Pay Ratio Disclosures are an Employee-Relations Opportunity … Really

Most companies are now devoting substantial resources and effort to ensuring compliance with the SEC’s new rules requiring disclosure of the ratio of the CEO’s and median employee’s respective annual total compensation. Because the disclosure is required for fiscal years beginning on or after January 1, 2017, calendar-year-end companies must include it in their upcoming proxy statements. As the number crunching and parsing of new SEC disclosure guidance (see Doug’s Notes here and here) begins to take shape, these companies will soon get a sense of the magnitude of their ratio and, therefore, of any concerns it may raise. Discussions are also taking place regarding the extent to which companies can, or should, provide supplemental proxy disclosure that adds explanatory context to the mandated ratio disclosures. In the course of all of that analysis, it would be a shame to overlook “silver-lining” opportunities to engaging in proactive, positive dialogue with the company’s various stakeholders. And the most important constituency at most companies is the employees. Pay ratio disclosures may be disconcerting to employees for a variety of reasons. Most obviously, while the CEO’s total compensation has long been public information, its stark numerical contrast to median employee compensation could be expected to generate negative emotional responses from some members of the workforce. Less obvious, but perhaps as disconcerting, may be the realization by half of your employees that they are compensated below the median. This realization could be further exacerbated by negative comparisons to peer company compensation medians and ratios, which will likewise now be public. Failure to proactively address these issues could result in a disgruntled subset of...

What’s Happening with Pay Ratio Disclosures?

Well, we’re more than half-way through the year, Independence Day has come and gone, the 2018 proxy season is closer than it used to be, and we still don’t know whether pay ratio disclosures will go away. A brief background. Dodd-Frank Act Section 953(b) requires that the SEC amend Item 402 of Regulation S-K to mandate pay ratio disclosures. In 2015, the SEC dutifully adopted the mandated rules, which state that all companies required to provide executive compensation disclosure under Item 402(c) of Regulation S-K must provide new executive compensation disclosure regarding: the median of annual total compensation of all employees, the annual total compensation of the CEO, and the ratio of those two amounts. The new rules, which are complex and involve much time-consuming preparation, require companies to report the pay ratio disclosure for their first fiscal year beginning on or after January 1, 2017. This means that, for calendar-year companies, the new disclosures are required in 2018 proxy statements. Companies generally reacted with an initial howl of outrage over the perceived arbitrary uselessness of these disclosures, observed that the implementation date was nearly three years away, and then studiously ignored the issue, hoping that in the meantime Section 953(b) would be modified or repealed. Yet, as 2017 rounded into view, the Division of Corporation Finance issued guidance regarding some of the rule’s vaguer points, seemingly in part to remind companies that the rule was still out there and that much work was required to comply with its provisions. But just as companies reluctantly began to gear up (or to think about gearing up) to collect the necessary compensation...

Pay Ratio Disclosure Guidance from the SEC (and a Reminder)

As everyone knows by now, the SEC adopted new pay ratio disclosure rules in August 2015. The good news back then was that the rules are effective for compensation during the first fiscal year beginning on or after January 1, 2017. For calendar-year companies, that means that the new disclosure will first be included in spring of 2018 proxy statements, which was more than two years away and was, therefore, well down many priority lists. Well, here we are, nearing the start of 2017, and many companies have not yet begun the extensive data collection and analysis necessary to satisfy the new rules. Nevertheless, the SEC is apparently unwilling to similarly pretend that the new rules never happened, as evidenced by its recent new CDIs (128C.01-.05) addressing some of their many complexities. Therefore, if you have not yet done so, now is the time to be sure your company is putting the proper procedures and compliance timeline in place. A brief refresher… The pay ratio rules state that all companies required to provide executive compensation disclosure under Item 402(c) of Regulation S-K (which excludes smaller reporting companies, foreign private issuers, emerging growth companies, MJDS filers and registered investment companies) must provide new executive compensation disclosure regarding: the median of annual total compensation of all employees, the annual total compensation of the CEO, and the ratio of those two amounts. Companies may identify the median employee using annual total compensation under the current executive compensation rules or using their own methodology, which may include the total employee population, statistical sampling or another reasonable, consistently applied methodology. Companies may identify the...

