Source: http://streeterwyatt.com/2014/05/27/the-secs-new-ceoemployee-pay-ratio-rule/
Timestamp: 2019-04-21 06:52:32+00:00

Document:
In September, 2013, the SEC proposed to amend Item 402 to add the Dodd-Frank Act Pay Ratio Disclosure requirements to require certain registrants to disclose the median of the annual total compensation of all employees (excluding the Principal Executive Officer (“PEO”)), the annual total compensation of the PEO, and the ratio of the median of the annual total compensation disclosed for all employees to the annual total compensation of the PEO (collectively referred to as the “Pay Ratio Disclosure”). Pay Ratio Disclosure would be required in annual reports on Form 10-K, registration statements under the Securities Act and Exchange Act, and proxy and information statements (collectively, “Applicable Forms”) to the same extent that each form requires compliance with Item 402. Pay Ratio Disclosure should be reported in the CD&A and Summary Compensation Table of the proxy.
“Registrant” for Purposes of Pay Ratio Disclosure. For purposes of Pay Ratio Disclosure, “registrant” means any company that is required to provide summary compensation table disclosure pursuant to Item 402(c). Excluded from the term “registrant” are: emerging growth companies, smaller reporting companies, foreign private issuers and MJDS filers.
Pay Ratio Disclosure not Limited to NEOs. Until Dodd-Frank’s Pay Ratio Disclosure requirements, compensation disclosure in the Applicable Forms was limited to NEO and director compensation. However, Pay Ratio Disclosure requires registrants to track total compensation information for “all employees of the registrant” as registrants must for NEOs, in compliance with Item 402(c)(2)(x) of Regulation S-K. For purposes of Pay Ratio Disclosure, “all employees of the registrant” means any employee of the registrant or any subsidiary (including any full-time, part-time, temporary, seasonal and non-U.S. employee) that was employed on the last day of the company’s prior fiscal year. Registrants are also permitted, but not required, to annualize total compensation for all permanent employees who were employed on the last day of a registrant’s fiscal year, but were employed for less than the full fiscal year. However, the following types of adjustments are expressly prohibited: full-time equivalent adjustments for part-time employees, annualized adjustments for seasonal or temporary employees, and cost of living adjustments for non-US employees.
o The dollar value of any dividends or other earnings paid on stock or option awards, when those amounts were not factored into the grant date fair value required to be reported for the stock or option award in column ( l ) of the Grants of Plan-Based Awards Table required by paragraph (d)(2)(ix) of this Item.
Flexibility in Calculations. Despite the detailed information that registrants must collect to comply with Pay Ratio Disclosure, registrants are allowed certain amounts of flexibility under the proposed rules in determining which employees require the calculation in order to determine the median employee.
Methods for Determining the Median Employee. The proposed regulations allow at least two methods for determining the Annual Total Compensation of the median employee. In addition, the proposed regulations allow registrants to use reasonable estimates and statistical sampling in calculating the annual total compensation for employees (other than the PEO) so long as registrants using estimates or statistical sampling consistently apply the same compensation measure.
Calculate the Annual Total Compensation for All Employees then Identify Median. Registrants may calculate annual total compensation for all employees, a statistical sample or other reasonable method using Item 402(c)(2)(x). Following completion of the calculation, registrants may identify the median employee. In determining the median using statistical sampling, registrants may choose the statistical method that each deems appropriate based on each registrant’s size and business structure; i.e., no prescribed “one-size-fits-all” approach applies.
Identify Median Employee then Calculate Annual Total Compensation. Identify the median employee based on any consistently applied compensation measure. Once the median employee is identified, calculate annual total compensation for that median employee in accordance with Item 402(c)(2)(x).
disclosed ratio is required, although registrant’s may include one if they feel it would be helpful to explain the ratio to stakeholders.
Registrants not Subject to Proxy Filing Requirements. A registrant with a fiscal year ending on December 31 that is not subject to the proxy rules or does not file a proxy or information statement in connection with an annual meeting of shareholders would be required to include pay ratio information relating to compensation for its fiscal year in its Form 10-K covering that fiscal year, which would be due in the first quarter of the following fiscal year.
