[Federal Register Volume 78, Number 190 (Tuesday, October 1, 2013)]
[Proposed Rules]
[Pages 60560-60605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-23073]
[[Page 60559]]
Vol. 78
Tuesday,
No. 190
October 1, 2013
Part IV
Securities and Exchange Commission
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17 CFR Parts 229 and 249
Pay Ratio Disclosure; Proposed Rule
Federal Register / Vol. 78 , No. 190 / Tuesday, October 1, 2013 /
Proposed Rules
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229 and 249
[Release Nos. 33-9452; 34-70443; File No. S7-07-13]
RIN 3235-AL47
Pay Ratio Disclosure
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: We are proposing amendments to Item 402 of Regulation S-K to
implement Section 953(b) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act. Section 953(b) directs the Commission to amend
Item 402 of Regulation S-K to require disclosure of the median of the
annual total compensation of all employees of an issuer (excluding the
chief executive officer), the annual total compensation of that
issuer's chief executive officer and the ratio of the median of the
annual total compensation of all employees to the annual total
compensation of the chief executive officer. The proposed disclosure
would be required in any annual report, proxy or information statement
or registration statement that requires executive compensation
disclosure pursuant to Item 402 of Regulation S-K. The proposed
disclosure requirements would not apply to emerging growth companies,
smaller reporting companies or foreign private issuers.
DATES: Comments should be received on or before December 2, 2013.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
Send an email to [email protected]. Please include
File Number S7-07-13 on the subject line; or
Use the Federal Rulemaking ePortal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549-1090.
All submissions should refer to File Number S7-07-13. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. All comments received will be posted without change; we do
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Christina L. Padden, Attorney Fellow
in the Office of Rulemaking, at (202) 551-3430, in the Division of
Corporation Finance; 100 F Street NE., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are proposing amendments to Item 402 \1\
of Regulation S-K \2\ and a conforming amendment to Form 8-K \3\ under
the Securities Exchange Act of 1934 (the ``Exchange Act'').\4\
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\1\ 17 CFR 229.303.
\2\ 17 CFR 229.10 et seq.
\3\ 17 CFR 249.220f.
\4\ 15 U.S.C. 78a et seq.
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Table of Contents
I. Background
A. Section 953(b) of the Dodd-Frank Act
B. Comments Received
II. Discussion of the Proposed Amendments
A. Introduction
B. Scope of Section 953(b) of the Dodd-Frank Act
1. Filings Subject to the Proposed Disclosure Requirements
2. Registrants Subject to the Proposed Disclosure Requirements
C. Proposed Requirements for Pay Ratio Disclosure
1. New Paragraph (u) of Item 402 (Pay Ratio Disclosure)
2. Employees Included in the Identification of the Median
3. Identifying the Median
4. Determination of Total Compensation
5. Disclosure of Methodology, Assumptions and Estimates
6. Clarification of the Meaning of ``Annual''
7. Timing of Disclosure
8. Status as ``Filed'' Not ``Furnished''
D. Transition Matters
1. Proposed Compliance Date
2. Proposed Transition for New Registrants
III. General Request for Comment
IV. Economic Analysis
V. Paperwork Reduction Act
VI. Small Business Regulatory Enforcement Fairness Act
VII. Regulatory Flexibility Act Certification
VIII. Statutory Authority and Text of Amendments
I. Background
A. Section 953(b) of the Dodd-Frank Act
Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ``Dodd-Frank Act'') \5\ directs the Commission to
amend section 229.402 of title 17, Code of Federal Regulations, to
require each issuer, other than an emerging growth company, as that
term is defined in Section 3(a) of the Securities Exchange Act of 1934,
to disclose in any filing of the issuer described in section 229.10(a)
of title 17, Code of Federal Regulations (or any successor thereto)--
the median of the annual total compensation of all employees of the
issuer, except the chief executive officer (or any equivalent position)
of the issuer; the annual total compensation of the chief executive
officer (or any equivalent position) of the issuer; and the ratio of
the median of the total compensation of all employees of the issuer to
the annual total compensation of the chief executive officer of the
issuer. Section 953(b) also requires that the total compensation of an
employee of an issuer shall be determined in accordance with section
229.402(c)(2)(x) of title 17, Code of Federal Regulations, as in effect
on the day before the date of enactment of the Dodd-Frank Act.\6\
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\5\ Public Law 111-203, 124 Stat. 1376 (2010), as amended by
Public Law 112-106,126 Stat. 306 (2012).
\6\ Public Law 111-203, sec. 953(b), 124 Stat. 1376, 1904
(2010), as amended by Public Law 112-106, sec. 102(a)(3), 126 Stat.
306, 309 (2012). Section 102(a)(3) of the Jumpstart Our Business
Startups Act (the ``JOBS Act'') amended Section 953(b) of the Dodd-
Frank Act to provide an exemption for registrants that are emerging
growth companies as that term is defined in Section 3(a) of the
Exchange Act.
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We are proposing amendments to implement Section 953(b). We refer
to this disclosure of the median of the annual total compensation of
all employees of the issuer, the annual total compensation of the chief
executive officer of the issuer and the ratio of the two amounts as
``pay ratio'' disclosure.
Section 953(b) of the Dodd-Frank Act does not amend the Securities
Act of 1933 (``Securities Act'') \7\ or the Exchange Act. Instead,
Section 953(b) directs the Commission to amend Item 402 of Regulation
S-K (``Item 402'') to add the pay ratio disclosure requirements
mandated by the Dodd-Frank Act. Although Section 953(b) defines some
terms used in the provision, commenters have raised questions about the
scope of the
[[Page 60561]]
statutory requirements and the need for additional interpretive
guidance.\8\
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\7\ 15 U.S.C. 77a et seq.
\8\ Comments submitted to the Commission in connection with
Section 953(b) are discussed generally in Section I.B. and
throughout this release as they relate to specific aspects of the
proposals.
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B. Comments Received
In connection with rulemakings implementing the Dodd-Frank Act, we
have sought comment from the public before the issuance of a proposing
release. With respect to Section 953(b) of the Dodd-Frank Act, as of
September 15, 2013, we have received approximately 22,860 comment
letters and a petition with approximately 84,700 signatories.\9\ We
have considered these comments in proposing the rules described in this
release.
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\9\ Comments related to the executive compensation provisions of
the Dodd-Frank Act, including Section 953(b), are available at
http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml. In connection with Section 953(b), the
Commission received approximately 260 unique comment letters and
approximately 22,600 form letters (posted on the Web site as Letter
Type A) as of September 15, 2013. The Commission also received a
petition (posted on the Web site as Letter Type B) with
approximately 84,700 signatories. In this release, references to
comment letters identify the commenter by the name of the
organization or individual submitting the letter. Letters by
commenters who submitted multiple letters are identified by date.
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Commenters were divided in their recommended approaches to Section
953(b) and the implementation issues it raises. Comments from industry
groups, issuers, law firms and executive compensation professionals
generally raised concerns about the complexity of the Section 953(b)
requirements, the significant compliance costs that could be involved
and the potential inability for many companies to verify the accuracy
of their disclosure.\10\ These commenters generally asserted that this
type of disclosure would not be material to investors or useful to an
investment or voting decision, and they disputed the potential benefits
cited by commenters who supported the provision.\11\ Comments from
individual and institutional investors and some public policy
organizations generally outlined what they expected to be the benefits
of the mandated information and urged the Commission to implement the
provision in a way that would preserve those benefits.\12\
Notwithstanding these differing viewpoints, several commenters
supported a flexible approach to implementation that would retain the
potential benefits of the mandated disclosure, while avoiding the
additional compliance costs that a less flexible approach could
impose.\13\
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\10\ See, e.g., letters from American Bar Association (``ABA'');
Center on Executive Compensation dated September 10, 2010 (``COEC
I''); Center on Executive Compensation dated November 11, 2011
(``COEC II''); Davis Polk & Wardwell LLP (``Davis Polk''); Business
Roundtable et al., (``Group of Trade Associations''); Society of
Corporate Secretaries and Governance Professionals (``SCSGP'');
Greta E. Cowart, Haynes & Boone LLP et al. (``Group of Exec. Comp.
Lawyers''); Protective Life Corporation; Towers Watson; Brian Foley
& Co.; and Pay Governance LLC. We discuss these costs in detail in
Section IV of this release.
\11\ See, e.g., COEC I and letters from Brian Foley & Co.; Group
of Trade Associations; Meridian Compensation Partners, LLC; National
Association of Corporate Directors (``NACD''); and Retail Industry
Leaders Association (``RILA'').
\12\ See, e.g., letters from AFL-CIO dated December 13, 2010
(``AFL-CIO I'') and AFL-CIO dated August 11, 2011 (``AFL-CIO II'');
Americans for Financial Reform; Batirente et al. (``Group of
International Investors''); J. Brown; K. Burgoyne; Calvert
Investment Management; Community Action Commission; CtW Investment
Group; Drucker Institute; Institute for Policy Studies; R. Landgraf;
D. Miron; Social Investment Forum; S. Towns; Trillium Asset
Management; UAW Retiree Medical Benefits Trust; and Walden Asset
Management. See also Letter Type A. We discuss these benefits in
detail in Section IV of this release.
\13\ See, e.g., AFL-CIO II and letters from ABA; American
Benefits Council; COEC II; Protective Life Corporation; and Davis
Polk.
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We discuss the concerns and recommendations from the commenters in
more detail throughout this release. We agree with commenters that,
depending on how Section 953(b) is implemented, the cost of compliance
with these new disclosure requirements could be, at least for some
registrants, substantial. The rules we are proposing are intended to
address commenters' concerns and are designed to lower the cost of
compliance while remaining consistent with Section 953(b).
II. Discussion of the Proposed Amendments
A. Introduction
Section 953(b) imposes a new requirement on registrants to disclose
the median of the annual total compensation of all employees (excluding
the chief executive officer), the annual total compensation of the
chief executive officer and the ratio of the median disclosed to the
annual total compensation of the chief executive officer. Section
953(b)(2) specifies that, for purposes of Section 953(b), the total
compensation of an employee of an issuer shall be determined in
accordance with Item 402(c)(2)(x) of Regulation S-K. The Commission's
rules for compensation disclosure have traditionally focused on the
compensation of executive officers and directors.\14\ Although
registrants subject to Item 402 are required to provide extensive
information about the compensation of the principal executive officer
(``PEO'') and other named executive officers identified pursuant to
Item 402(a), current disclosure rules generally do not require
registrants to disclose detailed compensation information for other
employees in their filings with the Commission.\15\ Commenters have
observed that, because of the complexity of the requirements of Item
402(c)(2)(x), registrants typically compile information required by
Item 402(c) manually for the named executive officers, which they have
stated takes significant time and resources.\16\ We do not expect that
many registrants, if any, currently disclose or track total
compensation as determined pursuant to Item 402 for their
workforce.\17\
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Registrants are required to present various elements of employee
compensation, on an aggregate basis, in the relevant line items of
their financial statements and related footnotes (such as accrued
payroll and benefits amounts recorded in current liabilities on the
balance sheet, or salary and bonus amounts included in selling and
administrative expenses or cost of goods sold on the income
statement).\18\ These amounts are calculated and presented in
accordance with the comprehensive set of accounting principles that the
registrant uses to prepare its primary financial statements. For
example, under United States generally accepted accounting principles
(``U.S. GAAP''), there are several accounting standards that relate to
compensation,\19\ and these standards are distinct from the
Commission's executive compensation disclosure rules. In addition, the
Commission's executive compensation disclosure rules differ from tax
accounting and reporting standards.\20\ Therefore, Section 953(b)
requires registrants to disclose specific information about non-
executive employee compensation that is not currently required for
disclosure, accounting or tax purposes.
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\14\ Initially, disclosure requirements for executive and
director compensation were set forth in Schedule A to the Securities
Act and Section 12(b) of the Exchange Act, which list the type of
information to be included in Securities Act and Exchange Act
registration statements. In 1938, the Commission promulgated its
first executive and director compensation disclosure rules for proxy
statements. See Amended Proxy Rules, Release No. 34-1823 (Aug. 11,
1938) [3 FR 1991].
From time to time thereafter, the Commission has amended its
executive and director compensation disclosure requirements in light
of changing trends in executive compensation and other issues, and,
more recently, to comply with the mandates of the Dodd Frank Act.
See, e.g., Solicitation of Proxies Under the Act, Release No. 34-
3347 (Dec. 18, 1942) [7 FR 10655]; Solicitation of Proxies, Release
No. 34-4775 (Dec. 11, 1952) [17 FR 11431]; Uniform and Integrated
Reporting Requirements: Management Remuneration, Release No. 33-6003
(Dec. 4, 1978) [43 FR 58181]; Disclosure of Executive Compensation,
Release No. 33-6486 (Sept. 23, 1983) [48 FR 44467]; Executive
Compensation Disclosure, Release No. 33-6962 (Oct. 16, 1992) [57 FR
48126]; Executive Compensation Disclosure; Securityholder Lists and
Mailing Requests, Release No. 33-7032 (Nov. 22, 1993) [58 FR 63010];
Executive Compensation and Related Person Disclosure, Release No.
33-8732A (Aug. 29, 2006) [71 FR 53158] (``2006 Adopting Release'');
Proxy Disclosure Enhancements, Release No. 33-9089A (Dec. 16, 2009)
[74 FR 68334]; and Shareholder Approval of Executive Compensation
and Golden Parachute Compensation, Release No. 33-9178 (Jan. 25,
2011)[76 FR 6010].
\15\ Although the group of covered individuals for whom
disclosure is required has changed over time, the rules generally
have sought to require compensation disclosure for ``persons who, in
fact, function as key, policy-making members of management.''
Uniform and Integrated Reporting Requirements: Management
Remuneration, Release No. 33-5950 (July 28, 1978) [43 FR 34415], at
34416.
\16\ See letter from Davis Polk. See also letter from R.
Morrison.
\17\ See letter from Protective Life (noting that ``very few
employers routinely determine certain items of compensation for
individual `rank and file' employees, notably the values of stock
and stock option awards and the aggregate change in the actuarial
present value of defined benefit pension plan accruals. For most
employers, determining these amounts will require, for the first
time, calculations for all (or a large subset) of their
employees''). See also COEC I (``No public company currently
calculates each employee's total compensation as it calculates total
pay on the Summary Compensation Table for the named executive
officers, because disclosure of executive pay has a different
purpose than internal accounting.''); and letter from R. Morrison
(``Collecting, organizing, and analyzing this kind of data for all
employees in order to develop a median comp figure would be
extremely complex, time-consuming, and burdensome, assuming this is
even possible.'').
\18\ ``Total compensation'' as determined pursuant to Item 402
is not an amount that is reported or calculated in connection with a
registrant's financial statements.
\19\ See, e.g., FASB ASC 710, Compensation--General; ASC 715,
Retirement Benefits Compensation; ASC 960, Defined Benefit Pension
Plans; ASC 962, Defined Contribution Pension Plans; ASC 965, Health
and Welfare Benefit Plans; and ASC 718, Compensation--Stock
Compensation.
\20\ For example, registrants that are subject to the United
States Internal Revenue Code [26 U.S.C. 1 et seq.] are required to
report certain compensation information for each employee to the
Internal Revenue Service, typically on Form W-2. The elements of
compensation that are required to be calculated and reported on Form
W-2 are not the same as those covered by Item 402 requirements, and
the reported amounts relate to the relevant calendar year for tax
purposes, rather than the registrant's fiscal year.
Additionally, the compensation required to be disclosed under
Item 402 reflects the compensation that was awarded to, earned by or
paid to the executive officer during the fiscal year in contrast to
compensation reported on Form W-2, which reflects only compensation
that was includible in income for income tax purposes during the
calendar year regardless of when that compensation was earned. For
example, under Item 402, the value of stock options, deferred salary
and bonuses would be included in compensation in the period they
were awarded or earned. In contrast, for purposes of Form W-2,
income from stock options is generally included in income at the
time of exercise, and income relating to deferred salary and bonuses
is included only when those amounts are actually paid, which could
be in a future year.
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Many commenters raised concerns about the significant compliance
costs that could result from requiring the use of ``total
compensation'' as defined in Item 402(c)(2)(x) to calculate employee
pay and requiring registrants to identify the median instead of the
average.\21\ According to these commenters, the primary driver of the
significant compliance costs is that many registrants, whether large
multinationals or companies of modest revenue size and market
capitalization, maintain multiple and complex payroll, benefits and
pension systems (including systems maintained by third party
administrators) that are not structured to easily accumulate and
analyze all the types of data that would be required to calculate the
annual total compensation for all employees in accordance with Item
402(c)(2)(x). Thus, in order to compile such disclosure, registrants
would either need to integrate these data systems or consolidate the
data manually, which, in both cases, would be, according to these
commenters, highly costly and time consuming.\22\
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\21\ See, e.g., letters from Davis Polk (noting that compliance
will be ``highly costly and burdensome, with tremendous uncertainty
as to accuracy. Companies are justifiably concerned about the costs
and burdens to accomplish the formidable data collection and
calculation tasks for employees worldwide between the end of the
year and the first required filing.''); Frederick W. Cook & Co.,
Inc. (stating, ``the calculation of median total pay for all
employees other than the CEO is problematic, burdensome and perhaps
impossible for many issuers'') and Protective Life Corporation (``It
is difficult to overemphasize how burdensome this requirement could
be for large employers. Calculating annual total compensation is
much more complicated than simply adding up numbers that companies
already have available. . . . Since many large companies use outside
accounting, actuarial nd compensation and pension administration
firms to perform these calculations, the costs of disclosure will
increase accordingly.''). See also letters from ABA; COEC I; Group
of Exec. Comp. Lawyers; Group of Trade Associations; Meridian
Compensation Partners, LLC; NACD; and R. Morrison.
\22\ See, e.g., letter from Group of Trade Associations (``There
is a widespread misconception that this information is readily
available at the touch of a button.'') See also COEC II and letters
from Group of Exec. Comp. Lawyers; Meridian Compensation Partners,
LLC; and R. Morrison.
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The proposed rules to implement Section 953(b) are designed to
comply with the statutory mandate and to address commenters' concerns
regarding the potential costs of complying with the disclosure
requirement. Where we have exercised discretion in implementing the
statutory requirements, we are proposing alternatives that we believe
will reduce costs and burdens, while preserving what we believe to be
the potential benefits, as articulated by commenters, of the disclosure
requirement mandated by the Dodd-Frank Act. We note, however, that
neither the statute nor the related legislative history directly states
the objectives or intended benefits of the provision.\23\ Commenters
supporting Section 953(b) have emphasized that potential benefits could
arise from adding pay ratio-type information to the total mix of
executive compensation information.\24\ We have considered the
statutory mandate of Section 953(b) in the context of other executive
compensation disclosure under Item 402, and, where practicable, we have
sought to make the mandated disclosure of Section 953(b) work with the
existing executive compensation disclosure regime.
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\23\ The requirements imposed by Section 953(b) originated in
the Senate. A provision identical to Section 953(b) was first
included in S. 3049, the ``Corporate Executive Accountability Act of
2010,'' which was sponsored by Senator Menendez and introduced on
February 26, 2010. In that bill, the provision accompanied a say-on-
pay provision. A provision identical to Section 953(b) next appeared
in S. 3217, the ``Restoring American Financial Stability Act of
2010'' sponsored by Senator Dodd and introduced on April 15, 2010,
which served as the basis for the Senate's amendments to H.R. 4173.
The legislative record includes only a few brief references to the
pay ratio disclosure requirements, each opposing the provision. See
156 Con. Rec. S3121 (daily ed. May 5, 2010) (statement of Sen.
Gregg) and 156 Cong. Rec. S4075 (daily ed. May 20, 2010) (statement
of Sen. Shelby). The April 30, 2010 report issued by the Senate
Committee on Banking, Housing and Urban Affairs does not mention the
pay ratio requirements other than a short statement by the minority.
See Report of the Senate Committee on Banking, Housing and Urban
Affairs to Accompany S. 3217 (``the Senate Report''), S. Rep. No.
111-176, at 245.
The requirements of Section 953(b) were not discussed during the
conference committee's deliberations on the legislation. Similarly,
the Joint Explanatory Statement of the Committee of Conference does
not mention the pay ratio requirements in its summary of Title IX,
Subtitle E. See Conference Report on H.R. 4173, H. Rep. No. 111-517,
at 872.
\24\ See, e.g., letters from Americans for Financial Reform
(``Existing requirements mandate disclosure of top executive
compensation only, encouraging companies to focus unduly on peer to
peer comparisons when setting CEO pay. . . . Disclosure of CEO-to-
worker pay ratios will encourage Boards of Directors to also
consider vertical pay equity within firms.''); Calvert Investment
Management (``The disclosure required by Section 953(b) will help
investors understand how issuers are distributing compensation
dollars throughout the firm in ways that may help improve employee
morale and productivity.''); CtW Investment Group (``The new
disclosure offers an insight into compensation within the entire
organization, and provides a different way for boards and
shareholders to evaluate the relative worth of a CEO.''); and UAW
Retiree Medical Benefits Trust (``[W]e view Section 953(b) as an
essential tool that will increase corporate board accountability to
investors . . . a comparison between CEO and employee pay may help
shareholders identify the board's strengths and weaknesses, and may
provide insight into [the board's] relationship with the CEO.'').
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[[Page 60563]]
In light of the significant potential costs articulated by
commenters,\25\ we believe that it is appropriate for the proposed
rules to allow registrants flexibility in developing the disclosure
required by the statute. The proposal seeks to implement Section 953(b)
without imposing additional prescriptive requirements that are not
mandated by the Dodd-Frank Act and reflects our consideration of the
relative costs and benefits of this approach as opposed to a more
prescriptive one. For example, registrants would be able to choose from
several options in order to provide the disclosure. Registrants may
choose to identify the median using their full employee population or
by using statistical sampling or another reasonable method. In doing
so, the proposed requirements would allow registrants to choose a
statistical method to identify the median that is appropriate to the
size and structure of their own businesses and the way in which they
compensate employees, rather than prescribing a particular methodology
or specific computation parameters. Registrants may calculate the
annual total compensation for each employee included in the calculation
(whether the entire population or a statistical sample) and the PEO
using Item 402(c)(2)(x) and to identify the median using this method.
As an alternative, registrants may identify the median employee based
on any consistently applied compensation measure and then calculate the
annual total compensation for that median employee in accordance with
Item 402(c)(2)(x). The proposed requirements also would permit
registrants to use reasonable estimates in calculating the annual total
compensation for employees other than the PEO, including when
disclosing the annual total compensation of the median employee
identified using a consistently applied compensation measure. We
believe that this flexible approach is consistent with Section 953(b)
and could ease commenters' concerns about the potential burdens of
complying with the disclosure requirement. We do not believe that a
one-size-fits-all approach would be prudent, given the wide range of
registrants and the disparate burdens on registrants based on factors
such as their type of business and the complexity of their payroll
systems. We seek comment on whether the proposed rules address
sufficiently the practical difficulties of data collection and whether
there are other alternative approaches consistent with Section 953(b)
that could provide the potential benefits of pay ratio information at a
lower cost. We also seek comment on whether the flexible approach
proposed in this release appropriately implements Section 953(b).
