Yesterday, I blogged about a to-do list of action items for the CEO Pay Ratio Disclosure Rules. Today, I want to make one tweak to the list of action items.
Yesterday, I blogged about a to-do list of action items for the CEO Pay Ratio Disclosure Rules. Today, I want to make one tweak to the list of action items. Again, there is no need to push the panic button on these new rules as they will not be effective for most companies until the fiscal year ending in 2017, reported in the 2018 proxy statement. However, companies should begin to consider the action steps necessary to comply with the rules (including those I listed).
The rules explicitly allow companies to apply a cost-of-living adjustment to the compensation measure used to identify the median employee. The SEC acknowledged that differences in the underlying economic conditions of the countries in which companies operate will have an effect on the compensation paid to employees in those jurisdictions and requiring companies to determine their median employee and calculate the pay ratio without permitting them to adjust for these different underlying economic conditions could result in a statistic that does not appropriately reflect the value of the compensation paid to individuals in those countries. The rules, therefore, allow companies the option to make cost-of-living adjustments to the compensation of their employees in jurisdictions other than the jurisdiction in which the CEO resides when identifying the median employee (whether using annual total compensation or any other consistently applied compensation measure), provided that the adjustment is applied to all such employees included in the calculation.
If the company chooses this option, it must describe the cost-of-living adjustments as part of its description of the methodology the company used to identify the median employee and any material assumptions, adjustments, or estimates used to identify the median employee or to determine annual total compensation.
Companies with a substantial number of non-US employees should seriously consider the ability of apply a cost-of-living adjustment to the compensation measure used to identify the median employee.