 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, §953(b), 124 Stat. 1376 (2010) 2010), as amended by Public Law No. 112-106, sec. 102(a)(3), 126 Stat. 306, 309 (2012) (codified at 12 U.S.C.A. §5301); 17 C.F.R. §229.402(u) (proposed Sept. 2013) [hereinafter, “Dodd-Frank Act”].
 Section 102(a)(3) of the Jumpstart Our Business Startups Act (the “JOBS Act”) amended Section 953(b) of the Dodd-Frank Act to provide an exemption for registrants that are emerging growth companies as that term is defined in Section 3(a) of the Exchange Act.
 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, §953(b), 124 Stat. 1376 (2010) 2010), as amended by Public Law No. 112-106, sec. 102(a)(3), 126 Stat. 306, 309 (2012) (codified at 12 U.S.C.A. §5301); 17 C.F.R. §229.402(u).
 SEC Release Nos. 33-9452, 34-70443, supra at note 1; p. 15-16, 67-69.
 SEC Release Nos. 33-9452, 34-70443, supra at note 1; p. 14.
 SEC Release Nos. 33-9452, 34-70443, supra at note 1; p. 13 (citing 15 U.S.C. 78c(a)).
 SEC Release Nos. 33-9452, 34-70443, supra at note 1; pp. 25, 31.
 Whatever compensation measure is used must be briefly described in the proxy; e.g., “We found the median using salary, wages and tips as reported to the U.S. Internal Revenue Service on Form W-2 and the equivalent for our non-U.S. employees.” Id. at 46, 59.
 Alternatively, registrants may calculate annual total compensation for all employees, and use the calculations to identify the median employee. However, this would generally be much more costly. Id. at 44-45, 51.
 For purposes of Pay Ratio Disclosure, “NEO” is replaced in Item 402 with “Employee”. Id. at 53.
 For non-salaried employees, references to “base salary” and “salary” in Item 402 may be deemed to refer instead, as applicable, to “wages plus overtime.” Id. at 53.
 SEC Release Nos. 33-9452, 34-70443, supra at note 1, p. 8; See Executive Compensation, 17 C.F.R. §229.402(c)(2)(iii) (Item 402) (Aug. 12, 2011); See also Instructions to Item 402(c)(2)(iii) and (iv).
 Id. at §229.402(c)(2)(iv); See also Instructions to Item 402(c)(2)(iii) and (iv).
 Id. at §229.402(c)(2)(v); See also Instructions to Item 402(c)(2)(v) and (vi).
 Id. at §229.402(c)(2)(vi); See also Instructions to Item 402(c)(2)(v) and (vi).
 Id. at §229.402(c)(2)(vii); See also Instructions to Item 402(c)(2)(vii).
 Id. at §229.402(c)(2)(viii); See also Instructions to Item 402(c)(2)(viii).
 Id. at §229.402(c)(2)(ix); See also Instructions to Item 402(c)(2)(ix).
 The methodology used to calculate total compensation for employees for purposes of Pay Ratio Disclosure differs from the currently required calculations for disclosure, accounting and tax purposes. See SEC Release Nos. 33-9452, 34-70443, supra at note 1; p. 8-9.
 SEC Release Nos. 33-9452, 34-70443, supra at note 1; p. 12.
 Id. at 60 (stating, “when statistical sampling is used, registrants should disclose the size of both the sample and the estimated whole population, any material assumptions used in determining the sample size, which sampling method (or methods) is used, and, if applicable, how the sampling method deals with separate payrolls such as geographically separated employee populations or other issues arising from multiple business or geographic segments”).
 Id. at 13, 39-40, 54, 59 (stating that “the methodology and any material assumptions, adjustments or estimates used to identify the median be briefly disclosed and consistently used, and any estimated amounts be clearly identified as such.”).
 SEC Release Nos. 33-9452, 34-70443, supra at note 1; p. 13.

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