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\25\ The potential costs arising from the requirements of
Section 953(b), as well as the potential costs relating to the
proposed rules, are discussed in detail below in Section IV of this
release.
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The details of the proposal are set forth in the sections below.
First, we interpret the scope of Section 953(b) with respect to the
filings and the registrants that are subject to the proposed
requirements. Next, we set forth the proposed new pay ratio disclosure
requirement in Item 402, to be designated paragraph (u), and provide
details on a variety of technical and interpretive issues, including:
The employees that are to be included in the
identification of the median;
identifying the median;
determining ``total compensation;''
disclosure of the methodology, assumptions and estimates
used;
the meaning of ``annual'' in the context of ``annual total
compensation;''
various timing matters that arise in connection with the
proposed requirements; and
the status of the disclosure as ``filed'' rather than
``furnished.''
Finally, we address transition matters, including the proposed
compliance date for registrants that would be subject to the rules, and
proposed transition provisions for new registrants.
B. Scope of Section 953(b) of the Dodd-Frank Act
1. Filings Subject to the Proposed Disclosure Requirements
In accordance with Section 953(b) of the Dodd-Frank Act, we are
proposing to require registrants to include pay ratio disclosure in any
filing described in Item 10(a) of Regulation S-K that requires
executive compensation disclosure under Item 402 of Regulation S-K.
Therefore, the proposed pay ratio disclosure would be required in
annual reports on Form 10-K,\26\ registration statements under the
Securities Act and Exchange Act, and proxy and information statements,
to the same extent that the requirements of these forms require
compliance with Item 402.\27\ We are not proposing changes to the
requirements of these forms relating to Item 402. Section 953(b) does
not direct the Commission to amend any of its forms to add the pay
ratio disclosure requirements to filings that do not already require
disclosure of Item 402 information, and we are not proposing to do so.
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\26\ 17 CFR 249.310.
\27\ Registrants would follow the instructions in each form to
determine whether Item 402 information is required, including any
instructions that allow for the omission of Item 402 information in
certain circumstances, such as General Instructions I(2)(c) and
J(1)(m) to Form 10-K containing special provisions for the omission
of Item 402 information by wholly-owned subsidiaries and asset-
backed issuers.
As described below in Section II.C.7., the proposed requirements
do not require a registrant to update its pay ratio disclosure for
the most recently completed fiscal year until it files its annual
report on Form 10-K, or, if later, its proxy or information
statement for its next annual meeting of shareholders (or written
consents in lieu of such a meeting).
In addition, we are proposing a transition period for compliance
by new registrants that are subject to Section 953(b), so that the
pay ratio requirement is not required in a registration statement on
Form S-1 [17 CFR 239.11] or Form S-11 [17 CFR 239.18] for an initial
public offering or registration statement on Form 10 [17 CFR
249.210]. See Section II.D.2. of this release.
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Although some commenters suggested that Section 953(b)(1) requires
pay ratio disclosure in every Commission filing,\28\ other commenters
suggested that the statute, by referring to filings described in Item
10(a) of Regulation S-K, is intended to apply only to those filings for
which the applicable form requires Item 402 disclosure.\29\ We agree
with the latter reading of Section 953(b). We believe that reading
Section 953(b) to require pay ratio disclosure in filings that do not
contain other executive compensation information would not present this
information in a meaningful context. Because some commenters have
asserted that the pay ratio disclosure would provide another metric to
evaluate executive compensation disclosure,\30\ we believe that the
proposed pay ratio disclosure should be placed in context with other
executive compensation disclosure, such as the summary compensation
table required by Item 402(c) and the compensation discussion and
analysis required by Item 402(b), rather than provided on a stand-alone
basis. Therefore, we believe it is appropriate to read Section 953(b)
as requiring pay ratio disclosure in only those filings that are
required to include other Item 402 information.
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\28\ See, e.g., COEC I and letters from American Benefits
Council; Compensia, Inc.; Davis Polk; SCSGP; and Towers Watson.
\29\ See, e.g., letters from ABA and RILA.
\30\ See, e.g., AFL-CIO I, House Letter and Senate Letter; and
letters from CtW Investment Group and UAW Retiree Medical Benefits
Trust.
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Request for Comment
1. Should we require the pay ratio disclosure only in filings in
which Item 402 disclosure is required, as proposed? Should we require
the pay ratio disclosure in Commission forms that do
[[Page 60564]]
not currently require Item 402 disclosure? If so, which forms, and why?
Would disclosure be meaningful to investors where no other executive
compensation disclosures are required?
2. Do registrants need any additional guidance about which filings
would require the proposed pay ratio disclosure? Are there
circumstances where the requirements of a particular form call for Item
402 information in certain circumstances, but the applicability of the
proposed pay ratio disclosure requirements may not be clear? If so,
please provide details about what should be clarified and what guidance
is recommended.
2. Registrants Subject to the Proposed Disclosure Requirements
The proposed pay ratio disclosure requirements would apply to only
those registrants that are required to provide summary compensation
table disclosure pursuant to Item 402(c). We recognize that the
reference to ``each issuer'' in Section 953(b) could be read to apply
to all issuers that are not emerging growth companies, including
smaller reporting companies and foreign private issuers. As a result of
the specific reference in Section 953(b) to the definition of total
compensation contained in Item 402(c)(2)(x), and the absence of
direction to apply this requirement to companies not previously subject
to Item 402(c) requirements, we propose to limit the pay ratio
disclosure requirement to registrants that are subject to Item 402(c)
requirements, as described in more detail below.
a. Emerging Growth Companies Are Not Covered
Under JOBS Act Section 102(a)(3), registrants that qualify as
emerging growth companies, as that term is defined in Section 3(a) of
the Exchange Act,\31\ are not subject to Section 953(b). To give effect
to the statutory exemption, we are proposing an instruction to Item
402(u) that provides that a registrant that is an emerging growth
company is not required to comply with Item 402(u).\32\
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\31\ 15 U.S.C. 78c(a).
\32\ See proposed Instruction 6 to Item 402(u).
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b. Smaller Reporting Companies Are Not Covered
Section 953(b) requires total compensation to be calculated in
accordance with Item 402(c)(2)(x). Smaller reporting companies (as
defined in Item 10(f)(1) of Regulation S-K) \33\ are permitted to
follow the scaled disclosure requirements set forth in Items 402(m)-(r)
instead of complying with the disclosure requirements set forth in
Items 402(a)-(k) and (s),\34\ and therefore are not required to
calculate compensation in accordance with Item 402(c)(2)(x). The
requirement set forth in Item 402(n) for disclosure of summary
compensation table information, which includes disclosure of ``total
compensation,'' does not require smaller reporting companies to include
all of the same types of compensation required to be included in total
compensation for other registrants under Item 402(c)(2).\35\ We believe
that by requiring the use of Item 402(c)(2)(x) to calculate total
compensation (without mention of Item 402(n)(2)(x)), Congress intended
to exclude smaller reporting companies from the scope of Section
953(b). In addition, requiring smaller reporting companies to provide
the pay ratio disclosure consistent with the requirement for other
registrants would require smaller reporting companies to collect data
and calculate compensation for the PEO in a manner they otherwise would
not be required to calculate compensation. Thus, we do not believe this
is the intent of the provision.
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\33\ 17 CFR 229.10(f)(1).
\34\ See Item 402(l). Smaller reporting companies are permitted
to choose compliance with either the scaled disclosure requirements
or the larger company disclosure requirements on an ``a la carte''
basis. As discussed in the scaled disclosure adopting release, the
staff evaluates compliance by smaller reporting companies with only
the Regulation S-K requirements applicable to smaller reporting
companies, even if the company chooses to comply with the larger
company requirements. See Smaller Reporting Company Regulatory
Relief and Simplification, Release No. 33-8876 (Dec. 19, 2007) [73
FR 934], at 941.
\35\ Specifically, under Item 402(n)(2)(viii), smaller reporting
companies are not required to include the aggregate change in the
actuarial present value of pension benefits that is required for
companies subject to Item 402(c)(2)(viii).
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Therefore, as proposed, the pay ratio disclosure requirements would
not apply to smaller reporting companies. To make this clear, we are
proposing a technical amendment to paragraph (l) of Item 402, to add
proposed paragraph (u) to the list of items that are not required for
smaller reporting companies.
c. Foreign Private Issuers and MJDS Filers Are Not Covered
Foreign private issuers that file annual reports and registration
statements on Form 20-F and MJDS filers that file annual reports and
registration statements on Form 40-F would not be required to provide
the proposed pay ratio disclosure, because those forms do not require
Item 402 disclosure.\36\ We do not read Section 953(b) as requiring the
Commission to expand the scope of Item 402 to apply to companies that
are not currently subject to the executive compensation disclosure
requirements set forth in Item 402. Accordingly, we are not proposing
to amend Form 20-F or Form 40-F, and the proposed pay ratio disclosure
requirements would not be applicable to foreign private issuers or MJDS
filers. In addition, we are not proposing any changes to existing Item
402(a)(1), which provides for the treatment of foreign private issuers.
Accordingly, foreign private issuers that file annual reports on Form
10-K will continue to be able to satisfy Item 402 requirements by
following the requirements of Items 6.B and 6.E.2 of Form 20-F and
would not be required to make the pay ratio disclosure mandated by
Section 953(b). In addition, requiring foreign private issuers and MJDS
filers to provide the pay ratio disclosure consistent with the
requirement for other registrants would require these registrants to
collect data and calculate compensation for the PEO in a manner they
otherwise would not be required to calculate compensation. Thus, we do
not believe this is the intent of the provision.
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\36\ The term ``MJDS filers'' refers to registrants that file
reports and registration statements with the Commission in
accordance with the requirements of the U.S.- Canadian
Multijurisdictional Disclosure System (the ``MJDS''). The definition
for ``foreign private issuer'' is contained in Exchange Act Rule 3b-
4(c) [17 CFR 240.3b-4(c)]. A foreign private issuer is any foreign
issuer other than a foreign government, except for an issuer that,
as of the last business day of its most recent fiscal year, has more
than 50% of its outstanding voting securities held of record by
United States residents and any of the following: A majority of its
officers and directors are citizens or residents of the United
States, more than 50% of its assets are located in the United
States, or its business is principally administered in the United
States.
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Request for Comment
3. Should the pay ratio disclosure requirements, as proposed, apply
only to those registrants that are required to provide summary
compensation table disclosure pursuant to Item 402(c)? If not, to which
registrants should pay ratio disclosure requirements apply?
4. Should we revise the proposal so that smaller reporting
companies would be subject to the proposed pay ratio disclosure
requirements? If so, why? If so, also discuss how smaller reporting
companies should calculate total compensation for employees and the
PEO. For example, should they be required to calculate total
compensation in accordance with Item 402(c)(2)(x) instead of the scaled
disclosure requirements? In the alternative, should smaller reporting
companies be required to provide a modified version of the pay ratio
disclosure? If so, why, and what should that modified version entail?
[[Page 60565]]
Should it be based on the compensation amounts required under the
scaled disclosure requirements applicable to smaller reporting
companies, such as a ratio where the PEO compensation and other
employee compensation are calculated in accordance with Item
402(n)(2)(x)? Please provide information as to particular concerns that
smaller reporting companies may have. Please discuss whether the
disclosure would be useful to investors in smaller reporting companies.
5. Should we amend either Form 20-F or Form 40-F to include
disclosure that is similar to the proposed pay ratio disclosure
requirements? If so, why? Assuming we would not otherwise subject
foreign private issuers to the executive compensation disclosure rules,
what modifications would be needed to address the different reporting
requirements that foreign private issuers and MJDS filers have for
executive compensation disclosure in order to require pay ratio
disclosure? In particular, how should these registrants calculate total
compensation (for the PEO and for employees) for purposes of such a
requirement? Please provide information as to particular concerns that
foreign private issuers or MJDS filers may have if they were required
to comply with such a requirement. Please discuss whether the
disclosure would be useful to investors, particularly in the absence of
the executive compensation disclosure that would accompany disclosure
of the ratio for registrants subject to Item 402 disclosure.
C. Proposed Requirements for Pay Ratio Disclosure
1. New Paragraph (u) of Item 402 (Pay Ratio Disclosure)
We are proposing new paragraph (u) of Item 402 that would require
disclosure of:
(A) The median of the annual total compensation of all employees of
the registrant, except the principal executive officer of the
registrant;
(B) the annual total compensation of the principal executive
officer of the registrant; and
(C) the ratio of the amount in (A) to the amount in (B), presented
as a ratio in which the amount in (A) equals one or, alternatively,
expressed narratively in terms of the multiple that the amount in (B)
bears to the amount in (A).
For consistency with existing Item 402 requirements, the proposed
requirements would use the defined term ``PEO'' (principal executive
officer), instead of the term ``chief executive officer'' used in
Section 953(b).\37\ PEO is defined in Item 402(a)(3) as an ``individual
serving as the registrant's principal executive officer or acting in a
similar capacity during the last completed fiscal year.'' We believe
that this consistency would simplify compliance for registrants and
would clarify how the pay ratio disclosure relates to the PEO's total
compensation figure disclosed in the summary compensation table. We
also believe that this change in terminology is consistent with Section
953(b).
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\37\ The term chief executive officer in the executive
compensation rules was replaced by the term ``principal executive
officer'' as part of the 2006 amendments to Item 402 of Regulation
S-K in order to maintain consistency with the nomenclature used in
Item 5.02 of Form 8-K. See 2006 Adopting Release, supra note 14, at
n. 326.
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Section 953(b) specifies that registrants must disclose the ratio
of the median of the annual total compensation of all employees to the
PEO's annual total compensation. We note that three commenters raised
concerns about the presentation of the pay ratio in the order set forth
in Section 953(b).\38\ These commenters noted that the customary manner
of presenting similar types of ratios would include the PEO's annual
total compensation in the numerator and the median of the annual total
compensation of all employees in the denominator and would typically be
expressed in terms of the multiple that the PEO amount bears to the
median amount (such as ``PEO pay is X times the median employee pay'').
These commenters recommended that we allow registrants to present the
ratio in this more customary manner.
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\38\ See letters from Compensia, Inc. (``For example, if the
annual total compensation of a company's chief executive officer was
$3,750,000 and the median of the annual total compensation of all
employees was $75,000, then as currently formulated, the required
disclosure would be 0.02 to 1, rather than the commonly understood
calculation of 50 to 1.''); Frederick W. Cook & Co., Inc.; and Group
of Exec. Comp. Lawyers (``For example, if CEO pay were 2 million and
the median annual compensation of all employees were $25,000, the
statute literally requires a disclosure that the median annual
compensation of all employees is 1/80 of the CEO's pay.'').
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Although Section 953(b) calls for a ratio showing the median of the
annual total compensation of all employees to the PEO's annual total
compensation, it does not specify how the ratio should be expressed. In
order to promote consistent presentation and address the potential for
confusion, the proposed pay ratio disclosure requirements specify that
the ratio must be expressed as a ratio in which the median of the
annual total compensation of all employees is equal to one, or,
alternatively, expressed narratively in terms of the multiple that the
PEO total compensation amount bears to the median of the annual total
compensation amount. For example, if the median of the annual total
compensation of all employees of a registrant is $45,790,\39\ and the
annual total compensation of a registrant's PEO is $12,260,000,\40\
then the pay ratio disclosed would be ``1 to 268'' (which could also be
expressed narratively as ``the PEO's annual total compensation is 268
times that of the median of the annual total compensation of all
employees'').
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\39\ Average salary for all occupations, U.S. Bureau of Labor
Statistics, May 2012 National Occupational Employment and Wage
Estimates United States, available at http://www.bls.gov/oes/current/oes_nat.htm#00-0000.
\40\ Derived from 2012 Average CEO at S&P 500 Index Companies,
AFL-CIO, Trends in CEO Pay, available at http://www.aflcio.org/Corporate-Watch/CEO-Pay-and-the-99/Trends-in-CEO-Pay.
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We believe that the proposed requirements for the expression of the
ratio would help to address the concerns of commenters and are
consistent with the statute. It does not appear that the order of the
ratio specified in Section 953(b) would impact investor understanding
or the usefulness, as expressed by some commenters,\41\ to investors of
the proposed pay ratio disclosure.
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\41\ The commenters asserting that Section 953(b) disclosure
would be useful to investors did not raise the order of the ratio
components as a factor that would diminish the meaningfulness of the
information. These commenters are listed at notes 155 through 165,
infra.
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Request for Comment
6. Are there any other presentation issues that companies need
guidance on or that should be clarified in the pay ratio disclosure
requirements? If so, please provide details about such issues and any
recommended guidance that should be provided.
2. Employees Included in the Identification of the Median
a. All Employees
Section 953(b) expressly requires disclosure of the median of the
annual total compensation of ``all employees.'' Consistent with that
mandate, the proposed requirements state that ``employee'' or
``employee of the registrant'' includes any full-time, part-time,
seasonal or temporary worker employed by the registrant or any of its
subsidiaries \42\ (including officers other
[[Page 60566]]
than the PEO).\43\ Therefore, under the proposed requirements, ``all
employees'' covers all such individuals. In contrast, workers who are
not employed by the registrant or its subsidiaries, such as independent
contractors or ``leased'' workers or other temporary workers who are
employed by a third party, would not be covered.\44\
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\42\ By directing the Commission to amend Item 402, we believe
that Section 953(b) is intended to cover employees on an enterprise-
wide basis, including both the registrant and its subsidiaries,
which is the same approach as that taken for other Item 402
information. See Item 402(a)(2) and Instruction 2 to Item 402(a)(3).
Because this issue was not addressed by commenters, we specifically
request comment below on this approach.
In the context of Item 402 disclosure, a subsidiary of a
registrant is an affiliate controlled by the registrant directly or
indirectly through one or more intermediaries, as set forth in the
definition of ``subsidiary'' under both Securities Act Rule 405 and
Exchange Act Rule 12b-2. Therefore, for purposes of the proposed pay
ratio disclosure, an employee would be covered by the disclosure
requirements if he or she is employed by the registrant or a
subsidiary of the registrant as defined in Rule 405 and Rule 12b-2.
\43\ Rule 405 under the Securities Act states that the term
``employee'' does not include a director, trustee or officer. The
parenthetical ``(including officers other than the PEO)'' in Item
402(u)(3) of the proposed rules is intended to clarify that
officers, as that term is defined under Rule 405, are not excluded
from the definition of employee for purposes of the proposed pay
ratio disclosure requirements.
\44\ For example, if a registrant pays a fee to another company
(such as a management company or an employee leasing agency) that
supplies workers to the registrant, and those workers receive
compensation from that other company, those workers would not be
counted as employees of the registrant for purposes of the proposed
rules.
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We note that commenters were split in their support for a rule that
would include all employees of the issuer,\45\ rather than only
covering full-time U.S. workers.\46\ Many commenters raised concerns
that the inclusion of workers located outside the United States, as
well as employees that are not permanent, full-time employees, would
render the comparison to the PEO less meaningful, while at the same
time imposing significant costs on registrants that have global
operations.\47\ According to these commenters, the international
variation in compensation arrangements and benefits, in addition to
cost-of-living differences and currency fluctuations, could distort the
comparability of employee compensation to that of a PEO based in the
United States.\48\ In addition, these commenters noted that the types
of compensation that are recorded in payroll and benefits systems
outside the United States may vary from those recorded as compensation
in the United States due to local accounting standards and tax
regulations. Because of these variations, they further suggest that
requiring registrants to recompute or adjust the output of payroll
systems to include non-payroll items that would be reportable as
compensation under Item 402 has the potential to impose significant
compliance costs.\49\
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\45\ See AFL-CIO I and letters from Americans for Financial
Reform; CtW Investment Group; Group of International Investors;
Senator Menendez; Social Investment Forum; Trillium Asset
Management; UAW Medical Benefits Trust; and Walden Asset Management.
\46\ See COEC I and letters from ABA; American Benefits Council;
Brian Foley & Co.; Group of Exec. Comp. Lawyers; NACD; Protective
Life Corporation; RILA; SCSGP; and Towers Watson.
\47\ See COEC I and letters from ABA; American Benefits Council;
Brian Foley & Co.; Group of Exec. Comp. Lawyers; NACD; Protective
Life Corporation; RILA; SCSGP; and Towers Watson.
\48\ See, e.g., letter from Group of Exec. Comp. Lawyers.
\49\ Id.
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In contrast, one commenter asserted that the provision was intended
to cover all employees of the issuer, including full-time, part-time,
U.S. and non-U.S. employees.\50\ Some commenters asserted that the
exclusion of non-U.S. and non-full-time employees would diminish the
meaningfulness of the pay ratio disclosure to investors.\51\ Some of
these commenters suggested allowing companies to present separate pay
ratios covering U.S. and non-U.S. employees, which they believed could
mitigate concerns that the comparison of the PEO to workers located
outside of the United States could distort the disclosure.\52\
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\50\ See letter from Senator Menendez, the sponsor of Section
953(b) (``Specifically, I want to clarify that when I wrote `all'
employees of the issuer, I really did mean all employees of the
issuer. I intended that to mean both full-time and part-time
employees, not just full-time employees. I also intended that to
mean all foreign employees of the company, not just U.S.
employees.'').
\51\ See AFL-CIO I and letters from Americans for Financial
Reform; CtW Investment Group; Group of International Investors;
Institute for Policy Studies; and UAW Medical Benefits Trust. But
see letter from Social Investment Forum (``[W]e acknowledge that a
comparison of a U.S. CEO's pay to the median for U.S. employees is
the most useful comparison as a factor for the compensation
committee in establishing executive pay packages.'') and letter from
Walden Asset Management (``[F]or the purposes of analyzing trends in
executive pay for U.S. executives, statistics comparing compensation
of NEOs to the median U.S. employee [are] most useful.'').
\52\ See AFL-CIO I and letters from Americans for Financial
Reform; Walden Asset Management; and Social Investment Forum (``We
recommend that the SEC require two statistics, one on pay disparity
with only U.S. workers and another for non-U.S. workers so that
investors can better study pay disparity trends and inherent
risks.'').
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We acknowledge the concerns of commenters that the inclusion of
non-U.S. employees raises compliance costs for multinational companies,
introduces cross-border compliance issues, and could raise concerns
about the impact of non-U.S. pay structures on the comparability of the
data to companies without off-shore operations. We also recognize that
differences in relative compliance costs may have an adverse impact on
competition. We have weighed these considerations and are proposing
that the requirement cover all employees without carve-outs for
specific categories of employees. Although we believe that the
inclusion of non-U.S. employees in the calculation of the median is
consistent with the statute, we have considered ways to address the
costs of compliance that commenters attribute to the provision's
coverage of a registrant's global workforce.
In particular, we are cognizant that data privacy laws in various
jurisdictions could have an impact on gathering and verifying the data
needed to identify the median of the annual total compensation of all
employees. Commenters have asserted that, in some cases, data privacy
laws could prohibit a registrant's collection and transfer of
personally identifiable compensation data that would be needed to
identify the median.\53\ We also understand that in many cases, the
collection or transfer of the underlying data is made burdensome by
local data privacy laws, but is not prohibited.
