news in connection with the final rules is the delayed effective date. Calendar year issuers will not have to comply with the new rules until their first annual report or proxy filing made in 2018. That should give folks plenty of time to digest some of the changes the SEC has made to the original proposal, summarized below:

  • Limited Exclusion of Non-U.S. Employees: Issuers will be allowed to exclude non-U.S. employees if either (i) foreign data privacy laws or regulations make issuers unable to comply with the final rule, despite their reasonable efforts, or (ii) non-U.S. employees account for 5 percent or less of the issuer’s total U.S. and non-U.S. employees, with certain limitations.
  • COLA Adjustment for Non-U.S. Employees: Issuers are permitted, but not required, to make cost-of-living adjustments for the compensation of employees in jurisdictions other than the jurisdiction in which the PEO resides to identify the median employee and calculate such employee’s annual total compensation.
  • Permissible Disclosure of Additional Pay Ratios: Issuers are permitted, but not required, to provide additional pay ratios (e.g., separate ratios for U.S. and non-U.S. employees) as long as any additional pay ratios are not misleading and are not presented with greater prominence than the required ratio.
  • Employees of Consolidated Subsidiaries: Issuers are only required to include their employees and the employees of their consolidated subsidiaries in determining the median employee. (The proposed rule had not restricted subsidiaries to consolidated subsidiaries for this purpose.)
  • Median Employee Determination Date: Issuers may use any date within three months prior to the last day of their last completed fiscal year to identify the median employee. (The proposed rule would have required issuers to use the last day of the fiscal year.) Issuers must disclose the date used for this purpose and, if the date changes from one year to the next, disclose the reasons for the change.
  • Three-Year Cycle for Median Employee Determination: Instead of every year as under the proposed rule, the final rule allows issuers to identify the median employee every three years, unless there has been a change in employee population or employee compensation arrangements that the issuer reasonably believes would result in a significant change in the pay-ratio disclosure. If an issuer relies on such a three-year cycle, it must disclose that it has done so and why it believes there has been no change in circumstances that would significantly change the pay ratio. The median employee’s annual total compensation must still be calculated each year, however. If the median employee leaves or changes position or otherwise experiences a material change in compensation during this period, the issuer may use an employee in a similarly compensated position instead.
  • Transition Period for New Issuers and Issuers that Lose their Exemption: A new issuer, like existing issuers, will not need to comply with the final rule before its first annual report or proxy or information statement for fiscal years beginning in 2017. In addition, an issuer that ceases to be a smaller reporting company or emerging growth company is not required to provide pay-ratio disclosure until it files a report for the first fiscal year commencing on or after it ceases to be a smaller reporting company or emerging growth company.
  • Transition Period for Mergers and Acquisitions: The final rule permits an issuer that engages in business combinations and/or acquisitions to omit the employees of a newly acquired entity from its pay-ratio calculation for the fiscal year in which the business combination or acquisition occurs