SEC Substantially Eases Burden of Pay Ratio Disclosure: New Guidance Allows Use of Widely Recognized Tests to Determine Who Is Included as an Employee, Reinforces Flexibility to Use Reasonable Estimates and Existing Internal Records to Identify the Median Employee and Allows Ratio to be Described as an EstimateSullivan & Cromwell LLP - September 22, 2017
The SEC’s Division of Corporation Finance yesterday issued interpretive guidance substantially easing the burden of CEO pay ratio disclosure, which will be required for most U.S. public companies beginning with the upcoming 2018 proxy season. In particular:
- The guidance allows the use of widely recognized tests used in other legal and regulatory contexts, such as for employment law or tax purposes, to determine who is an “employee” for purposes of the rule. The treatment of independent contractors in calculating the ratio had been a significant source of confusion and expense for many companies.
- The guidance clarifies that a registrant may use existing internal records, such as tax and payroll records, with respect to:
- determining whether the 5% de minimis exemption is available to exclude non-U.S. employees; and
- identifying the median employee using internal records that reasonably reflect annual compensation, even if those records do not include every element of compensation.
- The guidance reinforces the flexibility to use reasonable estimates and assumptions and determine reasonable methodologies and statistical sampling to identify the median employee and calculate the median employee’s annual total compensation.
- In light of the preceding, the guidance allows the ratio to be described as an “estimate.”
The new interpretive guidance was published “[i]n light of the approaching compliance date and concerns raised about the implementation of the disclosure requirement” and focuses on providing flexibility for registrants in their compliance with the pay ratio rule.