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\53\ See COEC II and letters from Davis Polk; Group of Exec.
Comp. Lawyers; and SCSGP.
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For example, we acknowledge that multinational companies based in
the United States may need to ensure compliance with data privacy
regulations in transmitting personally identifiable human resources
data (``personal data'') of European Union (``EU'') persons onto global
human resource information system networks in the United States,
sending personal data in hard copy from the European Union to the
United States, as well as personal data ``onward transfers'' to third-
party payroll, pension and benefits processors outside of the European
Union.\54\ In some EU Member States, employee consent is required,
while in others, consent may not be sufficient.\55\ Commenters also
have asserted that other jurisdictions, such as Peru, Argentina, Canada
and Japan also have data privacy laws that could be implicated by the
gathering of data for purposes of the proposed pay ratio
disclosure.\56\
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\54\ The EU Directive 95/46/EC, 1995 O.J. L 281 (European Union
Directive on the Protection of Individuals with Regard to the
Processing of Personal Data and on the Free Movement of Such Data)
sets forth the regulatory framework governing the transfer of
personal data from an EU Member State to a non-EU country.
\55\ See letter from Group of Exec. Comp. Lawyers.
\56\ Id.
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Although we are not proposing any additional accommodation to
address this concern, we believe that the flexibility afforded to all
registrants under the proposed rules could permit registrants to manage
any potential costs
[[Page 60567]]
arising from applicable data privacy laws. For example, consistent with
the proposed requirements, registrants in this situation would be
permitted to estimate the compensation of affected employees. We
request comment below on whether the proposed flexibility afforded to
registrants in selecting a method to identify the median, such as the
use of statistical sampling or other reasonable estimation techniques
and the use of consistently applied compensation measures to identify
the median employee, could enable registrants to better manage any
potential costs and burdens arising from local data privacy regulations
or if there are other alternatives that would be consistent with
Section 953(b). Commenters did not provide us with information about
applicable data privacy laws sufficient to analyze how the flexibility
allowed to all registrants under the proposed requirements could impact
the potential costs arising from such laws, and we request information
about the specific impact these matters would have on collecting or
transferring data needed to comply with the proposed requirements.
Request for Comment
7. Are there alternative ways to fulfill the statutory mandate of
covering ``all employees'' that could reduce the compliance costs and
cross-border issues raised by commenters? For example, would it be
consistent with the statute to permit registrants to exclude non-U.S.
employees from the calculation of the median? Would it be consistent
with the statute to permit registrants to exclude non-full-time
employees from the calculation of the median? If not, could these
alternatives be implemented in a way that would be consistent with the
statute?
8. Should registrants be allowed to disclose two separate pay
ratios covering U.S. employees and non-U.S. employees in lieu of the
pay ratio covering all U.S. and non-U.S. employees? Why or why not?
Should we require registrants to provide two separate pay ratios, as
requested by some commenters? \57\ What should the separate ratios
cover (e.g., should there be one for U.S. employees and one for non-
U.S. employees, or should there be one for U.S. employees and one
covering all employees)? If separate ratios are required, should this
be in addition to, or in lieu of, the pay ratio covering all U.S. and
non-U.S. employees? Would such a requirement increase costs for
registrants? Would it increase the usefulness to investors of the
disclosure?
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\57\ See AFL-CIO I and letters from Americans for Financial
Reform; Walden Asset Management; and Social Investment Forum.
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9. Please identify the applicable data privacy laws or regulations
that could impact the collection or transfer of the data needed to
comply with the proposed pay ratio requirement. Please also identify
whether there are exclusions, exemptions or safe harbors that could be
used to collect or transfer such data. Please quantify, to the extent
practicable, the impact of such laws on registrants subject to Section
953(b), such as an estimate of the number of registrants affected or
the average percentage of employees affected. How would the proposed
flexibility afforded to all registrants (i.e., selecting a method to
identify the median, the use of statistical sampling or other
reasonable estimation techniques and the use of consistently applied
compensation measures to identify the median employee) impact any
potential costs and burdens arising from local data privacy laws? In
particular, would a registrant be able to make a reasonable estimation
of the total compensation for affected employees? Would a registrant be
able to select a consistent compensation measure that is not subject to
local data privacy laws? If not, are there alternative ways to meet the
statutory mandate of Section 953(b) that would reduce the costs and
burdens arising from local data privacy laws?
10. Are there applicable local data privacy laws that would
prohibit the collection or transfer of data necessary to calculate the
annual total compensation of an employee or group of employees or the
identification of a median employee using a consistent compensation
measure? In that situation, would a registrant be able to reasonably
estimate compensation? If not, are there alternatives to the proposed
rule that would address such a situation while still being consistent
with Section 953(b)? Should any such alternatives be permitted? If an
alternative should be permitted, what limitations or conditions should
be imposed on using the alternative? For example, should registrants be
required to disclose the approximate number of employees affected and
identify the law that prohibits the collection or transfer of data?
Please discuss whether any such alternatives would significantly impact
the pay ratio disclosure.
11. Should the rule cover employees of a registrant's subsidiaries
as defined in Rule 405 and Rule 12b-2, as proposed? Are there any
situations where an entity meets the subsidiary definition but its
employees should not be included for purposes of the proposed
requirement? For example, should the rule be limited to subsidiaries
that consolidate their financial statements with those of the
registrant? Should the rule not apply to subsidiaries of certain types
of registrants, such as the portfolio companies of business development
companies? Please provide details of any recommended limitations.
12. Alternatively, should the requirements be limited to employees
that are employed directly by the registrant (i.e., excluding employees
of its subsidiaries)? Would such a limitation be consistent with
Section 953(b)? How would such a limitation affect the potential
benefits of the disclosure? Would such a limitation have other impacts,
such as incentivizing registrants to alter their corporate structure,
and, if so, are there alternative ways that the rule could address
those impacts?
13. Should Section 953(b) be read to apply to ``leased'' workers or
other temporary workers employed by a third party? Does the proposed
approach to such workers raise costs or other compliance issues for
registrants, or impact potential benefits to investors, that we have
not identified? Do registrants need guidance or instructions for
determining how to treat employees of partially-owned subsidiaries or
joint ventures? If so, what should such guidance or instructions
entail?
14. Is it likely that registrants would alter their corporate
structure or employment arrangements to reduce the number of employees
covered by the proposed requirements? How should we tailor the proposed
requirements to address such an impact?
15. Does the proposed inclusion of all employees raise competition
concerns? If so, are there some industries or types of registrants that
would be more affected than others? How should we tailor the proposed
requirements to address such concerns?
b. Calculation Date for Determining Who Is An Employee
The proposed requirement defines ``employee'' as an individual
employed as of the last day of the registrant's last completed fiscal
year.\58\ This calculation date for determining who is an employee
would be consistent with the one used for the determination of the
three most highly compensated executive officers under Item
[[Page 60568]]
402(a)(3)(iii). Two commenters expressly supported this approach.\59\
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\58\ Proposed Item 402(u)(3).
\59\ See letters from RILA (``For consistency with the
requirements of Item 402, we believe the best option is to determine
the median total annual salary of the issuer's employees as of the
close of the most recently completed fiscal year.'') and Towers
Watson (``[I]t will be necessary to fix the employee group as of a
particular date[hellip]The last day of the prior year would seem an
obvious choice.'').
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Additionally, two commenters suggested that only employees that
have been employed for the entire annual period (and as of the last day
of the fiscal year) should be covered.\60\ The composition of a
company's workforce typically changes throughout the fiscal year, and
in some industries and businesses, it can change constantly. Although
Section 953(b) requires the median calculation to cover all employees,
it does not prescribe a particular calculation date for the
determination of who should be treated as an employee for that purpose.
We believe that a bright line calculation date for determining who is
an employee would ease compliance for registrants by eliminating the
need to monitor changing workforce composition during the year, while
still providing a recent snapshot of the entire workforce.\61\ We agree
with the commenters who suggest that the most appropriate calculation
date is one that is consistent with the calculation date for
determining the named executive officers under current Item 402
requirements.
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\60\ See letters from ABA and RILA. One of these commenters
suggested that the use of the word ``annual'' in Section 953(b)
could be interpreted as limiting the scope of the provision to only
those employees that have been employed for the full fiscal year.
See letter from ABA.
\61\ We note that a requirement to track which employees have
been continuously employed for the entire annual period could
increase costs for registrants, although, as discussed below, we are
permitting registrants to annualize the compensation of certain
employees.
---------------------------------------------------------------------------
In proposing this approach, we have assumed that the potential
benefits of the disclosure mandated by Section 953(b) would not be
significantly diminished by covering only individuals employed on a
specific date at year-end, rather than covering every individual who
was employed at any time during the year. Although we believe that this
approach could help contain compliance costs for registrants, we
acknowledge that it could have other costs. For example, this approach
would not capture seasonal or temporary employees that are not employed
at year-end. This would enable a registrant with a significant amount
of such workers to calculate a median that does not fully reflect the
workforce that is required to run its business. It could also cause the
proposed requirements to be costlier for, and thereby have an anti-
competitive impact on, registrants whose temporary or seasonal workers
are employed at year-end as opposed to other times during the year.
Finally, it is possible, although commenters have asserted that it is
remote, that registrants could try to structure their employment
arrangements to reduce the number of workers employed on the
calculation date.\62\
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\62\ See AFL-CIO I (``The disclosure of compensation data under
Section 953(b) will not have unintended consequences on public
company employment decisions.'').
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Request for Comment
16. Is the proposed calculation date workable for registrants? If
not, what date should be used (e.g., the last day of the registrant's
second (or third) fiscal quarter) and why?
17. In the alternative, should registrants be permitted the
flexibility to choose a calculation date for this purpose? Why or why
not? If so, should we require the registrant to disclose why a
particular date was chosen? Should such flexibility be limited to
certain circumstances? If so, what principles should apply in
identifying those circumstances?
18. Is it appropriate to limit the scope of covered employees to
those who were employed on the last day of the registrant's fiscal
year, as proposed? Why or why not? Is consistency with other Item 402
disclosure important in this context? Would this approach ease
compliance costs for registrants? What impact would this calculation
date have on registrants that employ seasonal workers and would the
exclusion of seasonal workers not employed on the calculation date
likely have an impact on the median or the ratio? Please provide data,
such as an estimate of the number of registrants that employ seasonal
workers and the average percentage of seasonal employees that would
likely be excluded. Is it likely that registrants might structure their
employment arrangements to reduce the number of workers employed on the
calculation date? Are there other costs that would be incurred using
this approach that we should consider? Would the proposed calculation
date have a meaningful impact on the potential usefulness of the
disclosure for investors? Are there other ways to deal with defining
the scope of covered employees that are more effective at reducing
costs and providing meaningful disclosure?
19. Should registrants be required to include any individual who
was employed at any time during the year, or for some minimum amount of
time (and if so, what amount of time) during the year?
20. Should the rule only apply to employees employed for the full
fiscal year? Why or why not?
c. Adjustments for Certain Employees
Some commenters raised questions about how to treat employees who
were not employed during the entire fiscal year and recommended that
companies be permitted to annualize the compensation for these
employees in order to more accurately reflect the employment
relationship.\63\ We agree that in instances where the employment
relationship is permanent, and not temporary or seasonal, registrants
should be permitted to annualize the total compensation for an employee
who did not work for the entire year, such as a new hire or an employee
who took an unpaid leave of absence during the period.\64\
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\63\ See, e.g., letters from Davis Polk; Frederick W. Cook &
Co.; Social Investment Forum; RILA, Walden Asset Management; and
Trillium Asset Management.
\64\ RILA noted employees on leave under the Family and Medical
Leave Act of 1993 [29 U.S.C. 2601 et seq.] and employees called for
active military duty as common examples.
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Accordingly, the proposed requirements include an instruction that
states that total compensation may be annualized for all permanent
employees (other than those in temporary or seasonal positions) who
were employed for less than the full fiscal year.\65\ We are not
proposing to require registrants to perform this type of adjustment,
however, because we do not believe that the costs of requiring
companies to make an extra calculation would be justified.
---------------------------------------------------------------------------
\65\ By use of the term ``employee,'' this proposed instruction
would apply to individuals who were employed on the last day of the
fiscal year (the calculation date).
---------------------------------------------------------------------------
The proposed instruction is limited to permanent employees. In
addition, as proposed, the instruction would not permit a registrant to
annualize some eligible employees and not others. As discussed below,
this instruction also would not permit adjustments that would cause the
ratio to not reflect the actual composition of the workforce, such as
annualizing the compensation of seasonal or temporary workers.
Depending on the facts and circumstances, it could be appropriate for a
registrant to annualize the compensation for a permanent part-time
worker who has only worked a portion of the year (such as an employee
who is permanently employed for three days a week and who took an
unpaid leave
[[Page 60569]]
of absence under the Family and Medical Leave Act). In such a case, the
adjustment should reflect compensation for the employee's part-time
schedule over the entire year, but should not adjust the part-time
schedule to a full-time equivalent schedule.
In proposing this approach, we have assumed that this annualizing
adjustment would not significantly diminish the potential usefulness of
the disclosure mandated by Section 953(b). For example, we would not
expect that annualizing the salary of a permanent new hire would impact
the potential ability of an investor to use the pay ratio disclosure as
an indicator of employee morale or to gain an understanding of a
registrant's investment in human capital, which some commenters have
identified as potential benefits of the disclosure under Section
953(b).\66\ We also note that some of the commenters that support
Section 953(b) disclosure were also supportive of allowing annualizing
adjustments for employees employed for less than the full year.\67\
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\66\ See AFL-CIO I and letters from; Calvert Investment
Management; CtW Investment Group; Group of International Investors;
Americans for Financial Reform; Drucker Institute; Institute for
Policy Studies; Social Investment Forum; Trillium Asset Management;
and UAW Retiree Medical Benefits Trust.
\67\ See letters from Social Investment Forum and Trillium Asset
Management.
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By permitting but not requiring registrants to annualize
compensation for these employees, the comparability of disclosure
across companies could be reduced. As discussed elsewhere in this
release,\68\ we do not believe that precise comparability or conformity
of disclosure from registrant to registrant is necessarily achievable
due to the variety of factors that could cause the ratio to differ,
and, accordingly, we do not believe that the costs associated with
attempting to promote precise comparability in this respect would be
justified.
---------------------------------------------------------------------------
\68\ See Section IV of this release.
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Although we are proposing to permit the annualizing adjustments
described above, we believe that some of the assumptions or adjustments
suggested by commenters for calculating the annual total compensation
of employees might present a distorted picture of the actual
composition of a registrant's workforce or compensation practices. We
believe that certain adjustments or assumptions, such as full-time
equivalent adjustments for part-time workers, annualizing adjustments
for temporary or seasonal employees, and cost-of-living adjustments for
non-U.S. workers, would cause the median to not be reasonably
representative of the registrant's actual employment and compensation
arrangements for its workforce during the period and could, therefore,
diminish the potential usefulness of the disclosure. Therefore, the
proposed disclosure requirements would not permit such adjustments.
For example, under the proposed rules, a retailer that hires a
seasonal worker at minimum wage for three months during the holiday
season would need to calculate annual total compensation for that
employee as three months at $7.25/hour ($3,480) and could not
``annualize'' the wages as if the seasonal worker was paid for a full
12 months of work ($13,920). In this example, if the seasonal worker
was not still employed by the registrant on the last day of the
registrant's fiscal year, the registrant would exclude that worker from
the calculation of the median.\69\
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\69\ See proposed Item 402(u)(3).
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We understand that some commenters believe that these types of
adjustments could allow for a more meaningful comparison between the
compensation of the PEO and that of the registrant's employees,
especially where those employees are not full-time, U.S. employees.\70\
We are concerned, however, that adjusting for these variables could
distort an understanding of the registrant's compensation practices.
For example, if a registrant with a workforce primarily located in
jurisdictions with a lower cost of living than the United States
adjusted the annual total compensation of those employees using
purchasing power parity statistics, the median of the annual total
compensation of all its employees would likely increase. Likewise, if a
registrant with a workforce that is primarily part-time or seasonal
adjusted the annual total compensation of those employees using full-
time equivalent adjustments, the median of the annual total
compensation of all its employees would likely increase. In these
scenarios, the registrant's pay ratio would show less of a disparity in
compensation levels, while its labor costs would appear to be higher
than they actually were. We believe that, rather than making the
disclosure more meaningful, such a result could diminish the potential
usefulness of the disclosure because the ratio would show a less
accurate reflection of actual workforce compensation and could permit a
registrant to alter the reported ratio to achieve a particular
objective with the ratio disclosure.
---------------------------------------------------------------------------
\70\ See letters from American Benefits Council; Americans for
Financial Reform; Davis Polk; Frederick W. Cook & Co., Inc.; RILA;
Social Investment Forum; Trillium Asset Management; and Walden Asset
Management.
---------------------------------------------------------------------------
Request for Comment
21. Is it appropriate to allow registrants to annualize the
compensation for non-seasonal, non-temporary employees that have only
worked part of the year, as proposed? Why or why not? Would allowing
annualizing the compensation for these employees likely impact the
median or the pay ratio?
22. In the alternative, should registrants be required to annualize
the compensation for these employees? Why or why not?
23. Should we require all registrants that rely on the proposed
instruction to annualize compensation for these employees to disclose
that they have done so (or only when the adjustment is material, as
would be required under the proposed instruction for disclosure of
material assumptions, adjustments and estimates)? Why or why not? If
so, what should the disclosure entail? For example, should the
registrant only be required to state that it has relied on the
instruction, or should it also be required to discuss the number or
percentage of employees for which compensation was annualized?
24. Should we allow full-time equivalent adjustments for part-time
employees and temporary or seasonal employees, as recommended by some
commenters? \71\ Should we allow cost-of-living adjustments for non-
U.S. employees as recommended by some commenters? \72\ If so in either
case, please explain why. In particular, please address the potential
concern that these kinds of adjustments could cause the ratio to be a
less accurate reflection of actual workforce compensation. Is there an
alternative way to mitigate this concern?
---------------------------------------------------------------------------
\71\ See letters from Americans for Financial Reform; Frederick
W. Cook & Co., Inc.; and RILA.
\72\ See generally letter from CtW Investment Group.
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3. Identifying the Median
Commenters have suggested that a potential purpose of the pay ratio
disclosure is to allow investors to evaluate the annual total
compensation of the PEO within the context of the registrant's internal
compensation practices.\73\ We note that Congress
[[Page 60570]]
specifically chose ``median'' as the point of comparison for Section
953(b), rather than the average,\74\ and, therefore, the proposed pay
ratio requirements also require the median to be used.
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\73\ See letter from Senator Menendez (``I wrote this provision
so that investors and the general public know whether public
companies' pay practices are fair to their average employees,
especially compared to their highly compensated CEOs.'').
See also Representative Keith Ellison, et al. (``House Letter'')
and Senator Robert Menendez et al. (``Senate Letter'') (noting that
Section 953(b) ``requires disclosure by public companies of the
ratio between the compensation of their CEO and the typical worker
at that company . . . and while comprehensive data will not be
available until this provision takes effect, there is no question
that CEO pay is soaring compared to that of average workers.'').
\74\ Some commenters raised the possibility of using an average
rather than a median, which they believed would reduce the costs of
compliance. See, e.g., letters from American Benefits Council and
Brian Foley & Co.
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Section 953(b) does not expressly set forth a methodology that must
be used to identify the median, nor does it mandate that the Commission
must do so in its rules. In order to allow the greatest degree of
flexibility while remaining consistent with the statutory provision,
the proposed requirements do not specify any required calculation
methodologies for identifying the median. Instead, we are providing
instructions and guidance designed to allow registrants to choose from
several alternative methods to identify the median, so that they may
use the method that works best for their own facts and circumstances.
As discussed in detail below, we believe that even a registrant with a
large number of employees should be able to provide the proposed
disclosure in a relatively cost-efficient manner based on statistical
sampling, estimates and the use of any consistently applied
compensation measure to identify the median. For instance, an employer
with a large number of employees could take a random sample of
employees (as discussed further below, the size of the sample needed
would typically depend on the overall distribution of compensation
across employees) and determine the annual cash compensation, or any
other consistently applied compensation measure, for those employees.
Identifying the median employee would not necessarily require a
determination of exact compensation amounts for each employee in the
sample. The registrant could exclude the employees in the sample that
have extremely low or extremely high pay because they would fall on
either end of the spectrum of pay and, therefore, not be the median
employee. Once the registrant identifies the median employee based on
the selected compensation measure applied to each remaining employee in
the sample, the registrant would calculate that employee's annual total
compensation in accordance with Item 402(c)(2)(x) and disclose that
amount as part of the pay ratio disclosure.
We believe that allowing a registrant to choose a method that works
best for its particular facts and circumstances should help registrants
to comply with the disclosure requirements in a relatively cost-
efficient manner while still achieving the purpose of Section 953(b).
As such, the proposed requirements permit registrants to identify the
median by using a number of different methods, such as calculating
total compensation for each employee using Item 402(c)(2)(x), using
reasonable estimates, and/or statistical sampling.\75\ We are not
prescribing what a reasonable estimate would entail because we believe
that would necessarily depend on the registrant's particular facts and
circumstances. In addition, the proposed rules do not prescribe
specific estimation techniques or confidence levels for an estimated
median because we believe that companies would be in the best position
to determine what is reasonable in light of their own employee
population and access to compensation data. As discussed in Section
II.C.5. below, we are proposing to require that the methodology and any
material assumptions, adjustments or estimates used to identify the
median be briefly disclosed and consistently used, and any estimated
amounts be clearly identified as such. We are proposing this approach
because we believe that the appropriate and most cost effective
methodology would necessarily depend on a registrant's particular facts
and circumstances, including, among others, such variables as:
---------------------------------------------------------------------------
\75\ We discuss the specific recommendations of commenters
regarding the use of statistical sampling techniques below in this
section.
---------------------------------------------------------------------------
The size and nature of the workforce;
the complexity of the organization;
the stratification of pay levels across the workforce;
the types of compensation the employees receive;
the extent that different currencies are involved;
the number of tax and accounting regimes involved;
the number of payroll systems the registrant has and the
degree of difficulty involved in integrating payroll systems to readily
compile total compensation information for all employees.
We believe that these likely are the same factors that would cause
substantial variation in the costs of compliance. By not prescribing
specific methodologies that must be used, the proposed requirements
would allow registrants to choose a method for identifying the median
that is appropriate to the size, structure and compensation practices
of their own businesses, including identifying the median employee
based on any consistently applied compensation measure. In addition,
this flexibility could enable registrants to manage compliance costs
more effectively. We also believe that, by allowing registrants to
better manage costs, a flexible approach could mitigate, to some
extent, any potential negative effects on competition arising from the
mandated requirements.\76\ We recognize, however, that a flexible
approach could increase uncertainty for registrants that prefer more
specificity on how to comply with the proposed rules, particularly for
those registrants that do not use statistical analysis in the ordinary
course of managing their businesses.
