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years away, and then studiously ignored the issue, hoping that in the meantime Section 953(b) would be modified or repealed.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 data and draft the related disclosures, then-acting SEC Chairman Michael Piwowar issued a statement directing the SEC staff to take a fresh look at the rule because some companies “have begun to encounter unanticipated compliance difficulties that may hinder them in meeting the reporting deadline” and ordered a 45-day public comment period.

And there was much rejoicing.

Then, on June 8, the U.S. House of Representatives passed the Financial CHOICE Act of 2017, which would outright repeal Dodd-Frank’s Section 953(b). More good news, right? Well, not necessarily since many prognosticators believe that the Financial CHOICE Act is unlikely to make it through the Senate and become law. And even if it does, the SEC could still choose to leave the new pay ratio disclosure rules in place, particularly since it received more than 14,000 letters supporting the new rule during acting Chairman Piwowar’s comment period.

So, what should companies do?

If I were betting on whether or not pay ratio disclosures will ultimately be required in 2018 proxy statements (which I’m not because that might be illegal), I would lean toward “not.” Nevertheless, as of this date, the rules remain in effect and the implementation deadline looms large. This means that companies have no choice but to continue their efforts to comply with the pay ratio rule as currently written.

As I’ve said before, companies should try to turn this into a positive by using the new disclosures to educate their investors, analysts and employees regarding the process followed to evaluate and determine executive compensation. Employees in particular may not be aware of the amount of effort put into creating compensation structures that reward performance, encourage behaviors that inure to the benefit of all stakeholders and allow the company to hire and retain top executives in highly competitive industries. This means that your investor relations and human resources personnel should be working alongside the finance and legal departments throughout the process.

In the meantime, it wouldn’t hurt to keep your fingers crossed in hopes that pay ratio disclosure will go away before it’s too late.

All the best,

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