As the summer winds down and the fall conferences approach (including this year’s virtual Proxy Disclosure Conference), I’ve been preparing for my presentation on the CEO pay ratio and thinking about how next year’s disclosures are likely to be affected by the global pandemic. Things were going to be a bit different anyway since we’ll be going into the fourth year of the rule (can 2021 really be the fourth year already of the pay ratio?). As we know, companies that have been using the same median employee for the past three years are going to have to identify a new median employee for 2020. (Hopefully, you saved your notes from 2018 on your methodology for determining the median employee so that you have a road map to follow.) But perhaps more importantly, with all of the significant decisions that companies have had to make this year, such as employee layoffs, wage reductions, extended work furloughs and the various adjustments to executive (including CEO) compensation, there are likely to be a number of disclosure issues that arise that we haven’t had to think about before.
Today, I was reading the definitive proxy statement of Darden Restaurants, Inc. and saw that the company has already had to deal with one of these issues as it prepared its pay ratio disclosure given the impact of the pandemic on its business. Read the pay ratio disclosure, which goes into detail about how the company handled the furlough of nearly 80% of its workforce:
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 402(u) of Regulation S-K, we are providing the following information about the relationship of the annual total compensation of our median compensated employee and the annual total compensation of Mr. Lee, our President and Chief Executive Officer.
For the fiscal year ending May 31, 2020, our last completed fiscal year:
- The annual total compensation of the median compensated of all employees of the Company (other than our CEO) was $16,137.
- The annual total compensation of our CEO, as reported in the Summary Compensation Table included on p. 42 of this Proxy Statement, was $8,688,707.
As a result, for fiscal 2020, the ratio of the annual total compensation of Mr. Lee, our CEO, to the annual total compensation of the median compensated of all employees was 538 to 1. Neither the Compensation Committee nor management of the Company uses the pay ratio measure in making compensation decisions.
Due to the variable nature of part time restaurant team member schedules, work hours and tenures from one year to the next, we believe it is most appropriate to identify a new median employee for each fiscal year.
To identify the median compensated employee and to determine the annual total compensation of the median employee, we used the following methodology, which is substantially the same methodology we used in fiscal 2019, with clarifications added below for treatment of employees on furlough during fiscal 2020:
- We prepared a listing of all of the Company’s employees as of February 24, 2020, three months prior to our fiscal year end, resulting in a list of approximately 189,000 employees after certain permitted exclusions. As permitted by the de minimis exception under applicable SEC rules, we excluded all of our non-United States based employees, as they represented less than 5 percent of our total workforce. We excluded approximately 1,000 employees located in Canada and one employee located in Malaysia. The remaining employees were all based in the United States. We also excluded new hires who had not yet received their first paycheck. As a result of the COVID-19 pandemic’s impact on our operations, including the temporary closure of all of our dining rooms beginning in March 2020, we placed many restaurant and corporate team members on furlough for portions of the fourth quarter of fiscal 2020. At the highest point during that quarter, approximately 150,000 team members were on furlough. We included these furloughed team members as employees for purposes of the calculations.
- We organized the resulting list by a consistently applied compensation measure (the Compensation Measure). The Compensation Measure that we used was comprised of all items of compensation, both cash and non-cash paid to our employees during the fiscal year, as represented in our corporate payroll system, excluding items such as Flex Comp awards, performance stock unit awards, restricted stock awards and certain other similar or related items that are not widely distributed to all employees. We annualized the compensation of employees who were hired during fiscal 2020. We did not annualize the compensation of our furloughed employees for the period of their furlough. We included amounts paid under our emergency pay program for the furloughed team members as compensation. We then determined the median amount from this list and the related employee is our “median employee.” The median employee determined for fiscal 2020 is a part time team member at one of our restaurants. Our median employee for fiscal 2020 was on furlough for a portion of the fourth fiscal quarter and received compensation from our emergency pay program.
- After identifying the median employee, we calculated annual total compensation for this employee using the same methodology we use for calculating the total compensation of our named executive officers as set forth in the Summary Compensation Table.
In the recesses of my memory, I recalled an SEC Staff Compliance & Disclosure Interpretation (No. 128C.04) under Regulation S-K that addresses furloughed employees, so I turned there to see if it offered any guidance. However, what I found was the following:
Item 402(u) does not define or even address furloughed employees. Because a furlough could have different meanings for different employers, registrants will need to determine whether furloughed workers should be included as employees based on the facts and circumstances. If the furloughed worker is determined to be an employee of the registrant on the date the employee population is determined, his or her compensation should be determined by the same method as for a non-furloughed employee.
So, that is precisely what Darden did. Based on an evaluation of its facts and circumstances, the company decided (i) to include the furloughed workers as employees (at least those who were employed as of the date three months prior to the end of their fiscal year), (ii) not to annualize their compensation, and (iii) to include amounts paid under the company’s emergency pay program as part of their pay.
At the end of the day, it didn’t have a dramatic impact on their median employee compensation or their resulting disclosure. Last year’s median employee income was approximately $18,000, while this year’s was approximately $16,000. And the pay ratio itself didn’t change much, going from 589 to 1 in fiscal 2019 to 538 to 1 in fiscal 2020 (with CEO pay dropping by about $2.0 million).
It’s going to be interesting to see how other companies that were hard hit by the pandemic handle this situation since it’s going to depend on each organization’s specific facts and circumstances. And I expect that there are going to be at least a few situations presented that are more complicated than Darden’s. At a minimum, I believe that next year’s CEO pay ratio disclosures are going to be a bit longer — and possibly more complicated — than what we’ve seen the past couple of years. It should make for a unique (and hopefully just “one-off”) proxy season.
-Mark Borges, CompensationStandards.com August 22, 2020