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\76\ See the discussion in Section IV of this release.
---------------------------------------------------------------------------
We acknowledge that commenters provided a variety of
recommendations for identifying the median aimed at reducing compliance
costs or providing a roadmap for registrants to use to ensure
compliance. For example, one commenter suggested that the Commission
should establish safe harbor methodologies that authorize registrants
to identify the median using a sampling method that is reasonably
representative of its workforce, that could be certified by an
independent expert or that exceeds a minimum number or percentage of
the issuer's total employees.\77\ Another commenter suggested that the
Commission prescribe a ``menu of alternatives'' from which a registrant
may select the calculation method that works best in its situation to
facilitate disclosure that is meaningful while minimizing data
collection costs; registrants would then be required to explain the
method and assumptions used.\78\ Several commenters recommended that
registrants be permitted to use reasonable estimation techniques to
identify median compensation for all employees and to determine all
forms of compensation, including annual changes in pension value.\79\
In considering these alternatives, we favored the recommendations that
did not call for prescriptive requirements in order to avoid the
additional costs that a less flexible approach could impose. In
particular, we believe that the use of reasonable estimates could
afford
[[Page 60571]]
registrants flexibility without imposing prescriptive requirements that
may not be workable for all types of registrants. In addition, we
highlight below two alternatives recommended by commenters that would
be permitted under the proposal.
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\77\ See American Benefits Council.
\78\ See letter from Group of Exec. Comp. Lawyers.
\79\ See COEC I and letters from Meridian Compensation Partners,
LLC and SCSGP.
---------------------------------------------------------------------------
Use of Statistical Sampling. Two commenters suggested that
companies should be permitted to identify the median through a sampling
technique or other statistically reasonable method.\80\ Two other
commenters also provided views on statistical sampling. One commenter,
based on a survey of 95 registrants, disagreed that statistical
sampling methodology would reduce the compliance burden for companies
because of the wide variability in pay practices and recordkeeping and
asserted that requiring statistical sampling would introduce further
complexity.\81\ Another commenter supported the use of statistical
sampling and described a random sampling technique that could yield an
accurate and unbiased estimate of a registrant's actual median
compensation using a relatively small sample size.\82\ This commenter
asserted that more complicated procedures, such as stratified sampling,
would be unnecessary, regardless of company size, how many countries it
operates in or how many subsidiaries it has.\83\
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\80\ See AFL-CIO II (``The SEC can minimize issuer compliance
costs by permitting the use of random statistical sampling to
calculate the median. . . . Because the median is a statistical term
that is frequently used to describe a set of observations randomly
drawn from a larger population, it is reasonable for the SEC to
permit issuers to sample their employee populations to calculate the
median.'') and letter from Davis Polk (``We recommend that the
Commission permit companies to identify a single employee, via a
sampling technique or other statistically reasonable method, among
its employee base as the representative for median compensation.'').
\81\ See COEC II (noting that sampling ``would introduce
additional complexity by requiring the development of a methodology
to determine the appropriate stratification of the sample
population, develop and assess the appropriate confidence intervals
to enhance the reliability of the data collected and ensure that
comparable forms of compensation are included across the varying pay
practices that are common in different regions of the world.'').
\82\ See letter from M. Ohlrogge.
\83\ The commenter assumed that any compensation distribution is
lognormal and that the variance of compensation distribution within
a company is given as a constant number. We believe, however, that
this may not be a practical assumption because, as described in
detail in Section IV of this release, each registrant would have a
company-specific compensation variance, which is impossible to be
generally assumed. In addition, registrants that have multiple
business or geographical segments may not necessarily have lognormal
distribution of wages.
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As we discuss in more detail in the economic analysis section of
this release, the variance of underlying compensation distributions
(that is, how widely employee compensation is spread out or distributed
around the mean) can materially affect the sample size needed for
reasonable statistical sampling.\84\ Variation in the types of
employees at a registrant across business units and geographical
regions can also add complexity to the sampling procedure. While we
generally agree that a relatively small sample size would be
appropriate in certain situations, a reasonable determination of sample
size would ultimately depend on the underlying distribution of
compensation data.\85\ As a result, compliance costs would vary across
registrants according to the characteristics of their compensation
distributions. Nevertheless, we believe that permitting registrants to
use statistical sampling may lead to a reduction in compliance costs as
compared to other methods of identifying the median.
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\84\ Our analysis, further discussed in Section IV of this
release, uses mean and median wage estimates from the Bureau of
Labor Statistics (BLS) at the 4-digit NAICS industry level (290
industries) and assumes a lognormal wage distribution, a 95%
confidence interval with 0.5% margin of error. The analysis focuses
on the registrants that have a single business or geographical unit.
The analysis also assumes that when the sampling is implemented, the
sampling method would be a true random sampling, i.e., it would not
be biased by region, occupation, rank, or other factor. In our
analysis, the appropriate sample size for the registrants with a
single business or geographical unit varies between 81 and 1,065
across industries, with the average estimated sample size close to
560.
\85\ We believe that reasonable estimates of the median for
registrants with multiple business lines or geographical units could
be arrived at through more than one statistical sampling approach.
All approaches, however, require drawing observations from each
business or geographical unit with a reasonable assumption on each
unit's compensation distribution and inferring the registrant's
overall median based on the observations drawn. Certain cases may
not easily generate confidence intervals around the estimates or
prescribe the appropriate minimum sample size. See Section IV of
this release for further discussion.
---------------------------------------------------------------------------
We note that the identification of a median employee does not
necessarily require a determination of exact compensation amounts for
every single employee included in the sample. A registrant could,
rather than calculating exact compensation, identify the employees in
the sample that have extremely low or extremely high pay and that would
therefore fall on either end of the spectrum of pay. Since identifying
the median involves finding the employee in the middle, it may not be
necessary to determine the exact compensation amounts for every
employee paid more or less than that employee in the middle. Instead,
just noting that the employees are above or below the median would be
sufficient for finding the employee in the middle of the pay spectrum.
Use of a Consistently Applied Compensation Measure. Several
commenters raised concerns about expected compliance costs arising from
the complexity of the ``total compensation'' calculation under Item
402(c)(2)(x) and, in particular, the determination of total
compensation in accordance with Item 402(c)(2)(x) for employees when
identifying the median.\86\ To address these concerns, several
commenters recommended allowing companies to use total direct
compensation (such as annual salary, hourly wages and any other
performance-based pay) or cash compensation to first identify a median
employee and then calculate that median employee's annual total
compensation in accordance with Item 402(c)(2)(x).\87\ We agree that
this approach would provide a workable identification of the median for
many registrants, and we expect that the costs of compliance would be
reduced if registrants were permitted to identify the median using a
less complex, more readily available figure, such as salary and wages,
rather than total compensation as determined in accordance with Item
402(c)(2)(x). This approach could also help reduce costs for
registrants that are not able to reduce costs using statistical
sampling techniques.\88\ Because some commenters have indicated that
using cash compensation could be just as burdensome to calculate for
registrants with multiple payroll systems in various countries,\89\ we
are not proposing to require companies to use a specific compensation
measure, like cash compensation or total direct compensation, when they
are identifying the median employee. Instead, we believe that
registrants would be in the best position to select a compensation
measure that is appropriate to their own facts and
[[Page 60572]]
circumstances and that a consistently applied compensation measure
would result in a reasonable estimate of a median employee at a
substantially reduced cost. Therefore, the proposed instructions would
permit a registrant to identify a median employee based on any
consistently applied compensation measure, such as compensation amounts
reported in its payroll or tax records, as long as the registrant
briefly discloses the measure that it used (e.g. ``We found the median
using salary, wages and tips as reported to the U.S. Internal Revenue
Service on Form W-2 and the equivalent for our non-U.S.
employees.'').\90\
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\86\ See, e.g., COEC I and II and letters from American Benefits
Council; Brian Foley & Co.; Group of Exec. Comp. Lawyers; Group of
Trade Associations; Protective Life Corporation; SCSGP; and Towers
Watson.
\87\ See AFL-CIO II and letters from ABA; American Benefits
Council; Americans for Financial Reform; CtW Investment Group;
Protective Life Corporation; RILA; and SCSGP.
\88\ Registrants would be permitted to use a consistently-
applied compensation measure to identify the median employee
regardless of whether they use statistical sampling.
\89\ See COEC II (asserting that cash compensation is not an
appropriate substitute since non-cash remuneration makes up a
substantial part of compensation in certain parts of the world, and
cash compensation would still need to be gathered manually for many
registrants due to variances in payroll systems and tax regimes).
\90\ As discussed in Section II.C.4 below, a registrant using a
consistently applied compensation measure for purposes of
identifying the median would be required to calculate and disclose
the annual total compensation for that median employee using the
definition of total compensation in Item 402(c)(2)(x).
---------------------------------------------------------------------------
We also understand from commenters that the annual period used for
payroll or tax recordkeeping can sometimes differ from the registrant's
fiscal year, and, therefore, for purposes of determining the annual
compensation amounts when using a consistently applied compensation
measure, the proposed instructions also permit the registrant to use
the same annual period that is used in the payroll or tax records from
which the compensation amounts are derived. We are not proposing to
define or limit what would qualify as payroll or tax records. We note,
however, that this proposed accommodation is intended to be construed
broadly enough to allow registrants to use information that they
already track and compile for payroll or tax purposes. We are persuaded
by commenters who asserted that permitting companies to use
compensation information in the form that it is maintained in their own
books and records would reduce compliance costs without appreciably
affecting the quality of the disclosure.
Two commenters suggested that registrants should be permitted to
calculate the ratio using employee earnings estimates available through
the U.S. Department of Labor's Bureau of Labor Statistics (``BLS''),
which they believed would reduce costs for registrants and promote
comparability across companies.\91\ Although we agree that such an
approach would greatly reduce the compliance burden for registrants, we
do not believe it would be consistent with Section 953(b). In addition,
we do not believe it would be useful for the Commission to require
registrants to compile and disclose information that investors are
already able to calculate using publicly available information.
---------------------------------------------------------------------------
\91\ See COEC II and letter from Group of Exec. Comp. Lawyers.
One of these commenters asserts that using BLS statistics would
likely result in ratio with a higher disparity than comparing PEO
compensation to median employee compensation, and, ``if a company
decides to avoid the cost and other burdens of an actual median
computation by publishing a statistic that shows a higher disparity,
it should be allowed to do so.'' See letter from Group of Exec.
Comp. Lawyers.
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Although the proposed flexible approach could reduce the
comparability of disclosure across registrants, we do not believe that
precise conformity or comparability of the ratio across companies is
necessary. Some commenters believe that a primary benefit of the pay
ratio disclosure would be providing a company-specific metric that
investors could use to evaluate the PEO's compensation within the
context of his or her own company,\92\ rather than a benchmark for
compensation arrangements across companies. Accordingly, we do not
believe that improving the comparability of the disclosure across
companies by mandating a specific method for identifying the median
would be justified in light of the costs that would be imposed on
registrants by a more prescriptive rule. We do not believe that
mandating a particular methodology would necessarily improve the
comparability across companies because of the numerous other factors
that could also cause the ratios to be less meaningful for company-to-
company comparison.\93\ We believe that greater comparability across
companies could increase the likelihood that a registrant's competitors
could infer proprietary or sensitive information about the registrant's
business,\94\ which could increase the costs to registrants of the
proposed requirements.
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\92\ See, e.g., Senate Letter; House Letter; and AFL-CIO I; and
letters from CtW Investment Group and UAW Retiree Medical Benefits
Trust.
\93\ These factors could include, among others, variations in
the way companies organize their workforces to accomplish similar
tasks; variations in pay between companies for identical tasks;
differences in the geographical distribution of employees (domestic
or international, as well as in high- or low-cost areas); degree of
vertical integration; reliance on contract and outsourced workers;
ownership structure; and differences in industry and business type.
\94\ Where pay ratio information is more ``precisely''
comparable between companies in the same industry, information about
median pay could allow inferences about the business, such as how a
company and its workforce is structured, what its compensation
practices are, its labor costs and use of outsourcing.
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Finally, we recognize that allowing registrants to select a
methodology for identifying the median, including identifying the
median employee based on any consistently applied compensation measure
and allowing the use of reasonable estimates, rather than prescribing a
methodology or set of methodologies, could permit a registrant to alter
the reported ratio to achieve a particular objective with the ratio
disclosure, thereby potentially reducing the usefulness of the
information. We believe that requiring the use of a consistently
applied compensation measure should lessen this concern. We request
comment on whether the flexibility of the proposed requirements would
allow a registrant to distort its pay ratio in material respects.
Request for Comment
25. Should registrants be permitted, as proposed, to choose a
method to identify the median that is workable for the company based on
its particular facts and circumstances? Will registrants be able to use
the proposed approach to identify the median? Do registrants need
additional guidance or instructions to be able to use the proposed
approach to identify the median? If so, what additional guidance is
needed?
26. Do registrants need further guidance on the permitted use of
reasonable estimates in identifying the median? If so, what should that
guidance be? In the alternative, should the proposed requirement
expressly disallow the use of reasonable estimates? Please explain how
the usefulness of the pay ratio disclosure would be affected by the use
of reasonable estimates. Should the rule specify requirements for
statistical sampling or any other estimation methods, such as
appropriate sample sizes for reasonable estimates or requiring the
results to meet specified confidence levels? Why or why not? If so,
what should the requirements be? For example, should the estimate have
at least a 90% (or 85%, or some other percentage) confidence level?
27. Are registrants likely to use statistical sampling to identify
the median? How would registrants conduct the sampling? Would it be
outsourced or conducted by internal personnel? How much would
statistical sampling cost? Would the use of statistical sampling
address costs relating to the inclusion of non-U.S. employees in the
calculation?
28. Should registrants be permitted, as proposed, to identify the
median employee using a consistently applied compensation measure? Why
or why not? How would this impact compliance costs? Would this address
costs arising from having employees in multiple jurisdictions and
payroll systems? Should there be any limitations on the
[[Page 60573]]
types of compensation measures that can be used? What compensation
measure would registrants likely use for this purpose? How would that
measure compare to total compensation calculated under Item
402(c)(2)(x)? How would the use of that measure affect the median (e.g.
would it likely generate a median that is a reasonable approximation of
the median of Item 402(c)(2)(x) total compensation)? What impact, if
any, would the use of a consistently applied compensation measure have
on the usefulness of the pay ratio disclosure? How could the proposed
rules be changed to address any such impact? Are there any
circumstances where it would be inappropriate to permit a registrant to
use a consistently applied compensation measure to identify the median
employee?
29. Should we, as proposed, permit registrants to use the time
period that is used for payroll or tax recordkeeping when identifying
the median employee based on consistently applied compensation
measures, whether or not the time periods correspond with the last
completed fiscal year or the tax year? Why or why not? Are there any
parameters that should be set, such as requiring the period to end
within a designated amount of time before the filing of the proxy or
information statement relating to the annual meeting of shareholders or
written consents in lieu of such meeting or annual report, as
applicable, in which updated pay ratio information is required (such as
3 months, 6 months, 9 months or 12 months) or, alternatively, a period
ending no more than 9 months (or 12 months or another amount of time)
following the last annual meeting of shareholders? Should such
flexibility only be permitted where the registrant's fiscal year-end is
different from calendar year-end? Are we correct that this
accommodation would decrease costs for registrants? Would the use of
different time periods for different employees have an adverse impact
on the disclosure? Would such flexibility meaningfully reduce the
comparability of the median of the annual total compensation of all
employees to the annual total compensation of the PEO, or otherwise
impair the potential usefulness to investors of the pay ratio
disclosure?
30. Could the flexibility of the proposed requirements allow a
registrant to distort its pay ratio in material respects? If so,
explain how.
31. Is our belief correct that allowing flexibility in identifying
the median could minimize the potential anti-competitive impact of the
costs of compliance? Would the proposed flexibility address other
impacts on competition that could arise from the proposed requirements?
Could a registrant's competitors infer proprietary or sensitive
information about a company's business operations, strategy or labor
cost-structure from the disclosure of the median of the annual total
compensation of all employees? If so, how can this impact be addressed?
32. Are there alternative ways to satisfy the statutory mandate?
Please be specific.
4. Determination of Total Compensation
As mandated by Section 953(b), the proposed requirements would
define ``total compensation'' by reference to Item 402(c)(2)(x). We
note that Section 953(b) refers to Item 402(c)(2)(x) as in effect on
the day before the date of enactment of the Dodd-Frank Act, or July 20,
2010. No substantive amendments have been made to Item 402(c) since
that date.\95\ Therefore, the proposed requirements would refer to Item
402(c)(2)(x), without reference to the rules in effect on July 20,
2010. We expect to address the impact on the proposed rules of any
future amendments to Item 402(c)(2)(x) if and when such future
amendments are considered.
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\95\ There have been technical amendments since that date. In
August 2011, certain references to U.S. GAAP requirements in the
instructions to Item 402 were updated to reflect the FASB's
Accounting Standards Codification. See Technical Amendments to
Commission Rules and Forms Related to the FASB's Accounting
Standards Codification, Release No. 33-9250 (Aug. 8, 2011) [76 FR
50117].
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Commenters have observed that, because of the complexity of the
requirements of Item 402(c)(2)(x), registrants typically compile
information required by Item 402(c) manually for the named executive
officers, which they have stated takes significant time and
resources.\96\ To address this issue, some of these commenters made
various recommendations to simplify the total compensation definition,
such as including only cash compensation, only cash compensation and
equity-based compensation, or only compensation that is reported to the
U.S. Internal Revenue Service on Form W-2.\97\ As discussed above, we
are proposing to allow registrants to identify the median in a variety
of ways, including by identifying the median employee using any
consistently applied compensation measure and then determining and
disclosing the Item 402(c)(2)(x) total compensation for that median
employee. As proposed, a registrant would be permitted to calculate
total compensation for all employees in accordance with Item
402(c)(2)(x), but would only be required to calculate and disclose such
information for the median employee.\98\ Because the total compensation
calculation using Item 402(c)(2)(x) would only be required for one
additional employee (the median employee), we are not proposing to
simplify the total compensation definition that is required to be used
to disclose the median employee compensation and the ratio.
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\96\ See letter from Davis Polk. See also letter from R.
Morrison.
\97\ See COEC I and letters from American Benefits Council;
Brian Foley; Group of Exec. Comp. Lawyers; Protective Life
Corporation; SCSGP; and Towers Watson.
\98\ Given the specificity of the definition used in Section
953(b), the proposed requirements incorporate the Item 402(c)(2)(x)
definition of total compensation as it is set forth in Section
953(b) for purposes of disclosing the median of the annual total
compensation of employees and the pay ratio.
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Some commenters have recommended that registrants be permitted to
use reasonable estimates to determine the value of the various elements
of total compensation for employees in accordance with Item
402(c)(2)(x).\99\ We believe that the use of reasonable estimates would
not diminish the potential usefulness of the pay ratio disclosure as a
general point of comparison of PEO pay to employee pay within a
company, and we believe that the use of reasonable estimates would be
consistent with Section 953(b). Furthermore, we expect that
requirements that allow registrants to use reasonable estimates in
these calculations would impose lower compliance costs than
requirements that prohibit the use of estimates. Accordingly, the
proposed pay ratio requirements permit the use of reasonable estimates
in determining any elements of total compensation of employees other
than the PEO under Item 402(c)(2)(x), including when disclosing the
annual total compensation of the median employee identified using a
consistently applied compensation measure. If a registrant uses
estimates, instructions to the proposed rule require that the resulting
disclosure would need to be clearly identified as an estimated amount
and include a brief description of the estimation methods used by the
registrant.\100\ In using an estimate for annual total compensation (or
for a particular element of total compensation), a registrant should
have a reasonable basis to conclude that the estimate approximates the
actual amount of compensation under Item
[[Page 60574]]
402(c)(2)(x) (or for a particular element of compensation under Item
402(c)(2)(iv)-(ix)) awarded to, earned by or paid to those employees.
We are not prescribing what a reasonable basis would entail because we
believe that would necessarily depend on the registrant's particular
facts and circumstances.
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\99\ See COEC I and letters from ABA and SCSGP.
\100\ See proposed Instruction 2 to Item 402(u).
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Because the requirements of Item 402(c)(2)(x) were promulgated to
address executive officer compensation, rather than compensation for
all employees, we have considered the difficulties that registrants
could face in applying the requirements of Item 402(c)(2)(x) to
employees that are not executive officers.\101\ First, to assist
registrants in applying the definition of ``total compensation'' to an
employee that is not an executive officer, the proposed requirements
state that, in determining the total compensation of employees in
accordance with Item 402(c)(2)(x), references to ``named executive
officer'' in Item 402 and the related instructions may be deemed to
refer instead, as applicable, to ``employee.'' Also, the proposed
requirements clarify that, for non-salaried employees, references to
``base salary'' and ``salary'' in Item 402 may be deemed to refer
instead, as applicable, to ``wages plus overtime.'' \102\
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\101\ See letter from RILA (``From a practical prospective, Item
402 raises a host of complexities when applied to an issuer's
overall employee population for purposes of calculating the [pay
ratio].'').
One commenter drew an analogy to the U.S. Treasury regulations
[31 CFR Part 30] that required TARP recipients to identify their 100
most highly compensated employees using the definition of total
compensation under Item 402; however, the Treasury regulations
notably permitted the exclusion of actuarial increases in pension
plans and above market earnings on deferred compensation. See letter
from ABA (``In our experience, TARP companies found that calculating
`total compensation' to identify their 100 highest paid employees
required weeks of work, and presented numerous interpretive issues
that do not typically arise when calculating total compensation of
executive officers.'').
\102\ Letter from RILA (noting `` `salary' and `bonus'
presumably would translate into total hourly wages plus overtime for
non-salaried employees'').
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In addition, we understand that certain elements of total
compensation may raise particular valuation issues that do not
typically arise in the context of compensation for named executive
officers. For example, in the case of pension benefits provided to
union members in connection with a multi-employer defined benefit
pension plan,\103\ commenters have noted that the participating
employers typically do not have access to information (or do not have
access in the timeframe needed to compile pay ratio disclosure) from
the plan administrator that would be needed to calculate the aggregate
change in actuarial present value of the accumulated benefit of a
particular individual under the plan.\104\ In such circumstances, we
believe it would be appropriate for a registrant to use reasonable
estimates as described above in determining an amount that reasonably
approximates the aggregate change in actuarial present value of an
employee's defined pension benefit for purposes of Item
402(c)(2)(viii).
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\103\ See letter from RILA (noting ``in cases involving multi-
employer plans for union employees, the availability of the required
information may be a significant issue when the plan is not required
to provide such data on each beneficiary''). See also, J. Goldstein,
Cost Benefit Analysis of Pay Disparity Disclosure, Oct. 16, 2010,
available at http://blogs.law.harvard.edu/corpgov/2010/10/16/cost-benefit-analysis-of-pay-disparity-disclosure/.
\104\ Section 101(k) and related regulations under the Employee
Retirement Income Security Act of 1974, as amended [21 U.S.C.
