IV. How the Rule Works
A. Which Companies Must Comply & When Disclosure Is Required 24-26
- Mandate Began With 2018 Proxy Statements 24-26
- Add Pay Ratio Tasks To Proxy Timetable (Process May Take Months) 24-26
- Required in Proxy Statements, Information Statements & Form 10-Ks 24-26
- No Pay Ratio Required Until CEO Salary/Bonus Determined 24-27
- Required in Registration Statements (But Not IPOs or Spin-Offs) 24-27
- EGCs, FPIs & Smaller Reporting Companies Exempt 24-27
- Pay Ratio Not Required in IPO (But Required 1st Year After) 24-27
- Exiting EGC/Smaller Reporting Companies Have One Transition Year to Prepare 24-28
- Report Early to Directors on Pay Ratio Calculation Process & Disclosure 24-28
B. Identifying “Median Employee” 24-28
- Three Steps to Identify “Median Employee” 24-28
- Median Employee Determination Only Required Every Three Years 24-29
- Permitted to Recalculate Median Employee Every Year 24-29
- Disclosure Required If No Changes In “Off” Years 24-29
- Recalculate Median Employee’s Pay For Years When Same Median Employee Used 24-30
- Must Make New Median Employee Determination for Change in Employee Population or Executive Pay Arrangements 24-30
- Not Clear What’s a “Significant” Change Triggering New Median Employee 24-30
- Consider Impact of Turnover on Median Employee 24-31
- May Replace Your Median Employee With Someone Similar (If They Leave or Otherwise) 24-31
- Make Your Identification Process Repeatable 24-31
- Document Year-Over-Year Changes To Methodology 24-32
- Follow Rule’s Principles—But Know Your Analysis Will Be Unique 24-32
- Don’t Disclose Median Employee’s Personal Information 24-32
C. Identifying “Employees” 24-32
- It’s Not Linear Exercise—Keep All Factors In Mind 24-32
- Begin By Gathering Workforce Numbers 24-33
- Keep Track of Data in Aggregate & By Employee Segment 24-33
- Enlist Local Officers to Complete Uniform Spreadsheet 24-33
- Considerations for Global Companies 24-34
- Accessing Global Data With Numerous Payroll Providers 24-35
- Obtaining Data From Outsourced Payroll Vendors 24-35
- Document Your Employee Workforce Analysis 24-35
- Include All Employees (Even Part-Time, Seasonal & Temporary) 24-36
- Furloughed Workers Treated Same as Non-Furloughed Employees 24-36
- Include Employees of Consolidated Subsidiaries (Not All Subsidiaries) 24-36
- “Consolidated Subsidiaries” Likely Includes Public Subs 24-36
- Consolidated Public Subsidiaries Also Need to Report Own Ratio 24-37
- Acquirors Can Exclude Seller’s Employees for Acquisition Year (But Disclosure Required) 24-37
- “Acquired Employee” Exclusion Not Always Practical 24-37
- Include Employees Hired By New Division 24-37
- Treatment of Contractors & Third-Party Service Providers 24-38
- Identify Material Assumptions for Distinguishing Contractors From “Employees” 24-38
- Pay Ratio May Not Apply to Externally-Managed Companies 24-39
- Take Big-Picture Look At Whether Contractors Will Affect Median 24-39
- Select “Median Employee” As of Any Day in Last Three Months of Fiscal Year 24-40
- Benefits of Early Determination Date 24-40
- Employee Determination Date Is Usually Month-End 24-40
- Must Disclose Employee Determination Date (But Not Reason for Date’s Selection) 24-40
- Possible Disconnect Between Determination Date & Total Compensation Calculation 24-40
- Include Permanent Employees on Temporary Leave (And Annualize Their Pay) 24-41
- Can Exclude Employees On Leave More Than One Year As Of Determination Date 24-41
- “Determination Date” May Impact Inclusion of Temporary Employees 24-41
- “Determination Date” May Impact Inclusion of Furloughed Employees 24-41
- Whether Furloughed Employee is “Permanent” Depends on Facts 24-42
D. Data Privacy & De Minimis Exemptions 24-42
- May Exclude Non-US Employees If Would Violate Data Privacy Laws 24-42
- Relying on Data Privacy Exemption Requires Disclosure 24-42
- Need to File Legal Opinion As Exhibit If Use Data Privacy Exemption 24-42
- Invoking Data Privacy Exemption Is Difficult 24-43
