Close
Close

Take 3 steps to prepare for CEO pay ratio disclosure

RFP
Compensation Benefits - CEO pay ratio disclosures, June 2015Compensation and Benefits Bulletin
The SEC recently released an analysis regarding the potential effect of excluding different percentages of employees from the CEO pay ratio calculation. According to the analysis, these exclusions don’t significantly affect the calculation of the pay ratio. However, the SEC’s release of the analysis suggests final rules are forthcoming and SEC registrants should start preparing.

Background
The SEC in 2013 released the proposed rules implementing a Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) provision that requires U.S. public companies to disclose a ratio of CEO compensation to median employee compensation. The proposed rules would require disclosure of the following:
  • Median annual total compensation (calculated in the same manner as the one used for the summary compensation table) of all employees except the CEO
  • Annual total compensation of the CEO
  • The ratio of these two amounts

The proposed rules also specified the inclusion of all employees, including non-U.S., part-time, seasonal and temporary employees. To determine the median employee, companies could use any reasonable method, including statistical sampling or a consistently applied compensation measure. The SEC received many comments regarding the calculation of the median annual total compensation of all employees and whether certain categories of employees (for example, non-U.S., part-time, seasonal and temporary) should be excluded. On June 4, the agency released an analysis it thinks will help companies evaluate how the exclusion of different percentages of certain categories of employees may affect the accuracy of the pay ratio calculation.

What the development means
Our observation is that public companies have been less likely to voluntarily disclose the ratio of their CEOs’ pay to the median employee’s pay than to voluntarily release information related to other recently announced proposed disclosure rules, such as hedging policy and pay-for-performance. In fact, in our search of proxy statements filed with the SEC in 2015, we found only three companies that made such a voluntary disclosure. Each of the three used a different methodology to calculate total compensation and determine the median employee. Only one calculated total compensation in the same manner as used for the summary compensation table (as proposed by the SEC) for all employees of the company. The lack of voluntary disclosure could result from many factors, including potential negative media coverage regarding a high ratio (especially without any context or comparisons), lack of SEC recommended methodology for determining the median employee or perhaps the hope that the pay ratio disclosure rules wouldn’t be finalized.

The pay ratio rules seem likely to be finalized and required of all SEC registrants, especially considering the results of the SEC’s analysis showing that excluding different percentages of employees doesn’t significantly affect the pay ratio.

What to do
Companies should take the following three steps:

  1. Determine which method to use to determine the median employee. As previously stated, a company can use any reasonable method, but the method must be applied consistently every year.  Companies should model the pay ratio under different methodologies and scenarios to determine which methodology is appropriate today and into the future.
  2. Gather the necessary compensation data and team members. This is especially important for multinational companies whose employee compensation data may be housed on multiple systems and administered by multiple individuals or teams. Companies should also determine who should participate in preparing the pay ratio disclosure (for example, HR, finance and legal).
  3. Develop a communication strategy. Companies with a “high ratio” (which has yet to be defined) should expect to get negative press. They should proactively determine what, if any, extra communication and disclosure will be appropriate.

The internal pay ratio disclosure requirement was possibly the most controversial item required under the Dodd-Frank Act, and many executives have wished or even expected this requirement to disappear. However, it’s becoming clear that it isn’t going away and could even be finalized for next year’s proxy season. Therefore, companies and boards of directors should start preparing now.

Contacts
Eric Myszka
+1 312 602 8297
eric.myszka@us.gt.com

Brian Martin
+1 214 561 2289
brian.martin@us.gt.com

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.