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...

New SEC Pay Ratio Disclosure Guidance

As everyone knows by now, the SEC amended Item 402 of Regulation S-K, as required by the Dodd-Frank Act, to state that all companies required to provide executive compensation disclosure under Item 402(c) of Regulation S-K must also 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 must provide the pay ratio disclosure for their first fiscal year beginning on or after January 1, 2017. There had been a chance, albeit dwindling, that the new rules might somehow be repealed or delayed before the 2018 proxy season. Recent statements by the SEC staff, followed by last week’s barrage of staff guidance on pay ratio disclosure, now make it clear that the rules will go into effect as written. The new guidance. A September 21 interpretive release “… reflects the feedback the SEC has received and encourages companies to use the flexibility incorporated in our prior rulemaking to reduce costs of compliance,” according to SEC Chairman Jay Clayton. As summarized in the accompanying press release, the guidance: States the SEC’s views on the use of reasonable estimates, assumptions and methodologies, and statistical sampling permitted by the rule; Clarifies that a company may use appropriate existing internal records, such as tax or payroll records, in determinations about the inclusion of non-U.S. employees and in identifying the median employee; and Provides guidance as to when a company may use widely recognized tests to determine whether its workers are employees for purposes of the rule. Of particular note is the staff’s articulation...

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...

Thwarting Shareholder Activism Through Engagement

As the 2017 proxy season draws to a close for most companies, it is obvious that shareholder activism remains alive and well, though the actual number of public activist campaigns appears to have tapered off slightly as compared to recent years. Activism takes many forms, ranging from takeover proxy battles to proxy access proposals to single-issue social welfare proposals. Particularly noteworthy is an apparent trend among institutional investors to target small and mid-size companies, perhaps believing (perhaps correctly) that these companies are ill-prepared to resist their forays. Companies have a wide array of defensive techniques at their disposal, depending on the nature of the activist’s approach, one of which is effective shareholder engagement. The good news is that more and more institutions are welcoming, and even encouraging, engagement with their portfolio companies. And while small and mid-size companies still sometimes struggle to get the attention of major institutions, this has become less problematic now that shareholder engagement is standard practice in corporate America. Although many of the governance benefits of shareholder engagement are widely known, often overlooked is its ability to thwart shareholder activism. Better communication between the company and its major shareholders reduces misunderstandings about management’s strategy or the reasons behind its latest moves. Misunderstandings, in turn, may lead to activism, or a willingness to side with activists. Strong relationships with traditionally non-activist institutional shareholders (by far the larger percentage) have the ability to actually deter activist behavior before it even happens, or to nip it before it gains too much momentum. For example, many activist shareholders own a relatively small percentage of the target company, particularly as compared...

Don’t Forget the Say-on-Frequency Form 8-K

The proxy rules require that public companies submit a nonbinding proposal to their shareholders every six years regarding how often they should hold say-on-pay votes, known as “say-on-frequency.” Most companies held their first say-on-frequency vote in 2011 and will be including another vote in their 2017 proxy statements. (“Smaller reporting companies” were not required to hold their first say-on-frequency vote until 2013, meaning that they won’t have to do it again until 2019, and there are special rules for “emerging growth companies.”) Shareholders may choose to vote on executive compensation every year, every two years or every three years, or they may choose to abstain. Though the vote is nonbinding, the charter of most compensation committees requires them to consider the outcome of the shareholder vote when deciding how best to proceed. Indeed, companies must amend their initial post-meeting Item 5.07 Form 8-K (which reports voting results) no later than 150 calendar days after the end of the shareholder meeting at which the vote was taken in order to “disclose the company’s decision in light of such vote as to how frequently the company will include a shareholder vote on the compensation of executives in its proxy materials….” Back in 2011 when these rules were still new, more than a few companies failed to make the necessary Form 8-K disclosures. While this may not sound like a big deal, in fact it is. A missed Form 8-K filing can render a company ineligible to use Form S-3 during the 12 months following the date that the Form 8-K should have been filed. For companies planning to raise capital in...

It’s Time to Consider Virtual Annual Meetings

More and more companies are moving to virtual-only or hybrid (both virtual and physical) annual shareholder meetings, though they remain in a substantial minority. Other companies sometimes pause to consider virtual meetings as they begin the annual proxy season sprint, then abandon the notion due to the press of time. Many (most?) companies haven’t yet considered them at all. In truth, there is much to be thought through, and much to be put in place, before taking the virtual meeting plunge—so much so that companies with spring proxy seasons have likely missed their chance for this year. Now is the perfect time, however, to tee up the issue for next year while management and the board of directors is focused on the annual meeting process. What is a virtual annual shareholders’ meeting? Virtual meetings can take many forms. Some are solely audio, much like most quarterly earnings calls. Others include video, much like a typical webcast. And as mentioned above, some companies (often those transitioning from physical to virtual-only meetings) hold hybrid meetings. Essentially, shareholders are issued a verifiable control number that allows them to access a secure meeting page, where they may listen to the meeting presentation and vote (if they have not already done so by proxy or if they wish to change their prior vote). Often they can ask questions, whether in real time by audio or electronically, or by submitting questions ahead of time. The meeting details and logistics of a virtual meeting can be tailored to the needs of each company, based on its analysis of its shareholder base and the message it wants...