The SEC has received more than 30,000 comments on the proposed rules for pay ratio disclosure comparing a company's CEO with the company's "median" paid employee. Mostof those are form letters expressing support for the disclosure without any substantive comments on the rules.
McGuireWoods has submitted comments to the SEC on the proposed rules that focus on the operational aspects of the pay ratio calculations.
Like most commentators, we believe that the most expense and effort will involve identification of the one individual who is the median employee. Our recommendations include:
- The median employee could be determined by using statistical sampling based on a definition of compensation other than "annual total compensation" under Item 402 of Regulation S-K.
- Companies should not take into account leased employees, independent contractors or other individuals who are not statutory employees to determine the median employee.
- Companies should be able to use a date other than the last day of the company's most recent completed fiscal year for identifying the company's employees for purposes of determining the median employee.
We also anticipate that the pay ratio is likely to vary substantially from year to year, due to changes in the compensation of the CEO. We recommend that the rules allow companies to provide additional information to help shareholders understand the pay ratio disclosure. This information might include a comparison of the current pay ratio with the pay ratio for prior years. It might also include an explanation for the variance in the pay ratio from prior years, such as changes resulting from pension plan interest rate movement.
As others submit substantive comments of particular interest, we will note them here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
