In 2015, the Securities and Exchange Commission adopted final rules under the Dodd-Frank Act that amended Item 402 of Regulation S-K to require certain public company filers to disclose in their annual proxy statements (i) the chief executive officer’s total annual compensation, (ii) the total annual compensation of the median employee of the reporting company (excluding the CEO), and (iii) the ratio between the two (i.e. the CEO Pay Ratio). Smaller reporting companies, emerging growth companies and foreign private issuers are exempt from this disclosure requirement.
While the final rules were adopted by the SEC in 2015, public companies subject to this disclosure rule did not have to disclose this information until their first fiscal year beginning after January 1, 2017. Therefore, many existing public companies initially had to make their pay-ratio disclosures in their 2018 annual proxy statements. Some filers have changed their “median employee” since their original disclosure in their 2018 proxy statements due to a change in employee compensation arrangements, their employee populations or the median employee’s circumstances (all in the event that the company reasonably believes such changes would result in a significant change in the disclosure). However, the final rule also requires (in addition to the significant changes above) each company to make a new determination of the company’s median employee at least once every three years.
As we approach the 2021 proxy season, companies that have not made a determination regarding their median employee since their initial disclosure in their 2018 annual proxy statement are required to make a new median employee determination.
When making the median employee determination, companies must comply with the following standards:
The disclosures in the annual proxy statement must describe the methodology used to identify the median employee and any material assumptions, adjustments or estimates used.
Finally, when calculating the median employee’s annual total compensation, companies must use the same rules they apply to determining the CEO’s annual total compensation (i.e., annual total compensation for the median employee is also the sum of all of the types of compensation listed on the executive summary compensation table).
For general information concerning calculations of annual compensation (for the CEO and the median employee), the determination of the median employee and the CEO Pay Ratio, please see the press release from the SEC regarding the final rules.
If you need assistance in preparing your CEO Pay Ratio disclosures, including the process of selecting your new median employee, or have any questions, please feel free to contact Michele Kloeppel, Brent Trame or Jesse Doggendorf.
Although we would like to hear from you, we cannot represent you until we know that doing so will not create a conflict of interest. Also, we cannot treat unsolicited information as confidential. Accordingly, please do not send us any information about any matter that may involve you until you receive a written statement from us that we represent you (an ‘engagement letter’).
By clicking the ‘ACCEPT’ button, you agree that we may review any information you transmit to us. You recognize that our review of your information, even if you submitted it in a good faith effort to retain us, and, further, even if you consider it confidential, does not preclude us from representing another client directly adverse to you, even in a matter where that information could and will be used against you. Please click the ‘ACCEPT’ button if you understand and accept the foregoing statement and wish to proceed.