1021(k)], govern the requirements for plan administrators to provide
actuarial reports relating to the plan. Under the rules, a plan
administrator has thirty days to respond to a request for an
actuarial report, and it is not required to provide access to any
reports that have not been its possession for more than thirty days.
In addition, the rules prohibit the disclosure of reports that
include information that the plan administrator reasonably
determines to be ``personally identifiable information regarding a
plan participant, beneficiary . . . or contributing employer.'' See
29 CFR 2520.101-6.
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Commenters have also mentioned that interpretive questions will
likely arise for registrants with non-U.S. employees in terms of how to
value certain unique types of employee compensation given only in
certain countries,\105\ including personal benefits such as housing.
Because we understand that compensation arrangements vary significantly
both in the United States and globally, we do not believe it would be
practicable for purposes of the proposed requirements to provide
detailed, prescriptive rules on valuing particular types of employee
compensation. We note, however, that the instructions to Item
402(c)(2)(ix) would permit the exclusion of personal benefits as long
as the total value for the employee is less than $10,000 and that
personal benefits should be valued on the basis of the aggregate
incremental cost to the registrant.\106\ In calculating any such
amounts for purposes of determining the total compensation of employees
other than the PEO, we are proposing that a registrant could use
reasonable estimates in the manner described above.
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\105\ See letters from SCSGP and Group of Exec. Comp. Lawyers.
We discuss comments relating to non-U.S. employees in more detail in
Section II.C.2 of this release.
\106\ See Instruction 4 to Item 402(c)(2)(ix). This instruction
applies to perquisites and personal benefits. Accordingly,
perquisites provided to executive officers who are included in the
identification of the median should be treated as set forth in
Instruction 4. For this purpose, however, benefits that are provided
to all employees or all salaried employees would not be considered
``perquisites.''
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In addition, questions have been raised involving the valuation of
government-mandated pension plans,\107\ and at least one commenter has
noted that the valuation of these plans can be difficult.\108\ Another
commenter has noted that cross-border differences in government-
mandated pension plans raise additional complexity for registrants
calculating total compensation for employees located outside the United
States.\109\ In light of these comments, we acknowledge that some
registrants may need clarity as to how to treat government-mandated
pension plans for purposes of calculating an employee's total
compensation and, specifically, for purposes of determining the
aggregate change in actuarial present value of defined pension benefits
under Item 402(c)(2)(viii).
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\107\ See J. Goldstein, supra note 103.
\108\ See letter from Group of Exec. Comp. Lawyers. This
commenter raised the issue in the context of a discussion of cross-
border differences in the availability of government-mandated
retirement benefits, which this commenter believed would cause
comparisons of employees across jurisdictions to be distorted. This
commenter further suggested that the difficulty in valuing
government-mandated pension benefits for individual employees would
make it difficult for registrants to adjust the ratio for these
differences. As described above in Section II.C.3., we believe that
such an adjustment would not comply with the proposed requirements.
\109\ See letter from Davis Polk (``The information for non-U.S.
employees is complicated by local severance benefits and pension
rights and related accounting outside the U.S.'').
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In most cases, amounts relating to a government-mandated pension
plan would not be included in an employee's total compensation, just as
these amounts would not be included under current rules applicable to
named executive officers. We note, in particular, that Item
402(c)(2)(viii) applies to a defined benefit plan, which, as explained
in the 2006 Adopting Release, is a retirement plan in which the company
pays the executive specified amounts at retirement that are not tied to
the investment performance of the contributions that fund the
plan.\110\ The 2006 Adopting Release states that the disclosure
required by Item 402(c)(2)(viii) is intended to permit a full
understanding of the company's compensation obligations to named
executive officers, given that defined
[[Page 60575]]
benefit plans guarantee what can be a lifetime stream of payments and
allocate risk of investment performance to the company and its
shareholders.\111\ In contrast, under many government-mandated pension
plans, the employee ultimately receives the pension benefit payment
from the government, not the employer, and the purpose of the mandated
pension benefit is not to provide compensation to the employee from the
employer.\112\ Notwithstanding any amounts that an employer may be
obligated to pay (typically as a tax) to the government in respect of
an employee or amounts the employee may be obligated to have withheld
from wages and paid to the government,\113\ where the pension benefit
is being provided to the employee from the government and not by the
registrant, a government-mandated defined benefit pension plan would
not be considered a ``defined benefit plan'' for purposes of Item
402(c)(2)(viii) and any accrued pension benefit under such a plan would
not be considered compensation for purposes of Item 402(c)(2)(x).
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\110\ See 2006 Adopting Release, supra note 14, at 53175. This
definition serves to distinguish defined benefit pension plans from
defined contribution plans, in which the amount payable at
retirement is tied to the performance of the contributions that fund
the plan.
\111\ Id.
\112\ Although Item 402(a)(2) includes in compensation
transactions between a registrant and a third party where the
purpose of the transaction is to furnish compensation to the
employee, we generally would not consider a government-mandated
pension plan to be such a transaction.
\113\ As under current rules, amounts an employer pays to the
government in respect of an employee are obligations of the
registrant to that government and would not be ``compensation'' for
purposes of Item 402(c)(2)(x).
Note, however, pursuant to Item 402(c)(2)(ix), tax gross-ups are
included in total compensation. Therefore, if a registrant pays an
employee's required contribution to the government (i.e., the
registrant satisfies the employee's obligation to the government),
the amount of the employee's contribution that is paid by the
registrant would be includable in total compensation as a tax gross-
up.
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Finally, we acknowledge the concern from some commenters that the
application of the definition of total compensation under Item
402(c)(2)(x) to employees that are not executive officers could
understate the overall compensation paid to such employees.\114\ One of
these commenters explains that ``[b]y design, Item 402 captures all of
the various compensation components received by a named executive
officer, excluding certain limited items like benefits under non-
discriminatory plans (e.g., healthcare) and perquisites and personal
benefits that aggregate less than $10,000. . . . Applied to an average
worker, however, these rules will work in the opposite direction. By
excluding certain benefit plans and perquisites (e.g., employee
discounts, transportation/parking benefits, education assistance) that
do not exceed the $10,000 threshold, the rules understate the average
employee's real total compensation. Relative to wages, benefits like
healthcare and employee discounts both add significant economic value
for an employee and are a prime motivator for the average employee when
applying for and maintaining employment.'' \115\ From this perspective,
the omission of these components from the annual total compensation of
employees, could render the ratio less meaningful, particularly for the
purpose, suggested by some commenters, of evaluating employee morale.
We note, however, that these exclusions are permissive, rather than
mandatory.\116\ Therefore, registrants would be permitted, at their
discretion, to include personal benefits (and perquisites in the case
of employees that are executive officers) that aggregate less than
$10,000 and compensation under non-discriminatory benefit plans in
calculating the annual total compensation of employees. In order to be
consistent, the PEO total compensation used in the related pay ratio
disclosure would also need to reflect the same approach to these items
as is used for employees, and the registrant should explain any
difference between the PEO total compensation used in the pay ratio
disclosure and the total compensation amounts reflected in the summary
compensation table.
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\114\ See letters from RILA and Protective Life Corporation.
\115\ See letter from RILA; however, as discussed above, by
definition, benefits provided on a non-discriminatory basis to all
employees would not be considered perquisites.
\116\ See Item 402(c)(ix)(A) and Item 402(a)(6)(ii).
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Request for Comment
33. Are there other alternatives to calculating total compensation
in accordance with Item 402(c)(2)(x) that would be consistent with
Section 953(b)?
34. Should the requirements provide instructions or should we
provide additional guidance about how to apply the definition of total
compensation under Item 402(c)(2)(x) (or any particular elements of
total compensation under Item 402(c)(2)) to employees that are not
executive officers? If so, what specific instructions or guidance would
be useful to registrants? Please also address whether specific
instructions or guidance would limit flexibility and thereby raise
costs for registrants.
35. Do registrants need further guidance on the permitted use of
reasonable estimates in determining total compensation (or specific
elements of total compensation) for employees other than the PEO in
accordance with Item 402(c)(2)(x)? If so, what should that guidance
entail? Would the use of reasonable estimates ever be inappropriate?
Please also address whether specific instructions or guidance would
limit flexibility and thereby raise costs for registrants.
36. Instead of allowing the use of reasonable estimates in
determining total compensation (or any elements of total compensation)
as described in this proposal, should the rules prohibit the use of
reasonable estimates for that purpose? If so, why? Please include an
explanation of how the potential usefulness of the pay ratio disclosure
would be affected by a registrant's use of reasonable estimates in this
context. Are there alternative ways to address this impact, such as
requiring an explanation describing the use of estimates, rather than
prohibiting the use of estimates?
37. Is it likely that the proposed requirements would affect the
types of compensation that registrants provide to employees, and if so,
what would that impact be? For example, one commenter suggested that
registrants could decide to discontinue pension and incentive plans for
employees or eliminate 401(k) plan matching contributions in order to
facilitate their calculation of the pay ratio.\117\ If so, how should
the proposed requirements address that impact?
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\117\ See letter from RILA.
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5. Disclosure of Methodology, Assumptions and Estimates
We are proposing instructions for the disclosure of the methodology
and material assumptions, adjustments and estimates used in the
calculation of the median or the annual total compensation of
employees.\118\ The proposed instruction provides that registrants must
briefly disclose and consistently apply any methodology used to
identify the median and any material assumptions, adjustments or
estimates used to identify the median or to determine total
compensation or any elements of total compensation, and registrants
must clearly identify any estimated amount as such. Registrants'
disclosure of the methodology and material assumptions, adjustments and
estimates used should provide sufficient information for a reader to be
able to evaluate the appropriateness of the estimates. For example,
when statistical sampling is used, registrants should
[[Page 60576]]
disclose the size of both the sample and the estimated whole
population, any material assumptions used in determining the sample
size, which sampling method (or methods) is used, and, if applicable,
how the sampling method deals with separate payrolls such as
geographically separated employee populations or other issues arising
from multiple business or geographic segments. In order to promote
comparability from year to year, the instruction also provides that, if
a registrant changes methodology or material assumptions, adjustments
or estimates from those used in the previous period, and if the effects
of any such change are material, the registrant must briefly describe
the change, the reasons for the change, and must provide an estimate of
the impact of the change on the median and the ratio.
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\118\ We note that other Commission rules require such
disclosures, particularly where registrants are given the
flexibility to choose a methodology. See, e.g., Instructions to Item
402(h)(2), requiring registrants to disclose the valuation method
and all material assumptions applied in quantifying the present
value of accrued pension benefits for purposes of the Pension
Benefit Table.
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Because we are concerned that disclosure about methodology,
assumptions, adjustments and estimates could become dense and overly
technical, the instruction asks for a brief overview and makes clear
that it is not necessary to provide technical analyses or formulas. In
addition, we do not believe that a detailed, technical discussion (such
as statistical formulas, confidence levels or the steps used in data
analysis) would enhance the potential usefulness, as suggested by some
commenters,\119\ of the ratio as a metric to evaluate the level of PEO
compensation. We expect that a succinct description of the methodology
and material assumptions, adjustments or estimates would not be overly
burdensome for registrants and would be more informative for investors.
We expect that the costs of the additional disclosure on registrants
would be marginal, as these additional disclosures are intended to
simply describe what has already been done or assumed in the
calculations and, therefore, will not require additional actions for
registrants. It is likely that some costs may be incurred in developing
and reviewing the appropriate language to describe the approach taken.
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\119\ See, e.g., Senate Letter; House Letter; and AFL-CIO I; and
letters from CtW Investment Group and UAW Retiree Medical Benefits
Trust.
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The instruction also provides that the methodology and any material
assumptions, adjustments and estimates should be consistently applied
by the registrant in identifying the median. Likewise, where a
registrant uses estimates in calculating the annual total compensation
(or elements thereof) of employees, the methodology and any material
assumptions, adjustments and estimates used in the calculation (such as
currency translations \120\ or annualizing newly hired, non-temporary
employees) should be used consistently by a registrant. Similarly, when
using a compensation measure to identify the median employee, that
compensation measure should be consistently applied to each employee
included in the calculation. We believe that requiring consistent use
of methodology, and particularly material assumptions, adjustments and
estimates, could reduce incentives for registrants to use methodology
to affect the outcome of the identification of the median or the ratio.
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\120\ Some commenters requested guidance on converting wages to
U.S. dollars for purposes of pay ratio disclosure. Instruction 2 to
Item 402(c) requires registrants to identify by footnote the
currency, exchange rate and conversion methodology used in
connection with compensation that is paid to or received by an
executive officer in a different currency than U.S. dollars. In
connection with the proposed requirements, registrants generally
would not be required to disclose the currencies, exchange rates and
conversion methodologies used in determining the annual total
compensation of employees, but, where applicable, the rates and
conversion methodologies used should be consistent with those used
for the named executive officers in the summary compensation table.
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Several commenters recommended that registrants be required to
describe the methodology, assumptions and estimates used in identifying
the median.\121\ Some commenters further suggested that a narrative
discussion of the ratio and its components (including methodology and
assumptions used), together with supplemental information about
employee compensation structures and policies, be required, in order to
provide additional context for the ratio.\122\ Other than the brief
description of methodology described above, the proposed requirements
do not include a specific requirement for narrative discussion of the
ratio, the median or any supplemental information. Section 953(b)
requires disclosure of the pay ratio, but it does not require any
additional information to provide context for or to explain the ratio
or its components, therefore, we are not proposing to require
additional information. We are sensitive to the costs of the mandated
disclosure, and we believe that additional narrative disclosure about
the ratio would not, for many registrants, provide useful information
for investors that would justify the costs associated with providing
that additional disclosure. The types of additional information that
may be relevant to further understanding the ratio in a particular
period would necessarily vary from company to company and could also
vary from time to time as a registrant's business evolves or due to
external factors, such as changes in the global economic environment or
the labor marketplace. While some investors and other market
participants could find supplemental information about a registrant's
employment practices, the composition of its workforce and similar
topics (such as employment policies, use of part-time workers, use of
seasonal workers, outsourcing and off-shoring strategies) useful or
informative, we do not believe that the cost of prescribing additional
disclosure would be justified. Therefore, we are not proposing
requirements for a narrative discussion beyond the proposed brief
description of the calculation methodology where estimation techniques
have been used.
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\121\ See AFL-CIO II and COEC I; and letters from ABA; Group of
Exec. Comp. Lawyers; Meridian Compensation Partners, LLC; and SCSGP.
\122\ See AFL-CIO I (recommending a required discussion and
analysis ``including their use of outsourcing and off-shoring
strategies, use of part-time and temporary employees, and use of
efficiency wages to boost productivity'') and letter from Americans
for Financial Reform.
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Finally, one commenter suggested that the rule expressly permit
additional disclosure to accompany the pay ratio.\123\ Although we do
not believe that it is necessary to include instructions in the
proposed requirements for this purpose, we emphasize that, as with
other mandated disclosure under our rules, registrants would be
permitted to supplement the required disclosure with a narrative
discussion if they choose to do so. Likewise, we note that registrants
may, at their discretion, present additional ratios to supplement the
required ratio. As with other disclosure under our rules, however, any
additional ratios should be clearly identified and not misleading, and
should not be presented with greater prominence than the required
ratio.\124\
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\123\ See letter from Towers Watson.
\124\ See, e.g., Exchange Act Rule 12b-20; and Commission's
Guidance Regarding Management's Discussion and Analysis or Financial
Condition and Results of Operations, Release No. 33-8350 (Dec. 19,
2003) [68 FR 75056], at 75060.
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Request for Comment
38. Should we require registrants to disclose information about the
methodology and material assumptions, adjustments or estimates used in
identifying the median or calculating annual total compensation for
employees, as proposed? Why or why not? Would this information assist
investors in understanding the pay ratio? Are there changes we could
make to the requirement to avoid boilerplate disclosure? Should we
require a more technical discussion, such as requiring the disclosure
of statistical formulas,
[[Page 60577]]
confidence levels or the steps used in the data analysis?
39. Should we require disclosure when a registrant changes its
methodology (or material assumptions, adjustments or estimates) from
previous periods, where such change has a material effect, as proposed?
Should registrants be required to describe the reasons for the change,
as proposed? Should registrants be required to provide an estimate of
the impact of the change on the median and the ratio, as proposed? Is
the proposed information useful? Is there other information that should
be required?
40. Should we require registrants to disclose additional narrative
information about the pay ratio or its components, or factors that give
context for the median, such as employment policies, use of part-time
workers, use of seasonal workers, outsourcing and off-shoring
strategies? If so, what additional information should be required?
Please be specific as to how this information would assist investors in
understanding the pay ratio or in using the pay ratio disclosure.
Please also be specific about the costs of providing such disclosure.
How could such a requirement be designed to avoid boilerplate
disclosure? Would such a requirement raise competition concerns?
41. Should we require registrants to disclose additional metrics
about the total compensation of all employees (or of the statistical
sample if one is used), such as the mean and the standard deviation, as
a supplement to the required disclosure? Would additional metrics be
useful to investors? We assume that these metrics could be provided
without additional cost or at a low cost once the median has been
identified. Is this assumption correct? If not, please identify the
costs and benefits of such additional disclosure. Would such a
requirement raise competition concerns?
6. Clarification of the Meaning of ``Annual''
In order to provide clarity, the proposed requirement defines
``annual total compensation'' to mean total compensation for the last
completed fiscal year, consistent with the time period used for the
other Item 402 disclosure requirements. This clarification is intended
to address questions from commenters about the need to update the pay
ratio disclosure throughout the year and make clear that the disclosure
does not need to be updated more than once a year.\125\ One commenter
expressly supported this approach.\126\
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\125\ See, e.g., letters from American Benefits Council and ABA.
\126\ See letter from RILA (noting ``we recommend that the
Compensation Ratio be based on the issuer's last completed fiscal
year, which would make it consistent with the executive compensation
disclosure under Item 402 and reduce the compliance costs and
burdens at least in so far as the information required for the
Summary Compensation Table could be used for purposes of the
Compensation Ratio as well.'').
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Two commenters suggested other possible alternatives for the
calculation of ``annual'' total compensation. One of these commenters
recommended that registrants should have flexibility to select a time
period for calculating the annual total compensation of employees,
noting that registrants without a calendar year fiscal year-end might
benefit from the flexibility to use the calendar year period since that
would be consistent with the registrant's tax reporting
obligations.\127\ Another commenter suggested two timing rules that
would grant registrants further flexibility to use the 12-month time
periods that their payroll systems use.\128\ We understand that these
suggestions are intended to reduce compliance costs for registrants by
giving registrants the ability to use information in the form that it
is currently compiled for other purposes, such as tax and payroll
recordkeeping. We believe, however, that it is appropriate for the time
period for the pay ratio disclosure to be the same as the time period
used for the registrant's other executive compensation disclosures,
and, therefore, a registrant would be required to calculate the total
compensation for the median employee for the last completed fiscal
year. As discussed above, for purposes of estimating the median
employee, we propose to allow a registrant to use compensation amounts
derived from its payroll or tax records for the same annual period that
is used in the payroll or tax records. We believe that permitting
companies to identify the median employee using compensation
information in the form that it is maintained in their own books and
records would reduce compliance costs and that the proposed flexibility
in estimating the median employee could address the concerns raised by
these commenters. Registrants using payroll or tax records to identify
the median employee would be required to calculate the Item
402(c)(2)(x) total compensation for that median employee for the last
completed fiscal year, rather than the annual period used in the
payroll or tax records.
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\127\ See letter from American Benefits Council.
\128\ See letter from Group of Exec. Comp. Lawyers
(recommending: ``Rule One--the registrant can select any date as of
which to calculate median compensation, provided the date is within
12 months of the proxy filing, and is the most recent practicable
date, and Rule Two--if different payroll systems are involved, the
12-month period for computing compensation data for each payroll
system's data will be acceptable so long as the period ends within
12 months of the date chosen under Rule One.'').
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Request for Comment
42. For purposes of the disclosure of the median of the annual
total compensation of employees and the pay ratio, should we, as
proposed, require total compensation to be calculated for the last
completed fiscal year, rather than some other annual period? Why or why
not? How does this impact the ability of a registrant to compile the
disclosure in time to include it in a proxy or information statement
relating to an annual meeting of shareholders (or written consents in
lieu of such meeting)?
7. Timing of Disclosure
a. Updating Pay Ratio Disclosure for the Last Completed Fiscal Year
We are proposing instructions to clarify the timing for updating
pay ratio disclosure after the end of a registrant's fiscal year.\129\
As discussed above, proposed Item 402(u) would require annual total
compensation amounts used in the ratio to be calculated for the
registrant's last completed fiscal year. In addition, pay ratio
disclosure would be required in any filing by the registrant that
requires Item 402 disclosure. Accordingly, without the proposed
instructions, a registrant could be required to include pay ratio
disclosure in an annual report or registration statement filed after
the end of the fiscal year, but before it has compiled the executive
compensation information for that fiscal year for inclusion in its
proxy statement relating to its annual meeting of shareholders,\130\
which could raise additional incremental costs for registrants that
elect to provide executive compensation disclosure in their annual
proxy statement rather than their annual report and for registrants
that are conducting registered offerings at the beginning of their
fiscal year.
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\129\ See letter from ABA (noting ``the Commission should
clarify when information for the most recently completed fiscal year
is required to first be disclosed'').
\130\ Many registrants typically satisfy their disclosure
obligations under Part III of Form 10-K (which includes Item 402
requirements) by incorporating the required information by reference
from their proxy or information statement that is filed after their
annual report on Form 10-K. See General Instruction G(3). We discuss
the mechanics of General Instruction G(3) in more detail below.
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To address this issue, some commenters recommended that pay ratio
disclosure not be required to be
[[Page 60578]]
updated for the most recently completed fiscal year until the
registrant files its proxy statement for its annual meeting of
shareholders.\131\ We agree with this suggested approach, and we
believe that such an approach would not diminish the potential
usefulness of the disclosure. At least one commenter who supported
Section 953(b) disclosure also recommended a similar approach.\132\ We
also believe that this approach could hold down additional costs for
registrants in connection with filings made or required to be made
before the filing of the proxy or information statement for the annual
meeting of shareholders (or written consents in lieu of such a meeting)
that would typically contain the registrant's other Item 402 disclosure
covering the most recently completed fiscal year. For example, under
the proposed approach, updating the pay ratio disclosure would not be
an additional hurdle for a registrant that requests effectiveness of a
registration statement after the end of its fiscal year and before the
filing of the proxy statement for its annual meeting of shareholders.
We believe that the proposed instruction would provide certainty to
registrants as to when the updated information is required and would
allow sufficient time after the end of the fiscal year to identify the
median.
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\131\ See letters from ABA and Compensia, Inc.
\132\ See AFL-CIO II (asserting that pay ratio disclosure will
be useful to investors and recommending that the disclosure be
limited to annual proxy statements).
