Most SEC reporting companies (excluding smaller reporting companies and emerging growth companies) will be required, beginning with the 2018 proxy statement, to disclose the annual total compensation of their median employee and the ratio of their CEO’s compensation to that of their median employee. Because we expect that most companies will experience some challenges while navigating the complex process of identifying the median employee, we recommend that each SEC reporting company subject to this new rule engage in a dry–run calculation this coming proxy season to establish the process it will use to determine its employee population, identify the median employee and calculate that employee’s compensation.

Additionally, the advance determination of the company’s pay ratio and median employee compensation will give the company an opportunity to adjust its 2017 compensation programs, if desired.

In particular, each such SEC reporting company should seek counsel to aid in the determination of the following:

• As of what date will the company determine its employee population?

• Will any non-U.S. employees be excluded from the population?How will the company treat employees obtained through business transactions?

• What methodology will the company use to measure each employee’s compensation for the purpose of determining the median employee?

• Will the company annualize the compensation of employees who did not work the full year?

• Will any estimates or adjustments be required to convert payroll and other source data into annual compensation?

• How will the total compensation of the median employee be computed so as to conform to the calculation of total compensation as reflected in the summary compensation table?

Additional detail on the pay ratio disclosure rules can be found in our August 11, 2015 Client Alert.

We Can Help You

Please contact any of the key contacts listed or another member of the Firm, if you have any questions or would like additional information regarding the issues above.

References

• Client Alert: Preparing for the New Pay Ratio Disclosure Rules (August 11, 2015) news-publications-161.html
• Client Alert - Pay Ratio Disclosure Implementation.pdf

Practice Areas

Professionals