It’s hard to believe it’s been a little over two years since the Securities and Exchange Commission (SEC) adopted the final rule for the CEO pay ratio disclosure as part of its implementation of the Dodd-Frank Act. As most readers will know, the CEO pay ratio rule requires public companies (with certain exceptions) to disclose the ratio of the annual total compensation of their Chief Executive Officer (CEO) to the annual total compensation of their median employee. Covered companies must comply with the rule for their first fiscal year beginning on or after January 1, 2017, with the result that companies should plan to include their initial CEO pay ratio disclosure in their proxy statements for the 2018 proxy season.
Importantly, the CEO pay ratio disclosures will require Sarbanes-Oxley Act certifications of the CEO and CFO and are considered “filed” for purposes of the Securities Act and Exchange Act, and may therefore subject a public company, and its CEO and CFO to potential securities law liability for any false or misleading material statements in the information disclosed.
Update: Former Acting Chairman Cleared of Wrongdoing in Re-Opening Comment Period
In February of this year, the SEC’s then-Acting Chairman Michael Piwowar requested public comment on “unexpected challenges that issuers have experienced as they prepare for compliance with the rule and whether relief is needed.” His request was widely seen as a mechanism that could lead to a delay in the effectiveness of the rule and/or a simplification of the rule. In March, four Senate Democrats asked the SEC to investigate the Acting Chairman’s actions, including whether he had authority to unilaterally request public comment on the final rule for the CEO pay ratio disclosure. Last week, the SEC announced the results of its investigation. With respect to the CEO pay ratio disclosure rule, the SEC found that the Acting Chairman had authority to unilaterally request public comment and to do so despite the temporary status of his position.
While the results of the SEC investigation may provide a glimmer of hope that an administrative delay of the effectiveness of the pay ratio rule may still be possible, this could well be wishful thinking. Also, it increasingly appears that any potential delay may be too late to be useful for calendar year companies. Thus, companies, particularly those with a calendar fiscal year, should be actively preparing to comply with the CEO pay ratio disclosure rule in the upcoming 2018 proxy season.
Prepare for Disclosure
For public companies with a global workforce, the CEO pay ratio disclosure will likely be a particularly time-intensive endeavor. To meet the requirement, a public company should take the following steps:
- Assemble a team and prepare a methodology for developing the CEO pay ratio disclosure, including selection of the compensation measure to be used to identify the median employee and determining whether statistical sampling will be used,
- Gather employee compensation data, potentially across different payroll platforms,
- Consider data privacy and de minimis exemptions that may apply to non-US employees, as discussed in our prior alert,
- Review preliminary results for the CEO pay ratio disclosure and brief the Compensation Committee/Board at least two meetings ahead of the proxy filing,
- Prepare draft disclosures, identify if supplemental disclosures and/or other pay ratios are desirable, and
- Prepare an internal and external narrative to explain and mitigate any potential adverse impact of the CEO pay ratio disclosure.
Lauren M. Schuster is an associate and business lawyer who focuses her practice on US and international executive compensation and employee benefits. Ms. Schuster advises public and private companies on issues that affect retirement plans, health plans, fringe benefit plans, non-qualified deferred compensation plans, severance arrangements, employment agreements, and mobile employment arrangements. She also advises on executive compensation and employee benefits matters in US and international mergers and acquisitions.