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Although we agree with the recommendation of commenters to not
require updated annual pay ratio disclosure until a registrant files
its annual proxy or information statement, we note that not all
registrants that would be subject to the proposed pay ratio disclosure
file proxy or information statements in connection with annual meetings
of shareholders. For example, reporting companies that do not have
securities registered under Section 12 of the Exchange Act are not
required to file proxy or information statements for their annual
meeting of shareholders and therefore typically provide Item 402
information updated for the most recently completed fiscal year in
their annual report on Form 10-K. In addition, some registrants are not
required to file annual proxy or information statements because they
are not required to hold annual meetings (such as registrants that are
organized as master limited partnerships) or because the securities
that are registered under Section 12 of the Exchange Act have limited
voting rights (such as common units representing limited liability
company interests). Accordingly, we are proposing a modified version of
the recommendation of commenters in order to provide a similar
accommodation for registrants that do not file annual proxy statements
and to align the proposed requirement to the timing rules for providing
Item 402 disclosure in annual reports and proxy and information
statements.
As noted above, registrants typically disclose Item 402 information
for the most recently completed fiscal year in their proxy or
information statement relating to their annual meeting of shareholders,
in reliance on General Instruction G(3) of Form 10-K. This instruction
allows the information required by Part III of Form 10-K (including
Item 402 information) to be incorporated by reference from the
registrant's definitive proxy statement (filed or required to be filed
pursuant to Regulation 14A) or definitive information statement (filed
or required to be filed pursuant to Regulation 14C) if that statement
involves the election of directors and is filed not later than 120 days
after the end of the fiscal year covered by the annual report. If a
definitive proxy statement or information statement is not filed in the
120-day period (or is not required to be filed by virtue of Rule 3a12-
3(b) under the Exchange Act), the Part III information must be filed as
part of the Form 10-K, or as an amendment to the Form 10-K, not later
than the end of the 120-day period.
In order to align with this timeframe, the proposed instruction
would state that a registrant is not required to include pay ratio
disclosure with respect to its last completed fiscal year until the
filing of its annual report for that last completed fiscal year or the
filing of a definitive proxy or information statement relating to an
annual meeting of shareholders (or written consents in lieu of such a
meeting), provided that updated pay ratio information must, in any
event, be filed as provided in General Instruction G(3) of Form 10-K
not later than 120 days after the end of such fiscal year. As an
example, a registrant would not be required to disclose pay ratio
information relating to compensation for fiscal year 2014 until its
definitive proxy or information statement for its 2015 annual meeting
of shareholders.\133\ Consistent with the treatment of other
information required by Part III of Form 10-K, if that registrant does
not file its definitive proxy or information statement within 120 days
of the end of 2014 (i.e., April 30, 2015), it would need to file
updated pay ratio disclosure in its Form 10-K for 2014 or an amendment
to that Form 10-K. In contrast, a registrant that is not subject to the
proxy rules or does not file a proxy or information statement in
connection with an annual meeting of shareholders would be required to
update its pay ratio disclosure for fiscal year 2014 in its annual
report on Form 10-K for that year.
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\133\ Consistent with the proposed instructions, we note that a
registration statement that incorporates by reference a Form 10-K
(or amended Form 10-K) containing all Part III information other
than updated pay ratio information could be declared effective
before the registrant's definitive proxy or information statement
containing updated pay ratio information is filed in accordance with
General Instruction G(3).
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In order to provide guidance to registrants in connection with
filings made before the annual update is triggered, the proposed
instruction would also state that, in any filing made by a registrant
after the end of its last completed fiscal year and before the filing
of such Form 10-K or proxy or information statement, as applicable, a
registrant must include or incorporate by reference its pay ratio
disclosure (if such disclosure had been required) for the fiscal year
prior to the last completed fiscal year.
Although the annual update is not required to be disclosed until
the filing of an annual report for the last completed fiscal year, or
if later, the filing of a definitive proxy statement or information
statement relating to the registrant's annual meeting of shareholders,
this updating provision does not alter the requirements for Item 402
disclosure under Item 8 of Schedule 14A in other proxy or information
statement filings. For example, if a registrant files a proxy statement
(other than the definitive proxy statement for its annual meeting) that
requires Item 402 information pursuant to Item 8 of Schedule 14A, the
registrant would be required to include or incorporate by reference pay
ratio disclosure for the most recent period that had been filed in its
Form 10-K or definitive proxy statement for its annual meeting.
Request for Comment
43. Should we, as proposed, require the pay ratio disclosure to be
updated no earlier than the filing of a registrant's annual report on
Form 10-K or, if later, the filing of a proxy or information statement
for the registrant's annual meeting of shareholders (or written
consents in lieu of such a meeting), and in any event not later than
120 days after the end of its fiscal year? Are we correct that the
proposed timing rule
[[Page 60579]]
would not affect the potential usefulness of the pay ratio disclosure
for investors? If not, how should the requirements be changed to
address that impact? Are we correct that the proposed timing rule would
help to keep costs down for registrants by providing certainty as to
the timing for annual updates and by allowing registrants to compile
the disclosure at the same time as other executive compensation
disclosure under Item 402? Are we correct that the proposed timing rule
would help keep down costs for registrants that request effectiveness
of registration statements after the end of the last fiscal year but
before the filing of their annual proxy statement?
44. Is the proposed timing workable for registrants? Does it
provide enough time after the end of the fiscal year for companies to
identify the median of the total compensation of all employees for that
year? We note that one commenter asserted that it could take
registrants three months or more each year to calculate pay ratio
disclosure, and, accordingly, that the disclosure would not be
available in time to be included in the annual proxy statement or
annual report.\134\ Would the ability to use reasonable estimates,
consistently applied compensation measures, or statistical sampling be
sufficient to alleviate this issue? For example, if a registrant is
unable to calculate its employees' incentive compensation before such
time, would it be able to reasonably estimate such compensation?
Instead, should the proposed rules provide an accommodation for a
company that cannot compile compensation information in time to be
included in its proxy statement for the annual meeting of shareholders
or Form 10-K, as applicable? For example, should registrants be
permitted to delay the pay ratio disclosure until it is calculable and
then file the disclosure under Item 5.02(f) of Form 8-K? \135\ If so,
under what circumstances should registrants be permitted to do so? Or,
if we were to allow for such a delay, should we specify when the
disclosure should be required to be made? If so, what deadline should
we impose? Would such a delay impact the usefulness to investors of the
disclosure, particularly if the disclosure would not be available in
time for inclusion in proxy or information statements for the annual
meeting of shareholders?
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\134\ See COEC II.
\135\ Item 5.02(f) of Form 8-K sets forth the requirements for
the filing of information that was omitted from Item 402 disclosure
in accordance with Instruction 1 to Items 402(c)(2)(iii) and (iv).
These are described in more detail in the next subsection of this
release.
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b. Proposed Instruction for Pay Ratio Disclosure When the Registrant
Omits Salary or Bonus Information for the PEO in Reliance on
Instruction 1 to Item 402(c)(2)(iii) and (iv), and Proposed Technical
Amendment to Item 5.02(f) of Form 8-K
In accordance with Instruction 1 to Items 402(c)(2)(iii) and (iv)
of Regulation S-K, a registrant is permitted to omit disclosure in the
summary compensation table of the salary or bonus of a named executive
officer if it is not calculable as of the latest practicable date. In
that circumstance, a registrant must include a footnote disclosing that
fact and providing the date that the amount is expected to be
determined, and the amount must be disclosed at that time by filing a
Form 8-K. Item 5.02(f) of Form 8-K sets forth the requirements for the
filing of information that was omitted from Item 402 disclosure in
accordance with Instruction 1 to Items 402(c)(2)(iii) and (iv),
including the requirement to include a new total compensation figure
for the named executive officer.
In cases where a registrant is relying on this instruction because
the salary or bonus of the PEO is not calculable until a later date, we
believe that it is also appropriate for a registrant to omit pay ratio
disclosure until those elements of the PEO's total compensation are
determined and provide its pay ratio disclosure in the same filing
under Item 5.02(f) of Form 8-K in which the PEO's salary or bonus is
disclosed. Accordingly, the proposed rule would include an instruction
that provides that a registrant relying on Instruction 1 to Items
402(c)(2)(iii) and (iv) with respect to the salary or bonus of the PEO
would be required to disclose that the pay ratio disclosure is being
omitted because the PEO's total compensation is not available and to
disclose the expected date that the total compensation for the PEO will
be determined.\136\ The instruction would then require the registrant
to include its pay ratio disclosure in the filing on Form 8-K that
includes the omitted salary or bonus information as contemplated by
Instruction 1 to Items 402(c)(2)(iii) and (iv). We are also proposing a
conforming amendment to Item 5.02(f) of Form 8-K to reflect the
addition of this pay ratio disclosure requirement. In addition,
although a filing is triggered under Item 5.02(f) when the omitted
salary or bonus becomes calculable in whole or in part, under the
proposed amendments to Form 8-K, the pay ratio information would be
required only when the salary or bonus becomes calculable in whole,
which would avoid the need for multiple updates to the pay ratio
disclosure until the final total compensation amount for the PEO is
known.
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\136\ See Proposed Instruction 4 to Item 402(u).
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In proposing this instruction, we have assumed that the potential
benefits of the disclosure could be diminished if the pay ratio were to
be calculated using less than the entire amount of the PEO's total
compensation for the period and that these potential benefits could
justify the potential costs to investors of a delay in the timing of
the disclosure. For example, in some cases, the amount of compensation
that is omitted under Instruction 1 to Items 402(c)(2)(iii) and (iv)
could be significant, and, therefore, the pay ratio would be lower if
it were presented using that incomplete compensation amount. Based on
the number of registrants that have historically relied on Instruction
1 to Items 402(c)(2)(iii) and (iv),\137\ we do not expect that the
proposed instruction would impact a significant number of registrants
each year.
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\137\ For example, based on a review of EDGAR filings in 2012,
only 22 registrants relied on Instruction 1 to Items 402(c)(2)(iii)
and (iv) in connection with the total compensation of their PEO.
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Request for Comment
45. Is the proposed instruction appropriate in instances where
registrants are relying on Instruction 1 to Items 402(c)(2)(iii) and
(iv) with respect to the salary or bonus of the PEO?
46. Instead of the proposed approach, should these registrants be
required to calculate pay ratio disclosure using only the amounts of
total compensation of the PEO that are available at the time of the
filing, or in the alternative, make a reasonable estimate of the
omitted total compensation amounts? Would such disclosure be useful or
meaningful? In that case, should the registrant be required to update
(by Form 8-K or otherwise) its pay ratio disclosure to reflect the
PEO's recalculated total compensation?
47. Is the proposed instruction clear? If not, what changes should
be made to clarify it?
48. Should we require any additional or supplemental disclosure
when a registrant relies on the proposed instruction? If so, what would
that disclosure entail? For example, should the proposed instruction
require registrants to report the median annual total compensation of
employees, even if the PEO total compensation and pay
[[Page 60580]]
ratio are not available? Should registrants relying on the proposed
instruction be required to disclose the pay ratio for the prior year in
the Form 10-K or proxy or information statement?
49. Would the proposed instruction cause registrants to change
their compensation practices? Alternatively, would the proposed
instruction have an adverse impact on the usefulness to investors of
the proposed pay ratio disclosure? How should we change the proposed
requirements to address such impacts?
8. Status as ``Filed'' Not ``Furnished''
Some commenters suggested that pay ratio information be deemed
``furnished'' and not ``filed'' for purposes of the Securities Act and
Exchange Act.\138\ We note that Section 953(b) refers to the pay ratio
information being disclosed in the registrant's ``filings'' with the
Commission. We believe that the use of the word ``filing'' in Section
953(b) is consistent with the disclosure being filed and not furnished.
Accordingly, we are not proposing to permit the pay ratio information
to be deemed ``furnished.'' Like other Item 402 information, the pay
ratio disclosure would be considered ``filed'' for purposes of the
Securities Act and Exchange Act and, accordingly, would be subject to
potential liabilities thereunder.
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\138\ See COEC I and letters from ABA; Protective Life
Corporation; and RILA. In contrast, no commenters have asserted that
the disclosure should be filed.
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We note that one of the reasons that commenters recommended
treating the information as furnished and not filed is because of the
difficulty that some companies may have in determining and verifying
the information, which must be covered by the certifications required
for Exchange Act filings under the Sarbanes-Oxley Act of 2002.\139\ We
also recognize that some registrants could have more difficulty in
gathering and verifying the information than others. Nevertheless, we
believe that the flexibility afforded to registrants in connection with
identifying the median could reduce some of the difficulties of
compiling the required information, because registrants would be able
to tailor the methodology to reflect their own facts and circumstances.
The ability to use reasonable estimates in connection with the
calculation of annual total compensation for employees other than the
PEO could also alleviate some of these concerns. In addition, we
believe that the proposed transition periods discussed below, which are
designed to give registrants sufficient time to develop and implement
compliance procedures, could mitigate some concerns about compiling and
verifying the information.
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\139\ See, e.g., COEC I.
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Request for Comment
50. Should the Section 953(b) information be filed rather than
furnished? What weight should we give to the use of the word ``filing''
in the statute?
51. Are there other ways to address commenters' concerns about the
ability to compile and verify the pay ratio information that still
fulfills the statutory mandate?
D. Transition Matters
1. Proposed Compliance Date
Section 953(b) does not specify a date when registrants must begin
to comply with the requirements that we implement. We are proposing to
require that a registrant must begin to comply with proposed Item
402(u) with respect to compensation for the registrant's first fiscal
year commencing on or after the effective date of the rule, and, as
proposed, a registrant would be permitted to omit this initial pay
ratio disclosure from its filings until the filing of its annual report
on Form 10-K for that fiscal year or, if later, the filing of a proxy
or information statement for its next annual meeting of shareholders
(or written consents in lieu of a meeting) following the end of such
year. Similar to the proposed instructions for updating pay ratio
disclosure, this initial pay ratio disclosure would be required, in any
event, to be filed as provided in connection with General Instruction
G(3) of Form 10-K not later than 120 days after the end of such fiscal
year. Thus, if the final requirements were to become effective in 2014,
a registrant with a fiscal year ending on December 31 would be first
required to include pay ratio information relating to compensation for
fiscal year 2015 in its proxy or information statement for its 2016
annual meeting of shareholders (or written consents in lieu of such a
meeting). Consistent with the treatment of other information required
by Part III of Form 10-K, if that registrant does not file its proxy or
information statement within 120 days of the end of 2015 (i.e., April
30, 2016), it would need to file its initial pay ratio disclosure in
its Form 10-K for 2015 or an amendment to that Form 10-K. Similarly, a
registrant with a fiscal year ending on December 31 that is not subject
to the proxy rules or does not file a proxy or information statement in
connection with an annual meeting of shareholders would be required to
include pay ratio information relating to compensation for fiscal year
2015 in its Form 10-K covering fiscal year 2015, which would be due in
the first quarter of 2016. Registrants would be permitted to begin
compliance earlier on a voluntary basis.
Several commenters noted that companies will need a long transition
period before they can implement systems to compile the disclosure and
verify its accuracy.\140\ We understand that this time would likely be
needed by large, multinational registrants and any registrants that
currently do not have a centralized, consolidated payroll, benefits and
pension system that captures the information necessary to identify the
median.\141\ We expect that it will take registrants one full reporting
cycle to implement and test any necessary systems,\142\ and we believe
that the proposal provides that time for transition and implementation.
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\140\ See letters from ABA; American Benefits Council; Brian
Foley & Co.; Group of Exec. Comp. Lawyers; Davis Polk; NACD; SCSGP;
RILA; and Towers Watson.
\141\ See letters from ABA; American Benefits Council; Brian
Foley & Co.; Group of Exec. Comp. Lawyers; Davis Polk; NACD; SCSGP;
RILA; and Towers Watson.
\142\ See, e.g., letters from American Benefits Council and
Group of Exec. Comp. Lawyers.
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We believe it is appropriate to allow a registrant to omit its
initial pay ratio disclosure from filings that would otherwise require
Item 402 information for its first fiscal year commencing on or after
the effective date of the final rule until the filing of its annual
report on Form 10-K or, if later, a proxy or information statement
relating to its next annual meeting of shareholders (and in any event
not later than 120 days after the end of such fiscal year), for the
same reasons described in Section II.C.7.a. above.
Request for Comment
52. Should the proposed requirements have a transition period, as
proposed? Is the period too long? Too short? If so, how long should the
transition period be and why? Please be specific (for example, instead
of the proposed period, should compliance be delayed until the first
fiscal year beginning on or after six months following the effective
date of the final rules?).
53. In the alternative, should the transition periods be different
for different types of registrants? If so, what transition periods
should apply to which registrants? For example, should registrants with
a workforce below a certain size (e.g., fewer than 1,000 employees)
have a shorter phase-in
[[Page 60581]]
period than others? Should there be a longer phase-in for multinational
registrants? Please provide specific information about how to define
the categories of registrants that should be subject to any recommended
phase-in.
54. Are there any other accommodations that we should consider for
particular types of companies or circumstances (other than the proposed
transition period for new registrants described below in this release)?
Should we provide a transition period for business
combinations? If so, what should the transition be? For example, should
a registrant be permitted to omit the employees of a newly acquired
entity until a period of time (e.g., six months, 12 months) has passed
following the closing of the business combination transaction? Instead
of a specific transition period, would guidance about when the
employees of a newly acquired entity need to be covered in the pay
ratio provide sufficient direction for registrants? What should that
guidance entail?
Should we permit a registrant that is not subject to the
proxy rules to amend its Form 10-K no later than 120 days after the end
of the fiscal year covered by the report to provide the pay ratio
disclosure? Should we permit such a registrant to provide the
disclosure by filing a Form 8-K instead of an amendment to Form 10-K?
Should we provide a transition period for registrants that
cease to be smaller reporting companies? If so, what should the
transition be?
Does the fact that Title I of the JOBS Act provides
transition periods for provisions other than Section 953(b) for
registrants that cease to be emerging growth companies suggest that we
should not provide a transition period for such registrants? Should we
provide a transition for registrants that cease to be emerging growth
companies? If so, what should the transition be? If not, would these
registrants have the information available to compile the disclosure in
time for their first proxy statement or annual report, as applicable,
following the date they exit emerging growth company status? Should a
transition period depend on the disqualifying event that occurs, on the
basis that the registrant may have more advance notice of the
occurrence for some types of events? \143\ For example, should a
company that exits emerging growth company status because it reaches
the fifth anniversary of its first sale of common equity be required to
first disclose pay ratio information relating to the fiscal year in
which its fifth anniversary occurred? Alternatively, should the amount
of transition time provided depend on how long a company has enjoyed
emerging growth company status, such as a longer transition for
registrants that lose that status after one year or less?
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\143\ The definition of emerging growth company provides that an
issuer continues to be deemed an emerging growth company until the
earliest of: (1) The last day of the fiscal year during which it had
total annual gross revenues of $1 billion; (2) the last day of the
fiscal year following the fifth anniversary of the first sale of its
common equity securities; (3) the date on which it has issued more
than $1 billion in non-convertible date during the previous three
years; or (4) the date on which it is deemed a large accelerated
filer. See Exchange Act Section 3(a)(80) [15 U.S.C. 78c(a)(80)] and
Securities Act Section 2(a)(19)[15 U.S.C. 77b(a)(19)].
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2. Proposed Transition for New Registrants
New registrants that do not qualify as emerging growth companies
are not exempted from the application of Section 953(b). The proposed
requirements include instructions that would permit new registrants to
delay compliance, so that pay ratio disclosure would not be required in
a registration statement on Form S-1 or S-11 for an initial public
offering or a registration statement on Form 10.\144\ Instead, such a
registrant would be required to first comply with proposed Item 402(u)
with respect to compensation for the first fiscal year commencing on or
after the date the registrant becomes subject to the requirements of
Section 13(a) or Section 15(d) of the Exchange Act, and, as proposed,
the registrant would be permitted to omit this initial pay ratio
disclosure from its filings until the filing of its Form 10-K for such
fiscal year or, if later, the filing of a proxy or information
statement for its next annual meeting of shareholders (or written
consents in lieu of a meeting) following the end of such fiscal year.
Similar to the proposed instructions for updating pay ratio disclosure,
these proposed instructions also require that this initial pay ratio
disclosure must, in any event, be filed as provided in connection with
General Instruction G(3) of Form 10-K not later than 120 days after the
end of such fiscal year.
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\144\ See proposed Instruction 5 to paragraph (u).
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For example, assuming the proposed requirements become effective in
2014, a company with a fiscal year ending on December 31 that completes
its initial public offering in October 2016 would not be required to
include any pay ratio information in its registration statement on Form
S-1. The company would then not be required to include pay ratio
disclosure in any filing until it files its definitive proxy or
information statement for its 2018 annual meeting of shareholders (or
written consents in lieu of such a meeting), which would include pay
ratio disclosure relating to 2017 compensation amounts. Consistent with
the treatment of other information required by Part III of Form 10-K,
if the company does not file its definitive proxy or information
statement within 120 days of the end of its fiscal year (i.e., April
30, 2018), it would need to file its initial pay ratio disclosure in
its Form 10-K for 2017 or an amendment to that Form 10-K. If that
company were not required to file a proxy statement relating to its
annual meeting of shareholders, the first filing that would be required
to include pay ratio disclosure would be its Form 10-K covering fiscal
year 2017, which would include pay ratio disclosure relating to 2017
compensation amounts.
Commenters did not address the impact of pay ratio disclosure
requirements on newly public companies. Although investors might
benefit from pay ratio information in connection with an initial public
offering or Exchange Act registration, we believe it is appropriate to
give companies time to develop any needed systems to compile the
disclosure and verify its accuracy. The transition period for new
registrants is similar to the proposed time frame provided for other
registrants to comply with pay ratio disclosure requirements following
the effective date of the final rules. The proposed approach is also
similar to the current phase-in for newly public companies in
connection with Item 308 of Regulation S-K, for management's report on
the registrant's internal control over financial reporting.\145\
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\145\ See Instruction 1 to Item 308 of Regulation S-K.
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We are sensitive to the impact that the proposed rules could have
on capital formation. We note that the requirements of Section 953(b),
as amended by the JOBS Act, distinguish between certain newly public
companies and all other issuers by providing an exemption for emerging
growth companies. We note that the incremental time needed to compile
pay ratio disclosure could cause companies that are not emerging growth
companies to delay an initial public offering, which could have a
negative impact on capital formation. In this regard, we assume that,
in order to be disqualified for emerging growth company status, these
companies are likely to be businesses with more extensive operations or
a greater number of employees than many emerging growth companies,
which
[[Page 60582]]
could increase the initial efforts needed to comply with the proposed
requirements. We believe that providing a transition period for these
newly public companies could mitigate this potential impact on capital
formation.
Request for Comment
55. Instead of the proposed transition period, should we require
new registrants that are not emerging growth companies to comply with
pay ratio disclosure requirements in registration statements on Form S-
1, Form S-11 or Form 10? Are we correct that the incremental time
needed to compile pay ratio disclosure could cause companies that are
not emerging growth companies to delay an initial public offering? What
costs would be imposed on these companies if we did not provide the
transition? Does the potential importance of the information to
investors justify the burden on these companies of complying with the
requirements in their Form S-1, Form S-11 or Form 10?
56. Does the proposed transition period for compliance by new
registrants provide sufficient time (or, alternatively, too much time)
for these companies to be able to comply? Why or why not?
