We are in Houston for the annual NASPP and Proxy Disclosure Conferences, but I need to alert readers that last week, the SEC published five helpful Compliance & Disclosure Interpretations on the CEO Pay Ratio Disclosure that will be required for 2017. We have been urging you to begin the data collection process necessary for calculating the CEO Pay Ratio for 2017 as soon as possible. (See, Data Collection for Calculating CEO Pay Ratio) Maybe this is the helpful clarification will spur on anyone left has not yet begun.
Question 128C.05 offers guidance on the important issue of when is a worker employed and whether his or her compensation determined by an unaffiliated third party, so that the worker is considered an independent contractor or leased worker under the rule. The C&DI provides that, in determining when a worker is an “employee” of the company under the rule, the company must consider the composition of its workforce and its overall employment and compensation practices. When a company obtains the services of workers by contracting with an unaffiliated third party that employs the workers, generally, the company will not be seen as determining the workers’ compensation if, for example, the company only specifies that those workers receive a minimum level of compensation.
The C&DI also clarifies that an individual who is an independent contractor may be the “unaffiliated third party” who determines his or her own compensation. There have been questions in the executive compensation community as to whether the SEC’s final rule allows companies to exclude individual independent contractors.
The other four C&DIs relate to the requirement that companies identify the median employee using annual total compensation or any other consistently applied compensation measure (CACM) that reasonably reflects the annual compensation of employees, such as information derived from the company’s tax and/or payroll records.
Question 128C.01 provides that the appropriateness of any measure will depend on the company’s particular facts and circumstances.
For example, total cash compensation could be a CACM unless the company also distributed annual equity awards widely among its employees. Social Security taxes withheld would likely not be a CACM unless all employees earned less than the Social Security wage base. The company must also briefly disclose the compensation measure used.
However, Question 128C.01 does acknowledge that the CACM would not necessarily identify the same median employee as if the company were to use annual total compensation.
Question 128C.02 clarifies that a company generally may not use hourly or annual rates of pay alone as its CACM. It also re-emphasizes that company generally may not use an annual rate only, without regard to whether the employees worked the entire year and were actually paid that amount during the year.
Under the SEC’s final rule, a company must select a date within three months of the end of its fiscal year to determine the population of its employees from which to identify the median employee. Once the employee population is determined, the company must then identify the median employee from that population using either annual total compensation or another CACM. Question 128C.03 clarifies that, in applying the CACM to identify the median employee, a company is not required to use (i) a period that includes the date on which the employee population is determined, or (ii) to use a full annual period. A CACM may also consist of annual total compensation from the company’s prior fiscal year so long as there has not been a change in the company’s employee population or employee compensation arrangements that would result in a significant change of its pay distribution to its workforce.
Question 128C.04 provides limited guidance on whether a company must count an employee who is furloughed on the date that the company uses to determine the population of its employees (from which it is required to identify the median).
We believe that companies should consider running the pay ratio calculation based on 2016 pay, as a “dress rehearsal” to see how well their systems operate and get an idea of what the actual ratio will be.
Later in the week, I will post some interesting tidbits from the presentations.