CEO Pay Ratio Rule – Start Preparing Now

Despite many predictions that the CEO pay ratio rule would be repealed, or at least delayed, there is no indication that any such relief will be provided to reporting companies. It appears, at least for now, that the CEO pay ratio rule is here to stay and that non-exempt (JOBS Act) companies will need to make the required disclosures in their 2018 proxy statements. Companies are advised to begin preparations now, but in any event not later than August, if they have not already started this process.

The Securities and Exchange Commission adopted the final “pay ratio” disclosure rule ((Item 402(u) of Regulation S-K) pursuant to Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act) on August 5, 2015, and published additional guidance on October 18, 2016. Although final, the rule has continued to be the subject of much discussion (and, of course, continued challenges in implementation).

The Financial CHOICE Act of 2017, introduced in April, included a repeal of the rule. The CHOICE Act was approved by the House of Representatives on June 8, 2017; however, it will also need to be approved by the Senate. It is our current view that it is unlikely that the CHOICE Act will be approved and become law prior to the 2018 proxy season.

We also believe that it is unlikely that the new SEC Chairman, Jay Clayton, or the SEC will take any action to delay effectiveness of the pay ratio rule. If recent actions by the U.S. Department of Labor are a predictor, the SEC will opt to not delay the rule. (The DOL has decided to not delay the effectiveness of its controversial fiduciary regulations, determining that, as a procedural matter, delay would require due process and public comment.)

Compensation consultants will and must be the key resource to companies as they prepare for their 2018 CEO pay ratio disclosure. Companies should connect with their compensation consultants to assess the complexity of their pay ratio analysis based on the composition of their workforce (e.g., domestic vs. international employees, significant number of consultants, etc.) and to create a timeline for the work required to complete the analysis. We suggest that companies seek to complete this analysis at least two months prior to their target date for the first draft of next year’s proxy statement.

We believe there will be no significant changes to, or delay of, the pay ratio rule before the end of 2017 and companies would be wise to prepare for compliance now.

CEO Pay Ratio Rule Requirements

For a summary of the requirements of the rule, please see our prior client alert, “SEC Issues Final CEO Pay Ratio Rule.”

Note that since the date we published that client alert, the SEC in October 2016 released guidance on the rule. Among other things, the CDIs provide additional clarity regarding when independent contractors must be included in the determination of the median employee. Under the CDIs, leased employees and independent contractors must be included in the employee population unless the workers were employed by, and their compensation was determined by, an unaffiliated third party.

  • A company does not determine a worker’s compensation if the worker’s services are retained via contract with an unaffiliated third party that employs the worker and the company only specifies a minimum level of compensation. This suggests that if a company retains workers through a leasing company and specifies only a minimum rate or amount, the workers can be excluded from the employee population.
  • The CDIs clarify that an individual who is an independent contractor may be the “unaffiliated third party” who determines his or her own compensation. This will require a company to analyze the facts and circumstances in making such a determination.

Next Steps

We recommend companies contact their compensation consultants or other advisers, if they have not already done so, to begin preparing to comply with the rule.