On Oct. 18, 2016, the SEC Division of Corporation Finance issued several new compliance and disclosure interpretations, or CDIs, regarding CEO pay ratio disclosure that will be required for 2017 compensation. The new CEO pay ratio rules require companies to disclose the ratio between the annual total compensation of the CEO and the annual total compensation of the median employee. The new CDIs provide companies guidance on how they should select and apply a consistently applied compensation measure, or CACM, in identifying the median employee. Specifically, the SEC confirmed the following.
- Any measure that reasonably reflects the annual compensation of employees may serve as a CACM, depending on a company’s particular facts and circumstances. It is not expected that CACM would necessarily identify the same median employee as if the company were to use annual total compensation.
- Hourly or annual pay rates used alone generally are not considered an appropriate CACM, but may be used as a component in determining an employee’s overall compensation.
- The time period used in applying CACM to identify the median employee does not have to be a full annual period nor include the date on which the employee population is determined.
- Annual total compensation from the prior fiscal year may be used as the CACM if there has not been a change in either employee population or compensation arrangements that would result in a significant change of the company’s workforce pay distribution.
- Companies should include all workers whose compensation is determined by the company or one of its consolidated subsidiaries in determining the median employee, regardless of whether the worker would be considered an "employee" for tax, employment law, or other purposes.
- A company will not be considered to be determining the compensation of workers employed by an unaffiliated third party, if the company merely specifies that those workers receive a minimum level of compensation.
- An individual who is an independent contractor may be the "unaffiliated third party" who determines his or her own compensation, and thus may be excluded from the employee population from which the median employee is identified.
- Companies must determine if a furloughed employee is an "employee" on the date of determination and, if so, whether the employee is a permanent employee on unpaid leave or a temporary or seasonal employee, based on their specific facts and circumstances. The amount of compensation included in the CACM would then be consistent with such category.