SEC Issues C&DIs for Pay Ratio Disclosure under Regulation S-K
On October 18, 2016, the SEC Staff issued Compliance and Disclosure Interpretations (“C&DIs”) addressing Item 402(u) of Regulation S-K, which prescribes a registrant’s executive pay ratio disclosure.
SEC Guidance on Pay Ratio Disclosure
According to the SEC:
When calculating the pay ratio disclosure, Item 402(u) requires a registrant to identify the median employee using annual total compensation determined under either:
(a) Item 402(c)(2)(x), which is the part of Item 402 that prescribes how total compensation is calculated for the registrant’s “named executive officers,” or
(b) another consistently applied compensation measure (“CACM”).
Any measure that reasonably reflects the annual compensation of a registrant’s employees can serve as a CACM, such as information derived from the registrant’s tax or payroll records. The CACM’s appropriateness depends on the registrant’s particular facts and circumstances. The registrant must briefly disclose the compensation measure it used. A registrant’s CACM measure is not necessarily expected to identify the same median employee as if the registrant had used annual total compensation calculated under Item 402(c)(2)(x).
A registrant may not exclusively use hourly or annual rates of pay as its CACM to identify the median employee. Using an hourly rate without taking into account the number of hours actually worked is not permitted. Similarly, using an annual rate only, without regard to whether the employees worked the entire year and were actually paid that amount during the year, would be similar to annualizing pay, which the rule permits only in limited circumstances.
In determining a registrant’s employee population from which to identify the median employee, a registrant must choose a date that is within three months of the end of its last fiscal year. Then the registrant must identify the median employee from the employee population using either annual total compensation or another CACM. When applying the CACM, the registrant is not required to use a period that includes the date it used to determine its employee population nor must it use a full annual period. Further, a CACM may consist of annual total compensation from the registrant’s prior fiscal year if there has not been a change in its employee population or employee compensation arrangements that would result in a substantial change of its pay distribution to its workforce.
Item 402(u) does not define or address “furloughed” employees. A registrant must determine whether its furloughed workers should be included as employees based on the facts and circumstances. If a registrant determines that a furloughed worker is an employee on the date it establishes the employee population, the furloughed employee’s compensation should be determined by the same method as for a non-furloughed employee. The registrant must ascertain in which class (full-time, part-time, temporary, or seasonal) the employee belongs on that date. Then it must determine the employee’s compensation using annual total compensation or another CACM in accordance with Instruction 5 of Item 402(u), which permits certain annualizing adjustments of total compensation.
When a registrant is determining whether a worker is an “employee” under Item 402(u), it must consider the composition of its personnel and its overall employment and compensation practices. If a registrant or one of its subsidiaries determines the worker’s compensation, it should include that worker as an employee, whether or not the worker would be considered an “employee” for tax or employment law purposes or under other definitions of “employee.” If a registrant obtains services of a worker by contracting with an unaffiliated third party that employs the worker, then the registrant is not determining the worker’s compensation for purposes of Item 402(u) when, for example, the registrant only specifies that the worker receive a minimum level of compensation. Also, an independent contractor may be considered an “unaffiliated third party” who determines his or her own compensation.
The C&DIs are available at:
If you have questions regarding this publication, please call any of the lawyers listed below or your regular Nelson Mullins contact:
Jeff Allred: 404.322.6101 or at firstname.lastname@example.org
Neil Grayson: 864.250.2235 or at email@example.com
John Jennings: 864.250.2207 or at firstname.lastname@example.org
Janis Kerns: 202.712.2813 or email@example.com
Kiran Lingam: 646.428.2612 or firstname.lastname@example.org
Daniel Nunn: 904.665.3601 or at email@example.com
Jim Rollins: 617.573.4722 or at firstname.lastname@example.org
Brennan Ryan: 404.322.6218 or at email@example.com
Douglas Spear: 404.322.6266 or at firstname.lastname@example.org
Jon Talcott: 202.712.2806 or at email@example.com
Charles Vaughn: 404.322.6189 or at firstname.lastname@example.org
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