- To Comply With Data Privacy Laws, Implement Data Transfer Compliance or Gather On-Site 24-43
- May Exclude Non-US Employees If Comprise Less Than 5% of Workforce 24-43
- De Minimis Exemption Valuable If It Impacts Median 24-44
- De Minimis Exemption is All or Nothing 24-44
- De Minimis Exemption Still Requires Total Headcount 24-44
- May Use Internal Records to Evaluate De Minimis Exemption 24-44
- Relying on De Minimis Exemption Requires Disclosure 24-44
- Interplay of Data Privacy & De Minimis Exemptions 24-45
E. Using Statistical Sampling or Other Reasonable Methods 24-45
- How Statistical Sampling Can Make Your Job Easier 24-45
- Understanding the Limits of Statistical Sampling 24-46
- Always an Estimate (Even When Not Using Statistical Sampling) 24-46
- Statistical Sample Must Be Representative 24-47
- Select Your Confidence Level 24-47
- Select Your Margin of Error 24-47
- Select Your Sample Size 24-48
- Limiting Sample Populations 24-48
- Perception Matters for Sample Sizes 24-49
- Ensure Your Sampling is Valid & Reliable (Which Are Two Different Concepts) 24-49
- Ensure Your Sampling is Defensible & Explainable 24-50
- Understand How Your Methodology Differs From Peers’ 24-50
- Complexity of Pay Distribution 24-51
- Challenges of Global Bimodal Employee Populations 24-51
- Types of Sampling Techniques 24-52
- Random Sampling May Not Work for Large Companies 24-52
- Stratified Sampling is More Precise 24-53
- Can Use “Reasonable Estimates” When Identifying Median 24-54
- Can Use “Other Reasonable Methods” When Identifying Median 24-55
- Examples: Using Reasonable Estimates, Statistical Sampling & Other Reasonable Methods 24-55
- Document Your Sampling Methodology 24-58
- Brief Disclosure About Selected Methodology Required 24-58
F. Selecting a “Consistently Applied Compensation Measure” 24-59
- Flexibility to Use Reasonable Estimates to Identify Median Employee 24-59
- Can’t Use Industry Estimates to Identify Median 24-60
- CACM Must Reasonably Reflect Company’s Compensation Profile 24-60
- Don’t Use Pay Rates As CACM 24-61
- If Many Employees at Median CACM, Don’t Cherry-Pick High Earner 24-61
- Don’t Construct CACM That Allows You to Manipulate Results 24-62
- Example: Selecting CACM When There Are Several Pay Elements 24-62
- Can Exclude Equity & Bonuses If They Won’t Change Median 24-63
- Test Your CACM 24-63
- CACM Must Get You Close To Median 24-64
- Consider Reliability of Your CACM 24-64
- Think About Benefits Volatility When Identifying Median Employee 24-64
- Tenure, Age, Nature of Job & Location’s Impact 24-65
- Non-US Workers’ Pay Elements May Affect CACM & Decision to Exclude 24-65
- Temporary Employees’ Pay Structure May Affect CACM 24-65
- Risks of Using Methodology Other Than Summary Compensation Table 24-66
- Forms of Cash Compensation Are Most Popular CACMs 24-66
- Taxable Wages” Can Vary By Country 24-67
- Cost-of-Living Adjustments Permitted But Add Much Work 24-67
- Narrow Situation Where COLA Might Make Sense 24-68
- Using COLA Requires Disclosure 24-68
- Calculate Your CACM Over Any Reasonable Time Period 24-68
- Choose Measurement Period That Permits Easy Data Collection 24-69
- Choose Measurement Period That’s Easy to Justify 24-69
- Measurement Period Can Be Partial Year 24-70
- Partial-Year Period Can’t Significantly Change “Median Employee” 24-70
- Can Use 12-Month Period That Runs Over 2 Fiscal Years 24-70
- Using Year-Old Data Is Permitted, But Tricky 24-70
- Steer Clear of Annualizing Partial-Year Data 24-71
- Majority of Companies Annualize Pay for New-Hires 24-71
- Don’t Annualize Seasonal or One-Time Pay Elements 24-72
- Full-Time Equivalent Adjustments Not Allowed 24-72
- Don’t Annualize Only Portions of Employee Population 24-72
- Rules Don’t Dictate Currency Conversion Method 24-73
- Document Your CACM Analysis 24-73
G. Determining Median Employee’s “Annual Total Compensation” 24-74
- Use Summary Compensation Table Rules to Calculate “Annual Total Compensation” 24-74
- Reasonable Estimates Can Be Used to Determine “Annual Total Compensation” 24-74
- Don’t Use CACM to Calculate Annual Total Compensation 24-74
