As expected, at an open meeting today, the SEC voted 3-2 to issue final rules on the so-called “CEO pay ratio rules” of the Dodd-Frank Act despite a $1.3 billion estimated cost and no known rational for the rules (other than “naming and shaming”). I will address this complicated topic in more than one blog post. Today, I will hit just a few of the high points.

  • Effective Date: Importantly, the rule will not require companies to report the pay ratio disclosure for any fiscal year beginning before January 1, 2017, which means, for most companies, reporting in the 2018 proxy statement. The disclosure requirements do not apply to smaller reporting companies, foreign private issuers, multijurisdictional filers, emerging growth companies, and registered investment companies.
  • Identification of Employee Population: The final rules allow a company to select a date within the last three months of its last completed fiscal year on which to determine the employee population for purposes of identifying the median employee. The company would not need to count individuals not employed on that date.
  • Independent Contractors: Individuals employed by unaffiliated third parties or independent contractors would not be considered employees of the company.
  • Non-U.S. Employees: As expected, the final rules only allow a company to exclude non-U.S. employees from the determination of its median employee in two circumstances:
    • Non-U.S. employees that are employed in a jurisdiction with data privacy laws that make the company unable to comply with the rule without violating those laws. (The rules require a company to obtain a legal opinion on this issue.)
    • Up to 5% of the company’s non-U.S. employees, including any non-U.S. employees excluded using the data privacy exemption, provided that, if a company excludes any non-U.S. employee in a particular jurisdiction, it must exclude all non-U.S. employees in that jurisdiction.
  • Part-Time Employees: Amazingly, the rules prohibit companies from full-time equivalent adjustments for part-time workers or annualizing adjustments for temporary and seasonal workers when calculating the required pay ratio.  
  • New Employees: The rules allow a company to omit from its calculation any employees obtained in a business combination or acquisition for the fiscal year in which the transaction becomes effective. (The company must identify the acquired business and disclose the approximate number of employees it is omitting.) Additionally, the rule allows companies to annualize the total compensation for a permanent employee who did not work for the entire year, such as a new hire. 
  • Determination of Total Compensation: The rules confirm that companies must calculate the annual total compensation for its median employee using the same rules that apply to the CEO’s compensation in the Summary Compensation Table (Item 402[c][2][x] of Regulation S-K). As in the proposed rules, companies may use reasonable estimates when calculating any elements of the annual total compensation for employees other than the CEO (with disclosure).
  • Identifying the Median Employee: The final rules permit company to identify its median employee once every three years, unless there has been a change in its employee population or employee compensation arrangements. If the median employee’s compensation changes within those three years, the company may use another employee with substantially similar compensation as its median employee.

More to come tomorrow, including rules on the methodology for identifying the median employee and the required disclosure of all methodology, assumptions, and estimates. (And a link to the new rules– SEC has not yet posted the rules on its website).