Finding the Silver Lining in the New CEO Pay-Ratio Disclosure Rules

Silver Lining

Posted by Michael Kesner on October 23, 2013

Tucked inside 2010’s Dodd-Frank legislation is the requirement for the SEC to implement rules requiring public companies to disclose the ratio of their median employee’s compensation to the CEO’s compensation. The SEC proposed the new rules on September 18, 2013, subject to a 60-day public comment period after the rule is published in the Federal Register. Once finalized, the rules will take effect the following compensation year. So, depending on the effective date, companies will have to start reporting the ratio in 2015 or 2016. (Also depending on the effective date, companies following a fiscal year calendar may be subject to reporting before their calendar year counterparts.) While this may sound too far away to worry about today, calculating the ratios will be no small feat — and will likely come with a substantial “headache factor.” Companies would be wise to prepare sooner rather than later.

The rules require companies (excluding emerging growth companies, smaller reporting companies, and foreign private issuers) to determine the median employee compensation based on all employees at the end of the year, whether part-time, full-time, seasonal, union, or nonunion. (Median means half of all employees are above that rate, and half are below.) The figures are not allowed to be annualized for part-time or seasonal employees, so for some companies, this may mean the CEO’s compensation could be compared to that of a part-time employee.

Companies will have to calculate what every employee makes in order to determine what the median employee earns. And of course, “compensation” includes more than base salary, also encompassing incentives, benefits, and allowances. For large global companies — and even for domestic companies — the calculations are likely to be time-intensive and may require input from several functions, such as HR, payroll, finance, legal, and corporate governance.

The SEC is allowing companies to do some statistical sampling to determine the median employee, which may simplify the process. The more you know about your employee population and how employees are paid, the easier it can be to set up the proper sampling to identify your median employee and their compensation. The potential silver lining? Once you gather the appropriate data, it can be used to gain additional insights into the business, such as productivity per labor hour, the mix of direct and indirect compensation across different work groups, and more.

I will be conducting a Deloitte Dbriefs webcast, SEC Proposes New CEO Pay-Ratio Disclosure Rules: Do Tell, on this topic on Friday, October 25th at 2:00 p.m. ET. We’ll give an overview of the new rules, discuss statistical sampling concepts and examples (because it’s probably been a while since statistics class), and talk about how to get started gathering the appropriate data. Click the session name above for more information or to register — and feel free to pass the information on to your colleagues in other areas who might potentially be called in to assist in the disclosure effort.

While most of the companies we’ve talked with are dreading the effort this disclosure will entail and see little or no value in it, the exercise can potentially yield some useful data. I hope you will be able to join the webcast this Friday to discuss the possibilities.

Michael Kesner Michael Kesner is a principal with Deloitte Consulting LLP in charge of its National Compensation Strategies practice. He has more than 30 years of experience working with companies on a wide range of executive compensation issues.

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