August 6, 2015

Pay Ratio: 10 Things to Know About the New Rules

Yesterday, by a 3-2 vote, the SEC adopted its pay ratio rules. Here’s the 294-page adopting release – and here’s the press release. Commissioner statements for White, Aguilar and Stein – dissents from Gallagher and Piwowar.

Here’s 10 things to know:

1. Effective Date is Not Imminent (But You Still Need to Gear Up Now): We can look forward to new “Top 10” Lists in a couple years. Highest and lowest pay ratios. Although the rules aren’t effective until the 2018 proxy statements for calendar end companies, you still need to start gearing up, considering the optics of your ultimate disclosures. The rules don’t require companies to make pay ratio disclosures until fiscal years beginning after January 1, 2017.

2. You Don’t Need to Identify a New Median Employee Every Year! – This is the BIG Kahuna in the rules! A big cost-saver as the rules permit companies to identify its median employee only once every three years (unless there’s a change in employee population or employee compensation arrangements). You still need to disclose a pay ratio every year – but you don’t have to go through the hassle of figuring out who your median employee is each year. During those two years when you rely on a particular median employee, your median employee’s – and CEO’s – pay are the variables.

3. Pick Your Employee Base Within 3 Months of FYE – The rules allow companies to select a date within the last three months of its last completed fiscal year to determine their employee population for purposes of identifying the median employee (so you don’t count folks not yet employed by that date – but you can annualize the total compensation for a permanent employee who did not work for the entire year, such as a new hire).

4. Independent Contractors Aren’t Employees – Duh. Except there are nuances – so unfortunately it’s not a “duh”!

5. Part-Time Employees Can’t Be Equivalized – The rules prohibit companies from full-time equivalent adjustments for part-time workers – or annualizing adjustments for temporary and seasonal workers – when calculating pay ratios.

6. Non-US Employees & The Whole 5% Thing – For some reason, the mass media is in love with this part of the rules. The rules allow companies to exclude non-U.S. employees from the determination of its median employee in two circumstances:

– Non-U.S. employees that are employed in a jurisdiction with data privacy laws that make the company unable to comply with the rule without violating those laws. The rules require a company to obtain a legal opinion on this issue – can you say “cottage industry”!
– Up to 5% of the company’s non-U.S. employees, including any non-U.S. employees excluded using the data privacy exemption, provided that, if a company excludes any non-U.S. employee in a particular jurisdiction, it must exclude all non-U.S. employees in that jurisdiction.

7. Don’t Count New Employees From Deals (This Year) – The rules allow companies to omit employees obtained in a business combination or acquisition for the fiscal year in which the transaction took place (so long as the deal is disclosed with approximate number of employees omitted.)

8. Total Comp Calculation for Employees Same as Summary Comp Table for CEO Pay – The rules state that companies must calculate the annual total compensation for its median employee using the same rules that apply to CEO compensation in the Summary Compensation Table (you may use reasonable estimates when calculating any elements of the annual total compensation for employees other than the CEO (with disclosure)).

9. Alternative Ratios & Supplemental Disclosure Permitted – Companies are permitted to supplement required disclosure with a narrative discussion or additional ratios (so long as they’re clearly identified, not misleading nor presented with greater prominence than the required ratio).

10. Register NOW for Our August 25th “Pay Ratio Workshop” – You need to register now because the discount ends at the end of this Friday, August 7th. Registration also includes access to our two October conferences “Proxy Disclosure/Say-on-Pay” (for those, it’s either in person in San Diego or by video webcast – for the “Pay Ratio Workshop,” it’s an audio-webcast only event). The Course Materials will include model disclosures and more. Here’s the agendas for all three conferences. Act by Friday, August 7th to save!

According to my poll yesterday, pay ratios remind the most folks of Pink Floyd’s “Another Brick in the Wall”…and see Mark Borges’ blog on the rules…

Whistleblowers: SEC Issues Interpretive Release on Retaliation

A few days ago, as noted in this blog by Steve Quinlivan, the SEC issued this interpretive release that appears to lay to rest some uncertainty raised by a 5th Circuit case in 2013. The SEC confirmed that an individual who reports internally and suffers employment retaliation will be no less protected as a whistleblower than an individual who comes immediately to the SEC. Here’s an excerpt from the release:

Since our adoption of the whistleblower rules, we have consistently understood Rule 21F-9(a) as a procedural rule that applies only to help determine an individual’s status as a whistleblower for purposes of Section 21F’s award and confidentiality provisions. Similarly, it has been our consistent view that Rule 21F-2(b)(1) alone controls the reporting methods that will qualify an individual as a whistleblower for the retaliation protections. Notwithstanding our view that Rule 21F-2(b)(1) alone controls in the context of determining the relevant reporting procedures for an individual to qualify as a whistleblower eligible for Section 21F’s employment retaliation protections, the Court of Appeals for the Fifth Circuit expressed some uncertainty about this reading in a recent decision. [Asadi v. G.E. Energy (U.S.A.), L.L.C., 720 F.3d 620, 630 (5th Cir. 2013).] Although we appreciate that if read in isolation Rule 21F-9(a) could be construed to require that an individual must report to the Commission before he or she will qualify as a whistleblower eligible for the employment retaliation protections provided by Section 21F, that construction is not consistent with Rule 21F-2 and would undermine our overall goals in implementing the whistleblower program. ………. [reasons]

For the foregoing reasons, we are issuing this interpretation to clarify that, for purposes of Section 21F’s employment retaliation protections, an individual’s status as a whistleblower does not depend on adherence to the reporting procedures specified in Rule 21F-9(a).

Transcript: “Selling the Public Company – Methods, Structures, Process, Negotiating, Terms & Director Duties”

We have posted the transcript for our recent webcast: “Selling the Public Company: Methods, Structures, Process, Negotiating, Terms & Director Duties.”

– Broc Romanek