On October 19, new pay ratio regulations from the Securities and Exchange Commission (SEC) go into effect, requiring public companies to state what CEOs earn compared to the median compensation of employees.
“Forward-thinking organizations will take proactive steps now to ensure their compliance. This is a complex process that will require significant time and resources, particularly as companies work to report this information for the first time,” said Mike Stevens, partner in Alston & Bird’s Employee Benefits and Executive Compensation Group, “The most complicated portion of the process involves the determination and identification of the median employee, and there will be important exceptions.”
When it comes to determining the median employee, the SEC gives “companies a great deal of flexibility in choosing a method, but it’s important to give some thought as to what will be the most cost-effective and least painful path to follow,” said Stevens.
He added: “Consider such factors as size of employee base. Smaller companies may be able to run a full compensation comparison for all employees. Larger companies may want to consider using a statistical sampling to narrow the data set. The type and source of data available on compensation — such as payroll systems, tax reporting and human resources information — and being able to run reports on the systems. The pay ratio rules allow companies to use alternate compensation measures to determine the median employee (such as taxable income).
“Many compensation consultants and other providers are preparing to offer statistical sampling for pay ration determination. General counsel and compensation professionals should start having conversations with their advisers to determine whether they could benefit from these services.
“The pay ratio rules allow each company to define their employee base as of a date they choose, as long as it is in the last quarter of the year. Companies with a large number of seasonal workers may want to choose an early date so they are excluded from the data set.”
Companies with employees in foreign nations should determine if exemptions are available.
“For example, if less than 5 percent of the employee base is outside the U.S., then all foreign employees can be excluded from the calculations,” Stevens noted. “If the company has plans to expand its operations in other countries, or to contract its U.S. workforce, it is important to consider the potential impact under the rules.”
Also, if a company operates in foreign nations where there are data privacy laws, general counsel should “determine the impact those laws will have on the information-gathering and reporting processes under the pay ratio rules,” Stevens explained. “Reliance on the data privacy exemption requires exhaustion of all avenues of relief from the data privacy laws (seeking legal exemptions, making data anonymous, and the like), and a written legal opinion. GC’s should discuss these issues with international counsel.
“Doing an early trial run will help to identify areas for improvement in the information gathering process and will allow compensation committees to take any necessary action to adjust compensation.”