- State Conversion Rate & Methodology for Foreign Currency 24-74
- Variability of Benefits Values for Employees 24-75
- Volatility of Interest Rate Movements 24-75
- Volatility of Retirement Plan Value 24-75
- Can Voluntarily Include Perks Under $10k & Other Non-Discriminatory Benefits 24-76
- Including Benefits Could Affect Employee Perceptions 24-76
- Including Benefits Could Cause Pay Ratio to Vary Each Year 24-77
- Apply COLA If Used to Identify Median Employee 24-77
- Calculate Total Annual Compensation Every Year 24-77
H. Determining CEO’s Total Compensation 24-77
- CEO’s “Total Compensation” Determined Same Way As Summary Compensation Table 24-77
- Two Alternatives If Company Has Two CEOs During Fiscal Year 24-77
- If Company Has Two CEOs During Fiscal Year, Explain Why Pay Ratio Is High 24-78
- No Pay Ratio Required Until CEO Salary/Bonus Determined 24-78
I. Disclosure 24-79
- Placement of Disclosure Flexible (Fits Best Outside of CD&A) 24-79
- But Pay Ratio May Need to Be Addressed in CD&A 24-79
- Pay Ratio Doesn’t Have To Accompany Say-On-Pay 24-79
- Pay Ratio Only Modestly Impacts Say-on-Pay 24-80
- Ratio Can Be Disclosed Numerically or Narratively (Or Both) 24-80
- Don’t Use Decimals 24-80
- Disclose Method & Estimates to Identify Median & Calculate Total Pay 24-80
- Brief Disclosure About Methodology Shouldn’t Be Technical 24-81
- Pay Ratio May Be Described as “Estimate” 24-81
- Disclose Any Changes in Methodology From Prior Year 24-81
- Disclosure Required If No Change to Median Employee In “Off” Years 24-81
- Must Disclose Employee Determination Date (But Not Reason for Date’s Selection) 24-82
- Disclose Material Features of Statistical Sampling 24-82
- Model Disclosure: Statistical Sampling 24-82
- Extra Disclosure Required for “Data Privacy” Exemption 24-83
- Extra Disclosure Required for “De Minimis” Exemption 24-83
- Model Disclosure: De Minimis Exemption 24-83
- Extra Disclosure Required for “Acquired Employees” Exemption 24-84
- Model Disclosure: Acquisition Exemption 24-84
- Extra Disclosure Required for Substitute Median 24-84
- Model Disclosure: Anomalous Non-US Median Employee 24-84
- Model Disclosure: Anomalous Commissioned Employee 24-86
- Extra Disclosure Required for Cost of Living Adjustments 24-86
- Interplay with Advisor Independence Disclosure 24-86
- Provide Context In Proxy If Helpful to Shareholders 24-86
- Use Pay-For-Performance & Pay Philosophies to Frame Narrative 24-77
- Align Proxy Narrative & Employee Communications 24-77
- Avoid Detailed Employee Pay Assertions (And If Included, Have Data) 24-87
- Don’t Disclose Median Employee’s Personal Information 24-87
- Consider Describing Position & Tenure of Median Employee 24-87
- Model Contextual Disclosure: Global Operations 24-88
- Model Contextual Disclosure: Approach to Workforce Compensation 24-88
- “Disclaimer” Common 24-88
- Model Disclaimer 24-89
- Supplemental Ratios Might Ease Peer Comparisons, But Not Recommended 24-89
- Supplemental Disclosures Increase Confusion & Litigation Risks 24-90
- Supplemental Ratios Set Precedent for Future Years 24-90
- Model Supplemental Ratio: One-Time Equity Award 24-90
- Model Supplemental Ratio: Change in Award Cycle Timing 24-91
- Model Supplemental Ratio: Combining Pay of Two CEOs 24-91
- Model Supplemental Ratio: Annualizing Pay of New CEO 24-92
- Model Supplemental Ratio: Pension Value Complexities 24-92
- Model Supplemental Ratio: US Employees 24-93
- Model Supplemental Ratio: Full-Time Employees 24-93
- Model Supplemental Ratio: Excluding Employees #
- Create Disclosure Controls & Procedures for Pay Ratio 24-96
- Reasonable Estimates Won’t Result in SEC Enforcement Action 24-96
- Report Early to Directors on Pay Ratio Calculation Process & Disclosure 24-96
- Prepare Communications Strategy Beyond Proxy Statement 24-97
- Include FAQs in Annual Meeting Prep 24-97
- Common Talking Points For All Audiences 24-97
- Investor Communications Likely Are “Additional Soliciting Material” 24-98
- Document Investor Reactions 24-98
