The staff of the Securities and Exchange Commission’s Division of Corporation Finance (the staff) issued new compliance and disclosure interpretations (C&DIs) on October 18, 2016, providing guidance to companies preparing to comply with the pay ratio disclosure rules adopted in 2015. The pay ratio disclosure rules will require publicly-traded companies to disclose the ratio of median compensation of all employees to the compensation of the principal executive officer for full fiscal years, beginning on and after January 1, 2017. The five new C&DIs provide guidance on three aspects of identifying the median employee for purposes of calculating the pay ratio.
What qualifies as a “consistently applied compensation measure” that may be used to identify the median employee?
The pay ratio rules require the median employee to be identified using annual total compensation or “any other compensation measure that is consistently applied to all employees included in the calculation,” such as information derived from tax and/or payroll records. The breadth of the category “any other compensation measure” created some uncertainty as to how literally it could be taken. The staff’s new guidance reduces this uncertainty by addressing the types of compensation measures the staff will view as acceptable consistently applied compensation measures (CACMs).
Under the new C&DIs, any CACM must “reasonably reflect . . . the annual compensation of employees.” However, the chosen CACM does “not necessarily have to identify the same median employee as if the registrant were to use annual total compensation.” Beyond these parameters, there are few bright-line rules. Instead, “the appropriateness of any measure will depend on the registrant’s particular facts and circumstances.”
In addition to these general principles, the C&DIs address three specific compensation measures in more detail:
What is the appropriate time period to consider when using a CACM?
Under the pay ratio disclosure rules, there are two independent time periods relevant to determining the median employee: (1) the date on which the employee population from which the median employee will be identified is determined and (2) the time period over which the registrant applies the CACM.
Who is an employee for the purposes of determining “the median compensation of all employees?”
Two of the new C&DIs clarify the definition of employee under the pay ratio rules. One clarifies how to deal with furloughed workers and another describes how to identify workers who may be excluded from the calculation of the median employee as independent contractors or leased workers.
Independent Contractors and Leased Workers. The pay ratio rules provide that workers who are employed by an unaffiliated third party and who provide services to the company as independent contractors or leased workers are not required to be included in the calculation of the median employee if their compensation is determined by the unaffiliated third party. The new staff guidance clarifies that it will not consider a company to be determining the compensation of workers for this purpose if the company obtains the workers’ services by contracting with an unaffiliated third party that employs the workers and only specifies that those workers receive a minimum level of compensation. The guidance also clarifies that an individual who is an independent contractor may be the unaffiliated third party who determines his or her own compensation.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following: