SEC Proposes Pay Ratio Disclosure Rule

Transcription

1 September 20, 2013 clearygttlieb.cm SEC Prpses Pay Rati Disclsure Rule The Cmmissiners f the SEC vted 3-2 n September 18, 2013 t prpse regulatins (the Prpsed Rules ) 1 implementing the mandate f Sectin 953(b) f the Ddd- Frank Wall Street Refrm and Cnsumer Prtectin Act (the Ddd-Frank Act ) 2 t require disclsure by a reprting cmpany f the median annual ttal cmpensatin f all its emplyees (excluding the cmpany s principal executive fficer ( PEO )) and the rati f that median t the annual ttal cmpensatin f the PEO. This memrandum summarizes the requirements f the Prpsed Rules. The principal ntewrthy aspects f the Prpsed Rules are: Date f cmpliance. Disclsure wuld likely first be required fr calendar year cmpanies in 2016 prxy filings relating t 2015 cmpensatin. Identifying the median emplyee. All emplyees f the issuer and its subsidiaries, including full time, part time, temprary, seasnal and nn-us emplyees, emplyed n the last day f the issuer s fiscal year are required t be taken int accunt. Cmpensatin is permitted t be annualized in specified circumstances, but nt fr part time, seasnal r temprary emplyees. Cst-f-living adjustment fr nn-us emplyees is nt permitted. The Prpsed Rules prvide leeway fr issuers t use reasnable appraches in identifying the median emplyee, including statistical sampling f emplyee ppulatins and estimates and measures f pay, rather than requiring the calculatin f each emplyee s ttal cmpensatin as defined fr prxy reprting purpses. Reprting the rati. Once the median emplyee is determined, the amunt f that emplyee s ttal annual cmpensatin and the pay rati must be calculated in the manner dictated fr ttal cmpensatin in the Summary Cmpensatin Table. Hwever, any cmpensatin permitted t be 1 2 SEC Release N , available at Ddd-Frank Wall Street Refrm and Cnsumer Prtectin Act f 2010, Pub. L. N , Title IX, Subtitle E, 953(b), 124 Stat (2010), available at Cleary Gttlieb Steen & Hamiltn LLP, All rights reserved. This memrandum was prepared as a service t clients and ther friends f Cleary Gttlieb t reprt n recent develpments that may be f interest t them. The infrmatin in it is therefre general, and shuld nt be cnsidered r relied n as legal advice. Thrughut this memrandum, "Cleary Gttlieb" and the "firm" refer t Cleary Gttlieb Steen & Hamiltn LLP and its affiliated entities in certain jurisdictins, and the term "ffices" includes ffices f thse affiliated entities.

2 excluded frm annual ttal cmpensatin fr that purpse, such as benefits under plans available t all emplyees, may be added back int the rati calculatin in rder t capture benefits that may cmprise an imprtant part f a rank-and-file emplyee s cmpensatin. In cnnectin with the vte, the Cmmissiners expressed widely divergent views regarding the benefit f the Prpsed Rules and the interpretive apprach t Sectin 953(b) emplyed by the SEC staff. The SEC staff stressed the flexibility it had built int the Prpsed Rules, t the extent pssible under its statutry mandate, in rder t cntain the csts f cmpliance. Bth speakers at the pen meeting and the text f the prpsing release asked fr extensive, detailed and rbust cmmentary n the Prpsed Rules. Indeed, the prpsing release requests cmments n tpics as brad as alternative ways f meeting the statutry mandate f Sectin 953(b) and any effect f the Prpsed Rules n efficiency, cmpetitin and capital frmatin. The cmment perid fr the Prpsed Rules clses n the 60 th day fllwing the date f their publicatin in the Federal Register. Prpsed Rules What issuers will be subject t the prpsed pay rati disclsure requirement? The Prpsed Rules amend Regulatin S-K f the Securities Exchange Act f 1934, as amended (the Exchange Act ), adding new Item 402(u). Other than emerging grwth cmpanies, which are exempted by statute, any issuer required t include a Summary Cmpensatin Table in its public filings pursuant t Item 402(c) will have t include the pay rati disclsure. Smaller reprting cmpanies and freign private issuers are nt subject t the requirement. What emplyees are within scpe fr the determinatin f median cmpensatin? All emplyees f the issuer and its subsidiaries 3, including full time, part time, temprary, seasnal and nn-us emplyees, emplyed n the last day f the issuer s fiscal year are within scpe. Independent cntractrs and leased emplyees are nt included. The prpsing release recites in sme detail the arguments cntained in cmment letters received regarding Sectin 953(b) fr and against excluding nn-us emplyees, nn-full time emplyees r emplyees f nn-cnslidated subsidiaries. The SEC staff pted t include all emplyees, as set frth in the statute, prviding instead flexibility in the methd fr determining the median emplyee fr purpses f the pay rati disclsure. Hw is the emplyee with the median annual cmpensatin t be determined? The Prpsed Rules d nt dictate the methd by which the median emplyee is t be determined. Instead, the Prpsed Rules prvide leeway fr issuers t decide the mst suitable and cst-effective methdlgy, including using assumptins, adjustments and estimates based 3 Fr purpses f the Prpsed Rules, the term subsidiaries means affiliates cntrlled by the registrant directly r indirectly thrugh ne r mre intermediaries, as set frth in the definitin f subsidiary under bth Rule 405 f the Securities Act f 1933, as amended (the Securities Act ) and Exchange Act Rule 12b-2. 2

3 upn each issuer s wn facts and circumstances. The prpsing release des, hwever, utline certain necessary cnsideratins related t the chice f methdlgy. 4 In rder t determine the grup f emplyees frm which the median will be identified, an issuer may use either its entire emplyee ppulatin r a subset determined thrugh statistical sampling r ther reasnable methds. The prpsing release prvides examples f alternative methds that may be emplyed t allw fr cst efficiency while still satisfying the statutry mandate. The Ecnmic Analysis sectin f the prpsing release in particular cntains a discussin regarding the usefulness (r lack theref) f statistical sampling by issuers. As discussed further belw, the amunt f median cmpensatin and the pay rati must be calculated in the manner dictated fr annual ttal cmpensatin in the Summary Cmpensatin Table by Item 402(c) in respect f the issuer s last fiscal year. Hwever, fr purpses f identifying the median emplyee, the issuer may use ther cmpensatin measures s lng as they are cnsistently applied t all emplyees, fr example, payrll r tax recrds. In additin, if the cmpensatin measure used is based n an annual perid ther than the fiscal year f the issuer (such as emplyees calendar tax year), the median emplyee determinatin may be made by reference t the cmpensatin reprted with respect t such ther annual perid. In respnse t cmmenters cncerns abut data privacy laws limiting the ability t transmit persnally identifiable human resurces data and ther cnstraints n an issuer s ability t identify and quantify cmpensatin fr each emplyee n an enterprise-wide basis, the Prpsed Rules als permit issuers t use reasnable estimates f cmpensatin (r items f cmpensatin) f emplyees in rder t identify the median emplyee. Lastly, in respect f permanent emplyees f the issuer wh were nt emplyed fr the entire year (e.g., new hires r emplyees n unpaid leave), cmpensatin is permitted t be annualized. Hwever, certain adjustments are specifically prhibited t be made t wrkers cmpensatin, e.g., full-time equivalent adjustments fr part time emplyees, annualizatin fr seasnal r temprary emplyees r cst-f-living adjustments fr nn-us emplyees. Issuers will need t briefly disclse the methdlgy and all material assumptins, adjustments r estimates used t identify the median emplyee r t determine ttal cmpensatin r any particular element. If the issuer changes its methdlgy r ther material factrs frm thse used in the prir fiscal year, and there is a material effect n the result, the issuer must disclse the change, the reasn fr it and an estimate f the impact n the amunt f median cmpensatin and pay rati. 4 The prpsing release states that cnsideratin relevant t the chice f methdlgy shuld include the size and nature f the wrkfrce, the cmplexity f the rganizatin, the stratificatin f pay levels acrss the wrkfrce, the types f cmpensatin the emplyees receive, the extent that different currencies are invlved, the number f tax and accunting regimes invlved, and the number f payrll systems the issuer has and the degree f difficulty invlved in integrating payrll systems t readily cmpile the ttal cmpensatin infrmatin fr all emplyees. 3

4 What must be disclsed? Once the median emplyee is determined, his r her cmpensatin fr the fiscal year must be calculated in the manner required by Item 402(c)(x) and disclsed tgether with annual ttal cmpensatin f the PEO and the rati between the tw. 5 Hwever, in respnse t cmmenters, the prpsing release makes clear that any cmpensatin permitted t be excluded frm annual ttal cmpensatin under Item 402, such as benefits under plans available t all emplyees, may be added back int the calculatin in rder t capture benefits that may cmprise an imprtant part f a rank-and-file emplyee s cmpensatin. 6 The Prpsed Rules crrect a much maligned errr in the statute by clarifying that the rati may be presented either as a rati f median pay t PEO pay r alternatively as PEO pay as a multiple f median pay. What filings must cntain the prpsed pay rati disclsure? The pay rati disclsure fr an issuer s mst recent fiscal year must be included in the issuer s Annual Reprt n Frm 10-K fr the fiscal year, r, if later, the prxy r infrmatin statement relating t the annual sharehlders meeting fllwing the end f the fiscal year, prvided that in any event the infrmatin must be prvided within 120 days fllwing the end f the fiscal year. In additin, fr any filing requiring disclsure pursuant t Item 402 f Regulatin S-K, which cvers Frms 10-K, registratin statements, and prxy and infrmatin statements, the disclsure must be included r incrprated by reference. In the event f any filing after the end f a fiscal year and prir t the filing f the annual reprt r prxy r infrmatin statement cntaining the updated disclsure, an issuer may include r incrprate by reference the infrmatin fr the fiscal year prir t the mst recently cmpleted fiscal year. The prpsing release makes clear that, like the ther disclsures required by Item 402, the pay rati disclsure is t be filed and nt furnished fr purpses f liability under the Securities Act and the Exchange Act and PEO/PFO certificatins required by the Sarbanes- Oxley Act f What is the cmpliance date fr pay rati disclsure fr existing issuers? An existing issuer will be required t cmply with the new pay rati disclsure rules in its first fiscal year cmmencing n r after the effective date f the final rules and wuld nt be required t include the disclsure in any filing until its Annual Reprt n Frm 10-K fr such fiscal year, r if later, prxy r infrmatin statement fr its annual meeting (r written cnsent in lieu f meeting) fllwing the end f such fiscal year (but n later than 120 days after the end f such fiscal year). 5 6 The Prpsed Rules refer t the PEO and d nt address hw the requirements wuld apply t issuers with mre than ne PEO. Any such changes must als be made t the cmpensatin f the PEO and explained in the disclsure. 4

5 What is the transitin perid fr pay rati disclsure fr new issuers? Under the Prpsed Rules, pay rati disclsure wuld nt be required t be included in a registratin statement n Frm S-1 r Frm S-11 fr an initial public ffering r a registratin statement n Frm 10. A newly reprting cmpany wuld instead be required t make the pay rati disclsure in respect f its first fiscal year cmmencing n r after the date it becmes a reprting cmpany and wuld nt be required t include the disclsure in any filing until its Annual Reprt n Frm 10-K fr such fiscal year, r if later, prxy r infrmatin statement fr its annual meeting (r written cnsent in lieu f meeting) fllwing the end f such fiscal year (but n later than 120 days after the end f such fiscal year). Fr example, assuming the Prpsed Rules becme effective in 2014, a cmpany that cmpletes its initial public ffering in Octber 2015 wuld nt be required t include the pay rati disclsure until it files its prxy statement fr its 2017 sharehlders meeting, which wuld include the pay rati disclsure relating t 2016 cmpensatin. Issuers that cmpleted their initial public fferings in 2013 r 2014, assuming the Prpsed Rules becme effective in 2014, wuld generally be required t include the disclsure in prxy statements filed fr their 2016 meetings, which wuld relate t 2015 cmpensatin. * * * * * Please call any f yur regular cntacts at the firm r any f the partners and cunsel listed under Emplyee Benefits r Crprate Gvernance in the Practices sectin f ur website ( if yu have any questins. CLEARY GOTTLIEB STEEN & HAMILTON LLP 5

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