Focus on Incentive Pay Practices: A Message from the Regulators

Incentive pay is an important part of compensation packages.  It allows employers to reward those employees who perform well (and show those employees who do not that under-performing will have negative consequences).  It is a well known fact that incentive pay drives behavior.  But what the 2008 financial meltdown may have shown is that poorly calibrated incentives may generate counter-productive, if not dangerous, behaviors.  Therefore, all employers should carefully design and document their incentive pay programs to make sure their interests are well protected, and incentive pay is awarded only when appropriate. This is very clearly the opinion of six agencies that oversee financial institutions, and that have come to the conclusion that the 2008 crisis was caused, at least in part, by dangerous pay practices.  The Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency (FHFA), the National Credit Union Association (NCUA), the Board of Directors of the Federal Reserve System (the Federal Reserve) and the Securities and Exchange Commission (SEC) recently released proposed regulations that set forth detailed requirements applicable to incentive compensation programs adopted and maintained by financial institutions. While these requirements would only apply to covered financial institutions, we believe that they should at least be taken into account by all employers (particularly, publicly held companies), as this new set of rules and principles may very well become “best practices” beyond the financial services industry.  Here are some key aspects of the proposed regulations that may give employers some guidance in the design and implementation on their incentive pay programs. Identifying Risk-Takers While the proposed...

Good News for Compensation Committees

With executive compensation under fire from seemingly all directions these days, it’s nice to get some good news occasionally. In this case, that news comes via the Delaware Chancery Court’s recent decision in Friedman v. Dolan, which confirmed the application of the business judgment rule (rather than the “entire fairness” standard) to the actions of an independent compensation committee of a controlled public company. The Dolan decision… In Dolan, a stockholder of Cablevision System Corp. had alleged that both the CEO and Chairman (each a member of the Dolan family) had received excessive compensation that had been approved by the compensation committee. The plaintiff noted that the Dolan family accounted for ten of the sixteen board members, held more than 70% of Cablevision’s voting power and voted as a bloc pursuant to a voting agreement. In addition, the CEO had consulted with the compensation committee regarding the compensation in question. The complaint alleged that the compensation committee and certain members of management had breached their fiduciary duties by awarding and accepting the challenged compensation. Furthermore, the plaintiff asserted that the entire fairness standard of review (rather than the typical business judgment rule) should apply to those actions because the CEO and Chairman controlled the board of directors. The court determined that the compensation committee was, in fact, independent and rejected the plaintiff’s claim. In doing so, the court stated its reluctance to “endorse the principle that every controlled company, regardless of use of an independent committee, must demonstrate the entire fairness of its executive compensation in court whenever questioned by a shareholder.” The court further held that: “Delaware courts...

At Last–the SEC’s Compensation Clawback Proposal

Some five years ago, Section 954 of the Dodd-Frank Act instructed the SEC to adopt rules mandating that national securities exchanges require listed companies to implement incentive compensation recovery (or clawback) policies. Last week, the SEC proposed the long-awaited new rules, which SEC Chair Mary Jo White described as “the last of the Dodd-Frank Act executive compensation rulemaking.” Since Dodd-Frank was enacted, the clawback picture has become somewhat muddled. The Sarbanes-Oxley Act, of course, already contains a limited clawback policy applicable solely to CEO and CFO compensation and triggered by financial restatements resulting from “misconduct.” Also, many companies adopted “voluntary” clawback policies in response to Dodd-Frank in an effort to achieve what they perceived to be “best practices” in that area of corporate governance (an estimated 23% of all filers and 50% of S&P 1500 companies). The SEC’s proposed new Rule 10D-1 under the Securities Exchange Act would substantially broaden the scope of Sarbanes-Oxley clawbacks and would, no doubt, differ from existing voluntary policies. Therefore, companies must re-examine their current positions regarding clawbacks, as well as begin to prepare for the rule’s inevitable adoption. (See the suggested action steps below.) A brief summary of the proposed new rule… Companies listed on a national stock exchange (excluding investment companies) would be required to adopt clawback policies designed to recover incentive-based compensation awarded to a current or former executive officer during the three-year period before the year in which it was required to restate its financial statements due to material noncompliance with financial reporting requirements. The clawback would apply without regard to whether there was misconduct by the executive officer in...