By Greenberg Traurig, LLP from the AALU Washington Report
SYNOPSIS: Although the disclosure under the pay-ratio rule for calendar-year reporting companies likely will not be required until the spring of 2018 when such companies file their proxy statements in respect of 2017, in light of the complexity and anticipated implications associated with the disclosure, companies are advised to begin formulating their implementation approach now. The rules include flexibility on methodology with respect to identifying a median employee, and the approach to selecting a methodology that best fits the company is likely to vary due to multiple factors, including industry.
- Reporting companies are advised to begin discussing implementation approaches with their compensation committees well in advance of the time in which the 2017 proxy is prepared. Thoughtful consideration should be given to the employee profile of the company and whether such profile is typical to the industry and/or the company’s peer group. If the company or the compensation committee engages a compensation consultant, he or she may be in a position to provide data on models and methodologies found to be best suited to an industry to illustrate accurately the ratio and median employee compensation.
- In many cases, companies may benefit from analyzing 2016 compensation to estimate the likely ratio, experimenting with different methodological approaches.
- Under the pay-ratio rule, a registrant is permitted to supplement the required disclosure with explanatory narrative discussion or additional ratios, provided that such additional disclosure is not misleading, is clearly identified, and is not presented with greater prominence than the require disclosure. Accordingly, thought should be given to a complementary narrative disclosure that will help round out for shareholders whether and how the ratio reflects the company’s pay philosophy, efficiency, and other similar considerations.
- As with the introduction of any new and recurring disclosure, the manner of presenting the information and the methodology employed should be determined with an eye to consistency across disclosure years, as any change in approach in future years likely will trigger explanatory disclosure regarding the change.
- Regardless of what methodology is ultimately chosen, companies should consider any potential implications indirectly resulting from the required disclosure (for example, if the employee population is unionized in whole or part, the disclosure may impact collective agreements, and in any event, may create employee relations concerns and/or disrupt periodic pay negotiations for those whose pay is below the median).
- Companies may wish to stay apprised of developing positions within the institutional shareholder and proxy advisor communities regarding ratios that are deemed unacceptable or egregious.
MAJOR REFERENCES: Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act; Item 402 of Regulation S-K of the U.S. Securities Act of 1933; Compliance & Disclosure Interpretations for Regulation S-K updated October 18, 2016.