57. Are there any alternatives to the proposed transition period
that we should consider? For example, should we permit new registrants
to omit pay ratio disclosure from Form S-1 and Form 10 (as proposed),
but require them to comply with the proposed pay ratio disclosure
requirements in their first proxy statement or annual report, as
applicable?
58. Are there other accommodations we should consider for new
registrants?
III. General Request for Comment
We request and encourage any interested person to submit comments
on any aspect of the proposals, other matters that might have an impact
on the amendments and any suggestions for additional changes. With
respect to any comments, we note that they are of greatest assistance
to our rulemaking initiative if accompanied by supporting data and
analysis of the issues addressed in those comments, particularly
quantitative information as to the costs and benefits, and by
alternatives to the proposals where appropriate. Where alternatives to
the proposals are suggested, please include information as to the costs
and benefits of those alternatives.
59. Have we struck the appropriate balance between prescribing
rules to satisfy the mandate of Section 953(b) and allowing a
registrant flexibility to identify the median in a manner that is
appropriate to its own facts and circumstances?
60. Are there alternatives to the proposals we should consider that
would satisfy the requirements of Section 953(b) of the Dodd-Frank Act?
IV. Economic Analysis
A. Background
As discussed in detail above, Section 953(b) directs the Commission
to amend Item 402 of Regulation S-K to add the pay ratio disclosure
requirements prescribed by the Dodd-Frank Act. Section 953(b) imposes a
new requirement on registrants to disclose the median of the annual
total compensation of all employees and the ratio of that median to the
annual total compensation of the chief executive officer. In doing so,
Section 953(b) requires registrants to determine total compensation in
accordance with Item 402(c)(2)(x). The Commission's rules for
compensation disclosure have traditionally focused on compensation
matters that relate to executive officers and directors. Although
registrants subject to Item 402 are required to provide extensive
information about the compensation of the principal executive officer
and other named executive officers identified pursuant to Item 402(a),
current disclosure rules generally do not require registrants to
disclose detailed compensation information for other employees in their
filings with the Commission. In addition, the Commission's executive
compensation disclosure rules differ from tax accounting and reporting
standards.\146\ Therefore, Section 953(b) requires registrants to
disclose specific information about non-executive employee compensation
that is not currently required for disclosure, accounting or tax
purposes. We do not expect that many registrants, if any, currently
disclose or track total compensation as determined pursuant to Item 402
for their workforce.\147\
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\146\ ``Total compensation'' as determined pursuant to Item 402
is not an amount that is reported or calculated in connection with a
registrant's financial statements. The elements of compensation that
are required to be calculated and reported for U.S. tax purposes are
not the same as those covered by Item 402 requirements, and the
reported amounts relate to the relevant calendar year for tax
purposes, rather than the registrant's fiscal year.
\147\ See supra note 17.
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We are proposing these amendments to Item 402 in order to satisfy
the statutory mandate of Section 953(b). We note that neither the
statute nor the related legislative history directly states the
objectives or intended benefits of the provision or a specific market
failure, if any, that is intended to be remedied; \148\ however,
commenters supporting Section 953(b) have emphasized that potential
benefits could arise from adding pay ratio-type information to the
total mix of executive compensation information.\149\
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\148\ See supra note 23.
\149\ See supra note 24.
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As discussed throughout this release, in proposing amendments to
implement Section 953(b), we have considered the statutory language and
exercised our discretion to develop rules designed to lower the cost of
compliance while remaining consistent with Section 953(b). In doing so,
we have considered a variety of issues, including, among others, the
specificity of the statute, whether the rules should specify a
methodology for determining the median, the use of estimates and
assumptions, whether and how to define certain terminology used in the
statute, the form of the disclosure, how often the disclosure should be
updated in the required filings, and compliance and transition matters.
We are sensitive to the costs and benefits imposed by the statutory
requirements and the proposed pay ratio disclosure requirements, and
our analysis of these costs and benefits is discussed below. Some of
the costs and benefits stem directly from the statutory mandate in
Section 953(b), while others are affected by the discretion we exercise
in implementing that mandate. Our economic analysis of the proposed pay
ratio disclosure requirements addresses both the costs and benefits
that stem directly from Section 953(b) and those arising from the
policy choices under the Commission's discretion, recognizing that it
may be difficult to separate the discretionary aspects of the rules
from those elements required by statute. The economic analysis that
follows focuses first on the benefits and costs arising from the new
mandatory disclosure requirements prescribed by the Dodd-Frank Act and
then focuses on those that arise from the choices we have made in
exercising our discretion.
We request comment throughout this release on alternative means of
meeting the statutory mandate of Section 953(b) and on all aspects of
the costs and benefits of the proposals and possible alternatives. We
also request comment on any effect the proposed pay ratio disclosure
requirements may have on efficiency, competition and capital
formation.\150\ We particularly appreciate
[[Page 60583]]
comments that distinguish between costs and benefits that are
attributed to the statute and costs and benefits that are a result of
policy choices made by the Commission in implementing the statutory
requirements, as well as comments that include both qualitative
information and data quantifying the costs and the benefits identified.
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\150\ Section 2(b) of the Securities Act [15 U.S.C. 77b(b)] and
Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)] require us, when
engaging in rulemaking under those Acts where we are required to
consider or determine whether an action is necessary or appropriate
in the public interest, to consider, in addition to the protection
of investors, whether the action will promote efficiency,
competition and capital formation.
Section 23(a)(2) of the Exchange Act [15 U.S.C. 78w(a)(2)]
requires us, when adopting rules under the Exchange Act, to consider
the impact that any new rule would have on competition. In addition,
Section 23(a)(2) prohibits us from adopting any rule that would
impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
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B. Baseline
To assess the economic impact of the proposed rules, we are using
as our baseline the current state of the market without a requirement
for registrants to disclose pay ratio information. At present, the
registrants subject to Item 402(c)(2)(x) already provide disclosure of
their executive officer compensation as Section 953(b) requires. Other
registrants, such as emerging growth companies, smaller reporting
companies and foreign private issuers, are not required to comply with
to Item 402(c)(2)(x) and provide disclosure of executive compensation
different from Item 402(c)(2)(x). We do not expect that many
registrants, if any, currently maintain payroll and information systems
that track total compensation as determined pursuant to Item 402 for
their employees, or make that information publicly available.
Therefore, investors cannot calculate registrant-specific median
employee compensation because there are no existing or publicly
available sources for this data. Correspondingly, they cannot currently
calculate the annual pay ratio in accordance with Section 953(b).
Statistics on the earnings of U.S. workers in various ``industries''
are publicly available from the Bureau of Labor Statistics. Therefore,
investors may be able to approximate the ratio using the industry
median employee compensation and the information about PEO compensation
for the registrants subject to Item 402(c). For example, the
distribution of the ratios of PEO to industry median employee
compensation for a sample of large reporting companies is reported by
North American Industry Classification System (``NAICS'') industry
sectors in the figure below for fiscal year 2011.\151\
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\151\ The ratios in the figure are calculated for each
registrant with executive total compensation data from the Standard
and Poor's Compustat Executive Compensation database which tracks
compensation for the companies currently or previously in the S&P
1500 index and industry median employee wage information at each 3-
digit NAICS level from the U.S. Department of Labor's Bureau of
Labor Statistics (available at http://www.bls.gov/bls/wages.htm).
The distribution of the registrant-level ratios within each NAICS
industry sector (2-digit) is represented using horizontal box plots
that show the minimum and maximum, and 25th, 50th (median) and 75th
percentiles.
[GRAPHIC] [TIFF OMITTED] TP01OC13.001
The pay ratio compiled with currently available information as in
the above example is different from the ratio that Section 953(b)
requires issuers to disclose; the above example uses the median wage
information of U.S. workers within the same 3-digit NAICS industries,
while Section 953(b) mandates registrants to use company-specific
information about median employee compensation for ``all employees''
which would include employees in workplaces outside the United States.
Also, the example is based on only wages and does not consider other
forms of compensation for employees other than PEOs because the Bureau
of Labor Statistics does not report those components. In contrast,
Section 953(b) requires registrants to present the ratio using total
compensation including all forms of compensation in Item 402(c)(2)(x).
[[Page 60584]]
Although the ratio described in the above example does not
represent the ratio mandated by Section 953(b), it shows that there is
considerable disparity in the compensation differentials between
industries. It is not clear how the distribution of ratios by industry
would change if company-specific median employee wage and other
compensation components for employees were used. In the example above,
the variation in ratios within the same industry group at the 3-digit
NAICS level is determined only by the variation in PEO pay between
companies. The Section 953(b) disclosure of median pay at the company
level would introduce an additional factor for the variation, which is
the company-specific median employee compensation. This could widen or
narrow the distribution of ratios depending on how median pay
corresponds to PEO pay at each company.
To assess the effects of the proposed rule, we consider the impact
of the rule on investors, registrants subject to the pay ratio
disclosure and all their employees including executive officers. The
proposed disclosure requirement would apply to all registrants that are
not emerging growth companies, smaller reporting companies and foreign
private issuers, which we estimate to be approximately 3,830
registrants.\152\ We estimate that there are approximately 900 emerging
growth companies, approximately 3,750 smaller reporting companies,
approximately 750 foreign private issuers filing on Form 20-F and
approximately 144 MJDS filers.\153\
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\152\ Based on a review of EDGAR filings in 2011, we estimate
that of the approximately 8,870 annual reports on Form 10-K filed in
that year, approximately 3,750 annual reports were filed by smaller
reporting companies, approximately 290 were filed by ABS issuers and
approximately 100 were filed by wholly-owned subsidiaries of other
registrants. We have also reduced the total number affected
registrants by 900 to reflect the approximate number of emerging
growth companies that have identified themselves as such in their
EDGAR filings as of May 2013.
\153\ We estimate that approximately 900 SEC registrants have
identified themselves as emerging growth companies in their EDGAR
filings as of May 2013. The estimates for smaller reporting
companies and foreign private issuers including MJDS filers are
based on a review of EDGAR filings for calendar year 2011. Based on
a review of EDGAR filings in 2012, there approximately 8,154
registrants filing on Form 10-K, approximately 3,640 smaller
reporting companies, approximately 715 foreign private issuers
filing on Form 20-F and approximately 152 MJDS filers. Registrants
can fall into multiple categories among emerging growth companies,
smaller reporting companies and foreign private issuers.
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An important factor to consider when analyzing the competitive
effects of the proposed pay ratio disclosure requirements on the
affected registrants is the difference in size and nature of the
workforce, complexity of the organization and the degree of integration
of payroll systems that are likely to exist among these registrants.
The average number of business and geographical segments and employees
of each segment disclosed by some of the potentially affected
registrants in the calendar year 2011 are reported in the table
below.\154\
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\154\ The corporate segments data used in the table come from
the Standard and Poor's Compustat Segment database and the
information is self-reported by the companies. As such, it is not
based on standardized definitions of lines-of-business and
geographic areas. Segment information of approximately 65% of the
potentially affected registrants is available from the database.
Table 1--Registrants With Multiple Business or Geographical Segments
----------------------------------------------------------------------------------------------------------------
Number of
Average Min Median Max registrants
----------------------------------------------------------------------------------------------------------------
No. of Geographic Segments...... 2.92 1 2 28 2,691
No. of Business Segments........ 2.36 1 1 11 2,947
Total Assets ($ millions)....... 10,472 0 1,287 3,211,484 2,691
Geographic Segment Assets ($ 8,833 0 905 3,211,484 1,411
millions)......................
No. of Employees per Registrant. 12,681 0 2,300 2,100,000 2,652
No. of Employees per Geographic 7,096 0 1,155 338,000 1,433
Segment........................
----------------------------------------------------------------------------------------------------------------
The above table shows that the average number of segments among
potentially affected registrants was about three in 2011. Also, the
approximate number of average employees per registrant and per
geographic segment was 13,000 and 7,000 respectively. Although we do
not have information on how the registrants maintained their payroll
systems across the multiple segments, the number of segments for the
registrants serves as one indication of the potential complexity of
trying to comply with the proposed rules (whether by sampling at each
segment and aggregating the samples across the segments, or aggregating
the payroll observations and sampling from the aggregated pool).
Another important factor in analyzing the competitive effects of
the proposed disclosure requirement is the current level of competition
in the labor market for PEOs. Unfortunately, we do not have data that
would allow us to assess the degree of competitiveness of the current
market for PEOs.
C. Discussion of Benefits and Costs Arising From the Mandated
Disclosure Requirements
1. Benefits
We have considered the impact that the requirements prescribed by
Section 953(b) could have on the efficiency of the U.S. capital
markets, particularly the informational efficiency. The following
discussions of potential informational benefits are mainly intended to
address benefits of the mandated disclosure to investors and
shareholders and the employees (other than executive officers) of the
registrants that are subject to Section 953(b).
As noted above, there is limited legislative history to inform our
understanding of the legislative intent behind Section 953(b) or the
specific benefits the provision is intended to secure. In particular,
the lack of a specific market failure identified as motivating the
enactment of this provision poses significant challenges in quantifying
potential economic benefits, if any, from the pay ratio disclosure.
Some commenters have noted that there is an information gap between
registrants and investors with regard to internal pay parity at
companies.\155\ Although investors are able to compare compensation
arrangements for the PEO across companies, registrants are not required
to provide, and investors may not have access to, information that
would allow them to assess the level of a PEO's compensation as it
compares to
[[Page 60585]]
that of employees at the same company.\156\ Some investors have
suggested that this type of comparison would assist in their ability to
evaluate the PEO's compensation in the context of the company's overall
business,\157\ and could provide insight into the effectiveness of
board oversight.\158\ Other commenters have suggested that a comparison
of PEO compensation to employee compensation could be used by investors
to approximate employee morale and productivity,\159\ or analyzed as a
measure of a particular company's investment in human capital.\160\
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\155\ See letter from Social Investment Forum (noting ``a number
of investors, including several of our members, have been active in
submitting shareholder resolutions in recent years supporting
corporate disclosure of similar pay disparity data.''). See
generally House Letter and Senate Letter; and letters from Americans
for Financial Reform; Group of International Investors; Calvert
Investment Management; K. Burgoyne; Institute for Policy Studies;
and Trillium Asset Management. See also Form Letter A.
\156\ See, e.g., Senate Letter; House Letter; and AFL-CIO I
(noting ``few companies provide meaningful disclosure of how
employee compensation is allocated over their workforce'').
\157\ See, e.g., letter from UAW Retiree Medical Benefits Trust
(``Disclosure of internal pay equity, whether the ratio between
median employee wages and those of the CEO or the ratio between
compensation awarded to the CEO and to other top executives, will
ultimately help investors evaluate executive pay practices by better
contextualizing the information provided to the shareholders through
the proxy statement and other corporate filings.'') and letter from
CtW Investment Group (``The new [pay ratio] disclosure offers an
insight into compensation within the entire organization, and
provides a different way for boards and shareholders to evaluate the
relative worth of a CEO.'').
\158\ See letter from CtW Investment Group (noting that
``compensation disclosure is important, not only in its own right,
but the ability it offers shareholders to evaluate and hold
accountable board members''); and letter from UAW Retiree Medical
Benefits Trust (noting ``we view Section 953(b) as an essential tool
that will increase corporate board accountability to investors'').
\159\ See AFL-CIO I and letters from Americans for Financial
Reform; Calvert Investment Management; Drucker Institute; and
Institute for Policy Studies. See also Form Letter A.
\160\ See AFL-CIO I and letter from CtW Investment Group.
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These commenters did not quantify the magnitude or value of these
potential benefits. Statistics on the average earnings of U.S. workers
in various industries are already publicly available to investors.\161\
Company-specific information about median employee pay would be new
information generated pursuant to the Section 953(b) requirements, and
thus the potential incremental benefits identified by commenters
primarily derive from this company-specific information. Commenters
have not specified whether this type of company-specific information
would be equally useful in connection with all types of companies or
whether the potential benefits are more relevant to certain types of
businesses, industries, business structure or size of registrant. One
commenter asserted that the impact of pay disparity on employee
performance and morale is ``particularly strong in industries based on
technology, creativity and innovation,'' \162\ which suggests that a
measure of employee morale could be more potentially useful in
evaluating those businesses or that this pay ratio may be a more
sensitive indicator of that effect in those industries.
---------------------------------------------------------------------------
\161\ See U.S. Department of Labor's Bureau of Labor Statistics,
available at http://www.bls.gov/bls/wages.htm.
\162\ See AFL-CIO II (``These sectors . . . depend significantly
on the ability of employees to collaborate, share ideas, and
function effectively as teams, all of which are damaged by extreme
differentials in compensation amongst employees.'').
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Furthermore, commenters have not specified what an optimal pay
ratio is or what a proper benchmark should be. They also have not
specified what effect a pay ratio has on employee morale and
productivity relative to other environment-specific and company-
specific factors. To the extent that factors exist that could cause the
ratios to differ, precise comparability across companies may not be
relevant and could generate potentially misleading interpretations or
conclusions. In particular, the ratio may significantly depend on how a
company structures its business. For example, one company might
outsource the labor-related (manufacturing) aspects of its business to
a third-party to focus on product innovation, while another company
competing in the same industry might choose to retain the labor aspect
of its business. To the extent that product innovation requires higher
pay than manufacturing, the outsourcing company will have a lower pay
ratio for the same PEO pay. If pay ratio parity between these two
companies were pursued, and a lower ratio sought, this could create
incentive for the manufacturing company to outsource jobs. Therefore,
the potential value of this disclosure for assessing issues related to
employee morale, productivity and investment in human capital may be
diminished by the indirect costs of creating incentives for registrants
to change their business structure.
Some commenters have asserted that the intended purpose of the
provision is to address a broader public policy concern relating to
income inequality, which they suggest is exacerbated by increasingly
high levels of PEO compensation relative to other workers.\163\ More
specifically, some of these commenters have suggested that the mandated
disclosure requirement will encourage the boards of public companies to
consider the relationship between the PEO's compensation and the
compensation of other employees, which, these commenters suggest could,
in turn, curb excessive PEO compensation.\164\ It has also been
suggested that shareholders of public companies could use pay ratio
information, together with pay-for-performance disclosure, to help
inform their say-on-pay votes, which could also serve to limit PEO
compensation.\165\
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\163\ See Letter from Americans for Financial Reform (``[T]his
information clearly bears directly on the important public policy
issues of pay equity and income inequality''). See also House Letter
and Senate Letter (each stating ``income inequality is a growing
concern among many Americans . . . by 2010 large company CEO pay had
skyrocketed to $10.8 million, or 319 times the median worker's pay.
Section 953(b) was intended to shine a light on figures like this at
every company.'').
\164\ See, e.g., AFL-CIO I and letters from Americans for
Financial Reform; Group of International Investors; Institute for
Policy Studies. In contrast, the National Association of Corporate
Directors asserted that pay ratio information would not be useful
for this purpose. See letter from NACD.
\165\ See letters from CtW Investment Group and S. Towns.
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Commenters have also suggested \166\ that comparing PEO pay to the
compensation of the median worker may help offset an upward bias in
executive pay resulting from the practice of benchmarking PEO
compensation solely against the compensation of other PEOs.\167\ To the
extent that pay ratio disclosure diminishes the focus of benchmarking
executive compensation exclusively to the level of peer-PEO pay, the
mandate of Section 953(b) may provide indirect economic benefits to
registrants and their shareholders by reducing the frequency of pay
increases that are tied to a benchmarking process that is not based on
performance. It is also possible, however, that pay ratio disclosure
could exacerbate any upward bias in executive pay by providing another
benchmark that could be used in certain situations to increase PEO
compensation (i.e., for a PEO whose company's pay ratio is lower than
its peers' pay ratios). In addition to these possibilities, there is
also evidence that setting executive compensation through benchmarking
practices is practical and efficient,\168\ particularly when the
[[Page 60586]]
market can observe the method used.\169\ To the extent that current
benchmarking practices and disclosure requirements are efficient,
additional pay ratio disclosure would not provide additional benefits.
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\166\ See AFL-CIO II and letter from Americans for Financial
Reform.
\167\ See, e.g., M. Faulkender and J. Yang, Inside the Black
box: the Role and Composition of Compensation Peer Groups, J. of
Financial Economics. 96, 257-270 (2010); C. Elson and C. Ferrere,
Executive Superstars, Peer Groups and Overcompensation: Cause,
Effect and Solution, J. of Corporation Law. Forthcoming (2013) for
one view that benchmarking is inefficient because it can lead to
increases in executive compensation not tied to firm performance.
\168\ See, e.g. J. Bizjak, M. Lemmon, and L. Naveen, Does the
use of peer groups contribute to higher pay and less efficient
compensation? J. of Financial Economics. 90, 152-168 (2008). This
study shows that benchmarking is a practical and efficient mechanism
used to gauge the market wage necessary to retain valuable human
capital.
\169\ See, e.g., J. Bizjak, M. Lemmon, and T. Nguyen, Are all
CEOs Above Average? An Empirical analysis of compensation Peer
Groups and Pay Design. J. of Financial Economics. 100, 538-555
(2011). This study finds that disclosure of peer groups mandated in
the 2006 Adopting Release has reduced the bias in peer group choice.
---------------------------------------------------------------------------
Similar benefits to the potential benefits cited by commenters may
be achieved using the currently available information on PEO
compensation and the industry median or average wages of U.S. workers,
although currently available data do not provide company-specific
information. Also, these commenters did not provide details about the
causes of compensation disparity within particular companies or
industries and did not address whether there are alternative means to
effect an overall reduction in PEO compensation, or, alternatively, an
overall improvement in the wages and benefits for workers. The evidence
that the current PEO compensation practice is not efficient or that the
benchmarking process causes the upward bias in executive compensation
is not sufficiently clear to establish that the purpose of the
provision is a remedy for a specific market failure in the current
compensation practice.\170\
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\170\ See, e.g., J. Core, W. Guay, and R. Thomas, Is U.S. CEO
Compensation Broken? J. of Applied Corporate Finance. 12, 97-104
(2005); C. Fryman and D. Jenter, CEO Compensation, Annual Review of
Financial Economics. 2, 75-102 (2010).
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In contrast, other commenters believe that the disclosure mandated
by Section 953(b) would not have any benefit, or, at most, would not
have benefits sufficient to justify the compliance costs, which many of
such commentators anticipate would be substantial.\171\ Some of these
commenters questioned the materiality of pay ratio information to an
investment decision and specifically questioned the meaningfulness of
the information in the form expressly required by Section 953(b).\172\
This view was also asserted by the minority in the Senate Report
accompanying the legislation.\173\ In light of these comments, we are
particularly interested in receiving information relating to material,
direct economic benefits to investors or shareholders of the affected
registrants derived from the pay ratio disclosure.
