Interpretive Guidance Issued, But Pay Ratio Determination Still Difficult

Staff at the SEC recently issued interpretive guidance on the pay ratio rules under Section 953(b) of Dodd-Frank. Regular readers will know that I have written on the pay ratio many times. What many regular readers (those who are used to dealing with benefits issues, for example) may be less familiar with is that the interpretive guidance of staff carries full weight. That is, it's not just a suggestion.

Before digging into the guidance, let's recall what the pay ratio disclosure is. Generally, companies that issue definitive proxies in the US must, beginning with fiscal years starting in 2017, disclose the ratio of CEO compensation to that of the median-compensated employee in the company. And, for those purposes, compensation is that used in the Summary Compensation Table of the proxy. So, it includes (oversimplifying a bit), for example, the value of equity, deferred compensation, and qualified retirement plans provided by the employer.

The employee population for this purpose is not limited to full-time workers or to US workers. So, companies with lots of international employees who are compensated in a variety of different ways may have difficulty with this determination.

If you need a refresher on what the final rule said and how you might handle it, there is useful material here.

Back to the interpretive guidance.

As you may recall, you may determine who your median employee is by using simplified definitions of annual total compensation so long as your facts and circumstances support it. For example, if it's clear that compensation for the median employee will resemble W2 pay, then you can use information from tax or payroll records to determine who the median-compensated employee is. But, if you provide pensions or equity compensation broadly, this may be inappropriate to your situation. In fact, for many companies, determination of who their median-compensated employee is will be the most difficult part of the process.

What staff made clear is that rate of pay (hourly rates or salary) is not reasonable to use as a consistently applied compensation measure (CACM). Staff gave examples where those rates could be part of the process, but in order to make the measure reasonable, companies would need to know how many hours each hourly-paid worker actually worked and for what portion of the year salaried workers were employed.

The interpretive guidance makes clear that in determining the median employee, the population may be evaluated using any date within 3 months of the end of its fiscal year. Once the population as of that date is selected, the employer can go through this process:

• Identify the median employee using either annual total compensation or a CACM ... by
• Selecting a period over which to determine that CACM (the period need not include the selected date so long as based on the facts and circumstances indicate that there will be no significant changes (undefined term, of course) between compensation used and actual compensation for the fiscal year)

It is up to employers to determine, again based on all the facts and circumstances whether furloughed employees should be considered in the population. Employees who were hired during the year or who worked less than the full year due to a leave of absence may have their pay annualized. But, part-time and seasonal employees may not have their pay annualized.

And, finally, the staff weighed in on how to determine who might be or not be an employee for purposes of the pay ratio. Essentially, the determination of whether a worker who is not a common-law employee of the employer should be considered an employee for these purposes is based on, you guessed it, all the underlying facts and circumstances. Primarily, the employer should look to whether it sets the compensation of, for example, contract workers, or if that pay is set by someone else.

So, for example, if the company advertises that it will pay contract telephone callers $15 per hour, then they would be employees for these purposes even if they are not employees for tax purposes. On the other hand, a worker who is brought on board through a temporary staffing agency or for a specific contract is likely not a worker.

Well, this clears it up for you, doesn't it? Okay, I thought not. Continue to follow me here for more updates as they come rolling in. Or, let me know if you have questions.