During the two years following the SEC’s publication of final rules that require that companies satisfy the pay ratio disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act beginning in 2018 proxy statements, many public companies, hoping for a repeal or delay in the implementation of the rules, have waited to take the significant preparatory steps necessary for compliance. As there has been no reprieve in the deadline — the pay ratio is still required to be disclosed in 2018 proxy statements — the time for procrastination has ended, and public company clients need to take immediate steps to ensure compliance in 2018.
Briefly, the pay ratio disclosure contained in Item 402(u) of Regulation S-K requires public companies to disclose:
- The median of the annual total compensation of all employees of such public company other than the CEO;
- The annual total compensation of the CEO; and
- The ratio of those two amounts.
Keeping in mind that the annual total compensation of the CEO has been disclosed by public companies in the summary compensation table in the proxy for years, the annual total compensation of the CEO is likely not going to trigger any reaction as part of this new disclosure internally at the company or externally in the press or by investors.
However, the press and investors may react to the ratio. While public companies with high ratios may encounter negative press, it is not clear how investors will react to the ratios disclosed, at least during this first year of disclosure. Institutional Shareholder Services (ISS) sought information in a survey earlier this year regarding the pay ratio and found that 63% of investor respondents indicated that they did intend use the pay ratio to make comparisons between companies and to make comparisons between ratios for the same company year after year.
Internally, for each company, the public disclosure of the median of annual total compensation of all employees of such company is likely going to trigger a reaction from some employees. After all, half of each company’s work force is about to find out that they are paid at or below the median for such company, and this information has likely not ever been made available. Companies should consider taking proactive steps to communicate with employees about compensation programs of the company in anticipation of employee inquiries or complaints. Even if proactive communication is not done, a company should consider how the human resources department should respond to inquiries or complaints by an employee about his or her own compensation in comparison to the median of total annual compensation of all employees.
For more information regarding the pay ratio rule, the firm has previously published several client alerts. In 2015, the firm published a full summary of the final rule in a client alert and subsequently published updates on October 25, 2016, September 6, 2017, and September 28, 2017 as additional guidance was published by the SEC.