Pay Ratio Disclosure Fast Approaching
This year will be the first in which the ratio of the CEO's total compensation as compared to that of a median employee must be disclosed in the proxy statements of public companies.
In 2015, the U.S. Securities and Exchange Commission (SEC) adopted a pay ratio disclosure rule, requiring publicly traded companies to compare the compensation of their chief executive officer to the median compensation of all other employees. This pay ratio disclosure is part of the controversial Dodd-Frank Act executive compensation disclosure requirements—and the only one for which a final rule was adopted. In September 2017, the SEC confirmed that the pay ratio disclosure comparing 2017 compensation is required for 2018 proxy statements.
As you work to finalize your calculations and draft your disclosure, we wanted to identify some items for you to consider:
Where should pay ratio disclosure go?
The SEC's final rules do not mandate any specific placement of the disclosure in proxy statements. Some alternatives are:
- In Compensation Discussion and Analysis (CD&A): If this alternative is selected, the disclosure will be subject to review and approval of the Compensation Committee under the rules requiring a Compensation Committee report on CD&A.
- In the Say-on-Pay Proposal: This may be an alternative, depending on the history of your company's say-on-pay vote and the actual calculated ratio. However, because this is the first year, you aren't likely to have comparisons in your peer group, so placement with your say-on-pay proposal might have a negative impact on the vote for 2018.
- In—or immediately after—the Compensation Tables: This choice is our preference. It allows the ratio to be included within the other disclosures involving the compensation of the CEO and other named executive officers. The disclosure will include a discussion of how you arrived at the median employee and other compensation-related information.
What are some of the potential impacts of pay ratio disclosure?
While many reporting companies and some investor groups believe the pay ratio disclosure adds little to the mix of information provided to investors, it is likely to have an impact in the following ways:
- Employees: Because half of your workforce is paid less than the "median employee," the public disclosure could negatively impact morale and retention. Employers should expect questions about the pay ratio and what it means. It may be helpful to anticipate those questions and develop responses in the form of FAQs and other internal communications strategies.
- Investors: Depending on the ratio, and its comparison to ratios of peer or industry companies, the disclosure could have a negative effect on say-on-pay votes.
- Government: Some jurisdictions have enacted, or are considering, an excise tax on executive compensation when the ratio exceeds a certain threshold.
- Media and public reactions: Companies should expect that the pay ratio disclosure will generate media coverage. The size of your company and its local employee base, as well as its presence in the community, could play a role in press interest.
- Customers: Reactions from employees, investors, government, and media could have an effect on your customer relationships.
Our attorneys are available to help as you work through this first—and hopefully last—year of pay ratio disclosures. We recommend that you review the SEC's guidance, issued in September 2017, as you finalize your disclosure.