Risk & Compliance

SEC Clarifies New Rules on Executive Pay

Companies may use any "reasonable" measure to show how CEO pay compares to the median annual total compensation of other employees.
Matthew HellerOctober 24, 2016
SEC Clarifies New Rules on Executive Pay

The U.S. Securities and Exchange Commission has clarified what data companies can use to comply with its new rule requiring disclosure of the relationship between executive pay and performance.

The pay-for-performance proposal is part of the Dodd-Frank law’s disclosure package involving executive pay. It requires, among other things, that public companies disclose the ratio of the CEO’s annual total compensation to the median annual total compensation of all other employees.

In a recent compliance update, the SEC’s Division of Corporation Finance said registrants can use any reasonable “consistently applied compensation measure” (CACM) to identify the annual compensation of employees.

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“The appropriateness of any measure will depend on the registrant’s particular facts and circumstances,” the SEC said, noting that, for example, total cash compensation could be a CACM unless the registrant also distributed annual equity awards widely among its employees.

“Social Security taxes withheld would likely not be a CACM unless all employees earned less than the Social Security wage base,” the SEC added.

The update also clarifies that to calculate the required pay ratio, a registrant must first select a date within three months of the end of its fiscal year to determine the population of its employees from which to identify the median. “Once the employee population is determined, the registrant must then identify the median employee from that population using either annual total compensation or another CACM,” it said.

The worker count should include employees whose compensation is determined by the company or its subsidiaries, but exclude contract workers from unaffiliated third parties.

The pay ratio disclosure must be included in annual reports and proxy statements for the first fiscal year beginning Jan. 1, 2017. Timothy Bartl, chief executive for the Center On Executive Compensation, told The Wall Street Journal that many multinational companies have already begun to put in place the systems and processes for collecting the necessary payroll data to comply with the regulation.

For many companies a top concern is making sure they can get the data in time to review it and prepare the disclosure accurately, he said.