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\171\ See, e.g., letter from Meridian Compensation Partners LLC
(stating that ``disclosure of the CEO pay ratio will provide
investors with little or no meaningful information about an issuer's
executive or employee pay practices. We further believe that what
value this information may have to investors is far outweighed by
the administrative burden and associated costs borne by issuers in
accumulating the compensation data necessary to make the CEO pay
ratio disclosure.''); COEC I (opposing Section 953(b) because it
``does not believe that [the ratio] will provide any meaningful or
material information that will be used by investors.''); Brian Foley
& Co. (asserting that Section 953(b) disclosure ``realistically
provides little serious added analytical value, and presents, in its
current form, a variety of practical issues and potentially
significant calculation costs.''); letter from NACD (stating that
``it would take global companies months and thousands of hours to
come up with a completely useless number'').
\172\ See, e.g., letters from Group of Exec. Comp. Lawyers (``We
are unaware of any evidence correlating corporate performance to the
ratio of CEO pay to median employee pay.'') and Group of Trade
Associations (``While it may be of general interest to some
investors for different purposes, it is unclear how the pay ratio
disclosure will be material for the reasonable investor when making
investment decisions.''). See also, letter from RILA (noting
``current Item 402 requirements if applied to the overall employee
population of an issuer will only serve to distort the already
questionable meaning of the Compensation Ratio'').
\173\ See Senate Report, supra note 23 (``Although provisions
like this appeal to popular notions that chief executive officer
salaries are too high, they do not provide material information to
investors who are trying to make a reasoned assessment of how
executive compensation levels are set. Existing SEC disclosures
already do this.'').
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We note that some commenters asserted that certain investors
incorporate social and governance issues, like pay equity, as part of
their investment decisions.\174\ These investors may realize non-
economic benefits associated with their investment decisions based on
this type of information. These commenters, however, did not quantify
the extent to which investors would value pay ratio information or
would incorporate the disclosure required by Section 953(b) into their
investment or voting decision, if at all.\175\ We also note that many
commenters disagreed with the assertion that this type of disclosure is
material to investors or would be useful to an investment or voting
decision, particularly in the form required by the Dodd-Frank Act.\176\
As mentioned above, currently it is not possible to quantify the
usefulness to investors of company-specific pay ratio information as
required by Section 953(b) as compared to the usefulness of publicly
available statistics on average salaries, or the usefulness of any
other company-specific metric of employee compensation or satisfaction.
We understand from some commenters that the proposed pay ratio
disclosure could be used by some investors in allocating capital and
from that perspective would be perceived by such investors as a
benefit, although not necessarily an economic benefit measured by a
financial return. It is uncertain whether the investment decisions by
these investors would impact the overall efficiency of U.S. capital
markets, or if there would be an impact, whether the impact would be
net positive or negative.
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\174\ See letters from Americans for Financial Reform; Group of
International Investors; and Social Investment Forum.
\175\ We are not aware of any empirical studies that address the
value of pay disparity disclosure specifically. We are aware of
research that has studied whether there is a correlation between
information about employee satisfaction and long-term equity returns
in an effort to understand how the market values a public company's
intangible assets. This research was based on the equity prices of
companies that were identified on Fortune Magazine's list of the
``100 Best Companies to Work For in America.'' See A. Edmans, Does
the stock market fully value intangibles? Employee satisfaction and
equity prices, J. of Financial Economics 101, 621-640 (2011)
(finding evidence implying that the market fails to incorporate
intangible assets, like employee satisfaction, fully into stock
valuations until the intangible subsequently manifests in tangibles,
such as earnings, that are valued by the market; and finding
evidence suggesting that the non-incorporation of intangibles into
stock prices is not simply due to the lack of salient information
about them).
\176\ See, e.g., COEC I and letters from Brian Foley & Co.;
Group of Trade Associations; Meridian Compensation Partners, LLC;
NACD; and RILA.
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Nevertheless, as discussed above, in designing the proposed
requirements, we have sought to preserve what we believe to be the
potential benefits, as articulated by commenters, of the mandated
requirement. To the extent that some investors and other stakeholders
may seek the disclosure of pay ratio information, both those investors
and the registrants who have already disclosed similar information
voluntarily may benefit from mandated, rather than voluntary,
disclosure of pay ratio information. Given that some registrants have
already disclosed information similar to the pay ratio
voluntarily,\177\ those registrants may benefit from the mandated
disclosure requirement to the extent that standardized pay ratio
information may decrease uncertainty around, or increase the relevance
of, the voluntarily disclosed information.\178\ To the extent that the
voluntarily disclosed information and the manner in which it
[[Page 60587]]
is calculated differs from the disclosure that would be required under
the proposed rules, those companies may incur costs. We request comment
throughout this release about the potential benefits of the disclosure
mandated by the Dodd-Frank Act and the proposed rules and any
alternative ways of achieving these benefits in a manner consistent
with the Dodd-Frank Act. We seek further comment on the impact of the
proposed requirements on the efficiency of the U.S. capital markets.
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\177\ We are not aware of any registrants that currently provide
pay ratio disclosure in the form contemplated by the proposed rules
in their filings with the Commission. However, several registrants
provide (or in the past have provided) voluntary disclosures that
provide a comparison of CEO compensation with worker pay.
\178\ See, e.g., B. Bushee and C. Leuz, Economic consequences of
SEC disclosure regulation: evidence from the OTC bulletin board, J.
of Accounting and Economics. 39, 233-264 (2005); R. Lambert, C.
Leuz, and R Verrecchia, Accounting Information, Disclosure, and the
Cost of Capital, J. of Accounting Research. 45, 385-420 (2007).
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2. Costs
The following discussions are mainly intended to address costs to
registrants that are subject to the pay ratio disclosure, investors who
invest their capital in those registrants and employees of the
registrants who invest their human capital in those registrants. As
noted above, the provision does not identify a specific objective and
therefore, the appropriateness of the costs in relation to the
statutory objective is not readily assessable. Therefore, the following
analysis on costs focuses on direct compliance costs on registrants and
possible second-order effects on efficiencies and competition. We
expect that the effects of the pay ratio disclosure requirement on
capital formation would be minimal.
Many commenters raised concerns about the significant compliance
costs that would arise from requiring the use of ``total compensation''
as defined in Item 402(c)(2)(x) to calculate employee pay and requiring
registrants to identify the median instead of the average.\179\
According to these commenters, the primary driver of the significant
compliance costs is that many registrants, whether large multinationals
or companies of modest revenue size and market capitalization, maintain
multiple and complex payroll, benefits and pension systems (including
systems maintained by third party administrators) that are not
structured to easily accumulate and analyze all the types of data that
would be required to calculate the annual total compensation for all
employees in accordance with Item 402(c)(2)(x). Thus, in order to
compile such disclosure, registrants would either need to integrate
these data systems or consolidate the data manually, which, in both
cases, these commenters have stated would be highly costly and time
consuming.\180\
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\179\ See, e.g., letters from Davis Polk (noting that compliance
will be ``highly costly and burdensome, with tremendous uncertainty
as to accuracy. Companies are justifiably concerned about the costs
and burdens to accomplish the formidable data collection and
calculation tasks for employees worldwide between the end of the
year and the first required filing.''); Frederick W. Cook & Co.,
Inc. (stating ``the calculation of median total pay for all
employees other than the CEO is problematic, burdensome and perhaps
impossible for many issuers'') and Protective Life Corporation (``It
is difficult to overemphasize how burdensome this requirement could
be for large employers. Calculating annual total compensation is
much more complicated than simply adding up numbers that companies
already have available . . . . Since many large companies use
outside accounting, actuarial and compensation and pension
administration firms to perform these calculations, the costs of
disclosure will increase accordingly.'') See also COEC I and letters
from ABA; Group of Exec. Comp. Lawyers; Group of Trade Associations;
Meridian Compensation Partners, LLC; NACD; and R. Morrison.
\180\ See, e.g., COEC II and letters from Meridian Compensation
Partners, LLC; R. Morrison; and Group of Trade Associations (``There
is a widespread misconception that this information is readily
available at the touch of a button.'').
For example, one commenter submitted a survey demonstrating
that, of the 95 companies surveyed, 10.9% maintained a centralized
payroll computer system that could be used to calculate cash
compensation of each employee (or a sample of employees); 28.3% had
payroll systems in each location or regionally that could be used to
aggregate the data; 47.8% expected to compile the data manually and
13% expected to be able to use some combination of information
technology and manual data gathering. See COEC II.
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In addition, several commenters raised concerns about expected
compliance costs arising from the complexity of the ``total
compensation'' calculation under Item 402(c)(2)(x).\181\ These
commenters made various recommendations to simplify the total
compensation definition, such as including only cash compensation,
including only cash compensation and equity-based compensation,
including only compensation that is reported to the U.S. Internal
Revenue Service on Form W-2 or other relevant tax authority, or
including only compensation that is required to be recorded in the
payroll system of a particular jurisdiction and its overseas
equivalents.\182\
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\181\ See, e.g., COEC I and II; and letters from American
Benefits Council; Brian Foley & Co.; Group of Exec. Comp. Lawyers;
Group of Trade Associations; Protective Life Corporation; SCSGP; and
Towers Watson.
\182\ See COEC I and letters from American Benefits Council;
Brian Foley & Co; Group of Exec. Comp. Lawyers; Group of Trade
Associations; Protective Life Corporation; SCSGP; and Towers Watson.
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As discussed elsewhere in this release, registrants would be able
to choose from several options in order to identify the median and
provide the required disclosure. Registrants may choose to calculate
the annual total compensation for each employee and the PEO using Item
402(c)(2)(x) and to identify the median using this method. In addition,
the proposed requirements would allow registrants to choose a
statistical method to identify the median that is appropriate to the
size and structure of their own businesses and the way in which they
compensate employees, rather than prescribing a particular methodology
or specific computation parameters. The proposed rules also would
permit registrants to use a consistently applied compensation measure
to identify the median employee and calculate and disclose that median
employee's total compensation in accordance with Item 402(c)(2)(x). The
proposed requirements also would permit registrants to use reasonable
estimates in calculating the annual total compensation for employees
other than the PEO, including when disclosing the annual total
compensation of the median employee identified using a consistently
applied compensation measure. We believe that this flexible approach is
consistent with Section 953(b) and could ease commenters' concerns
about the potential burdens of complying with the disclosure
requirement. Also, allowing these specific alternatives could reduce
the potential uncertainty for registrants as to how to comply with the
proposed rules.
Although some commenters have estimated the cost of compliance for
certain registrants,\183\ the estimates we have received vary
significantly. The estimates provided by commenters are also based on
the commenters' initial reading and interpretation of the statute and
not the proposed means of implementation. One commenter reported that a
registrant estimated that compliance would cost approximately $7.6
million and take approximately 26 weeks,\184\ while another registrant
estimated approximately $2.0 million annually solely for computing the
actuarial change in accrued pension benefit.\185\ We have also received
cost information from discussions with registrants and industry groups,
including the following estimates:
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\183\ See COEC II and letter from Group of Trade Associations.
\184\ See letter from Group of Trade Associations (the commenter
does not clarify whether these estimates reflect a one-time or
ongoing annual burden).
\185\ See letter from Group of Trade Associations.
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Approximately 201 to 500 hours per year, plus significant
costs;
$3 to $6.5 million for a multinational manufacturing
company with 90 separate payrolls;
$4.725 million for a multinational consumer products
company (including an estimated 50 hours per country for employees
located in 80 countries);
$100 million dollars for a multinational company; and
[[Page 60588]]
$350,000 to implement plus $100,000 a year for ongoing
compliance for a global technology company.
We are, however, unable to quantify with any precision the compliance
costs at this time.\186\ Although these estimates are a useful starting
point for our analysis, we do not believe the aggregate of these
estimates necessarily represents an accurate indication of the expected
compliance costs because they do not take into account the flexibility
allowed under the proposed requirements.\187\ Also, these estimates,
although providing potentially useful data points, do not reflect costs
incurred across the breadth of the registrant population subject to the
requirement. Commenters did not provide sufficient information on the
factors used to produce these estimates to enable us to evaluate these
cost estimates, such as, among others, how separate payrolls are
maintained within a company across divisions or subsidiaries, how the
compensation components that the current payroll systems record compare
to the ``total compensation'' as defined in Item 402(c)(2)(x), whether
the estimated costs reflect internal personnel costs, technology costs
or the costs of third-party service providers and outside
professionals, and any assumptions used in deriving the estimates.
Accordingly, we could not quantify differential costs from these
estimates when the flexibility allowed under the proposed requirements
is applied to each of those inputs. Also, these estimates do not
precisely distinguish between initial and ongoing costs, while we
expect that, for many registrants, the overall compliance burden will
diminish after systems are in place to gather and verify the underlying
data. We request comment throughout this release for additional
information about the costs of compliance, including, where applicable,
estimates or data that differentiate between categories of registrants
facing relatively harder or easier burdens that could better inform our
understanding of the direct and indirect costs of the proposed rules.
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\186\ In light of the limitations of these estimates, we were
not able to use these estimates to inform the hour and cost burden
estimates that are required by the Paperwork Reduction Act of 1995
(the ``PRA''). See Section V of this release. Our discussion and
analysis in that section describes the assumptions we made for
purposes of deriving our PRA estimates. We request comment on our
PRA estimates in Section V. We expect to review and revise those PRA
estimates in light of any further information we receive on
estimated costs.
\187\ We expect that the flexibility allowed under the proposed
requirements could, at least for some registrants, substantially
reduce the overall compliance burden, and we request estimates or
data that quantifies this impact.
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We are particularly sensitive to the competitive effects that could
impact registrants subject to the requirements of Section 953(b). In
this regard, we have assumed that these registrants would incur direct
costs to compile the information and may incur indirect costs arising
from revealing information about the cost structure of their workforce
that registrants not covered by Section 953(b) would not have to
reveal. Such costs are potentially significant, although as described
elsewhere in this release we have sought to exercise our discretion to
reduce such costs. Any material costs resulting from Section 953(b),
however, could result in differential pressures from and treatment by
market participants for companies competing in the same industry that
are similar except for whether they are covered by Section 953(b).
Accordingly, registrants covered by Section 953(b) could be at a
competitive disadvantage to registrants (including private companies,
foreign private issuers, smaller reporting companies and emerging
growth companies) that are outside the scope of Section 953(b). This
disadvantage could be greater for registrants that have already
completed an initial public offering but that would otherwise have
qualified for emerging growth company status.\188\ In addition, we
understand from commenters that some registrants covered by Section
953(b) would likely incur higher costs of compliance based on size,
business type and level of integration of payroll and benefits
systems--such as large, multinational companies that do not maintain
integrated employee compensation information on a global basis.
Therefore, the competitive impact of compliance with the disclosure
requirements prescribed by Section 953(b) could disproportionately fall
on U.S. companies with large workforces and global operations, although
the incremental impact of the fixed cost components of compliance will
be proportionally smaller for large, multinational companies compared
to smaller companies.
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\188\ Registrants that completed their first sale of common
equity in a registered offering before December 8, 2011 do not
qualify as emerging growth companies, regardless of the level of
their annual total revenues or public float. See Section 101(d) of
the JOBS Act. These registrants could be at a competitive
disadvantage to companies with similar levels of revenue and public
float that do qualify as emerging growth companies.
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We also acknowledge that there could be competitive impacts that
result from indirect costs of disclosure. Registrants subject to
Section 953(b) could be subject to competitive harm if their
competitors are able to infer proprietary or sensitive information from
the disclosure of the median of the annual total compensation of all
employees. For example, it could be possible for a competitor to infer
sensitive information about a registrant's cost structure based on
information about median levels of employee compensation. This could
also have an impact on labor markets if competitors use the disclosure
to target and hire away a registrant's employees. We have sought to use
our discretion to reduce the potential for such indirect costs, by
permitting flexibility in the manner in which issuers may determine
median compensation. We request comment on whether the flexibility
provided by the proposed rule would make it more difficult for
competitors to infer a registrant's cost structure from such
disclosure. Alternatively, a registrant subject to Section 953(b) could
be at a competitive disadvantage when hiring or retaining a PEO if
there is pressure to limit PEO wages based on the pay ratio disclosure
while non-covered registrants are not subject to the same pressure.
Finally, a registrant subject to Section 953(b) could face pressure
from its PEO or from employees to increase compensation in light of the
pay ratio disclosure of the registrant's competitors. Alternatively,
there could be incentives to alter the median employee compensation
either by increasing all employee compensation or by reducing the
number of lowest wage employees or groups of employees, such as a
specific office or division of a company. One method of doing this, as
previously mentioned, is through outsourcing operations to third
parties, including through the use of independent contractors,
``leased'' workers or other temporary employees. In some instances this
might not harm and could even improve the profit margin of the
registrant, but it could also result in changes to the business
structure that are inefficient. Pressure for a registrant to maintain a
low pay ratio could also curtail the expansion of business operations
into lower cost geographies. This could adversely affect states and
municipalities in lower wage geographies seeking to generate jobs for
their communities. We do not have data that can be used to analyze the
likelihood or potential magnitude of these impacts. We request comment
on these and any other potential uses of the disclosure that could
result in costs for registrants or that could impact competition.
[[Page 60589]]
D. Discussion of Benefits and Costs Arising From the Exercise of Our
Discretion
1. General
In addition to the statutory benefits and costs described above, we
believe that the use of our discretion in implementing the statutory
requirements could result in benefits and costs to registrants and
users of the pay ratio disclosure. We discuss below the choices we made
in implementing the statute and the associated benefits and costs. We
are unable, in most cases, to provide quantified estimates of these
benefits and costs because we lack particularized data on the potential
effects of these policy choices. Specifically, we expect that most
registrants do not currently track total compensation as determined
pursuant to Item 402 for their employees, thus we would not be able to
acquire sufficiently analogous data.
In general, the proposed rules implementing Section 953(b) are
designed to comply with the statutory mandate. Because commenters
supporting Section 953(b) have emphasized the potential benefits that
could arise from adding pay ratio information to the total mix of
executive compensation information,\189\ we have sought to make the
mandated disclosure of Section 953(b) work with the existing executive
compensation disclosure regime. In light of the significant potential
costs that commenters attribute to the requirements of Section
953(b),\190\ we believe that it is appropriate for the proposed rules
to allow registrants flexibility, which we believe should help lower
the costs of compliance generally. The proposal seeks to implement
Section 953(b) without imposing additional requirements that are not
mandated by the Dodd-Frank Act. In this respect, the proposed
requirements reflect our consideration of the relative costs and
benefits of a more flexible approach as opposed to a more prescriptive
approach.
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\189\ See, e.g., letters from Americans for Financial Reform;
Group of International Investors; Calvert Investment Management; CtW
Investment Group; K. Burgoyne; House Letter; Institute for Policy
Studies; Senate Letter; Social Investment Forum; Trillium Asset
Management; UAW Retiree Medical Benefits Trust; and S. Towns.
\190\ See, e.g., letter from Group of Trade Associations.
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In weighing alternatives, we considered the potential costs and
benefits of comparability of disclosure across registrants. Although a
flexible approach could reduce the comparability of disclosure across
registrants, we do not believe that precise conformity or comparability
of the ratio across companies is necessarily achievable, due to the
variety of factors that could influence the ratio,\191\ or justifiable,
in light of the substantial additional costs that such an approach
would impose on registrants. In addition, we believe that a flexible
approach would not significantly diminish the potential benefits of the
mandated disclosure. In this respect, we note that some commenters
suggest that the expected benefits of pay ratio disclosure derive from
its ability to offer an internal comparison, by providing a metric by
which a PEO's compensation can be evaluated within the context of his
or her own company.\192\ We also acknowledge that some commenters that
support Section 953(b) disclosures suggest that the mandated disclosure
could be used to compare compensation practices between companies and
registrants,\193\ and our flexible approach could impose costs on
investors seeking to use the pay ratio disclosure to compare
registrants. We note, however, that using the ratios to compare
compensation practices between registrants without taking into account
inherent differences in business models, which may not be readily
available information, could possibly lead to potentially misleading
conclusions and to unintended consequences.
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\191\ We note that some commenters raised the issue of
comparability in their letters. For example, Towers Watson noted,
``Among other issues, there's no way (without significantly more
information) to reliably compare ratios between companies. For
example, companies in different industries will pay their employees
at different levels. And even within the same industry, companies
located in different geographical areas will pay their employees at
different levels. As a result, this disclosure does not provide much
meaningful information regarding differences in executive to
employee pay ratios from company to company.'' See letter from
Towers Watson. See also letter from RILA (noting that pay ratio
disclosure ``is more likely to result in confusion and erroneous
comparisons between companies because of inherent differences in
business models, staffing and compensation practices . . . these
disparate results are only magnified if the ratio is used to compare
publicly traded companies across industry sectors.'').
\192\ See letters from CtW Investment Group; and letter from
Senator Menendez.
\193\ See, e.g., AFL-CIO I and letter from Americans for
Financial Reform.
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2. Implementation Choices and Alternatives
a. Filings Subject to the Proposed Disclosure Requirements
Although some commenters raised questions as to whether Section
953(b)(1) could be read to require pay ratio disclosure in every
Commission filing,\194\ other commenters suggested that the statute, by
referring to filings described in Item 10(a) of Regulation S-K, is
better read as applying only to those filings for which the applicable
form requires Item 402 disclosure.\195\ The proposed requirements
follow the latter approach. We believe that requiring pay ratio
disclosure in filings that do not contain other executive compensation
information would not present this information in a meaningful context.
Because some commenters have asserted that the pay ratio disclosure
would provide another metric to evaluate executive compensation
disclosure,\196\ we believe that the proposed pay ratio disclosure
would be less useful for this purpose if it were provided on a stand-
alone basis, unaccompanied by other Item 402 information, such as the
summary compensation table required by Item 402(c) and the compensation
discussion and analysis required by Item 402(b). Therefore, we believe
it is appropriate to read Section 953(b) as requiring pay ratio
disclosure in only those filings that are required to include other
Item 402 information. We seek information from commenters regarding how
to quantify the costs or the benefits of this approach.
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\194\ See, e.g., COEC I and letters from American Benefits
Council; Davis Polk; Compensia, Inc.; SCSGP; and Towers Watson.
\195\ See, e.g., letters from ABA and RILA.
\196\ See, e.g., Senate Letter; House Letter; and AFL-CIO I; and
letters from CtW Investment Group and UAW Retiree Medical Benefits
Trust.
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b. Registrants Subject to the Proposed Pay Ratio Disclosure
Requirements
The proposed requirements would apply to only those registrants
that are required to provide summary compensation table disclosure
pursuant to Item 402(c). We recognize that the reference to ``each
issuer'' in Section 953(b) could be read to apply to all issuers that
are not emerging growth companies, including smaller reporting
companies and foreign private issuers. As a result of the specific
reference in Section 953(b) to the definition of total compensation
contained in Item 402(c)(2)(x), and the absence of Congressional
direction to apply this requirement to companies not previously subject
to Item 402(c) requirements, the proposals would not apply to
registrants that are not subject to Item 402(c) requirements.
As discussed in detail above in Section II.B.2.a., we considered
whether a broader reading of the statute was warranted in the context
of smaller reporting companies. Requiring smaller reporting companies
to provide the pay
[[Page 60590]]
ratio disclosure consistent with the requirement for other registrants
would require smaller reporting companies to collect data and calculate
compensation for the PEO in a manner they otherwise would not be
required to calculate compensation. Although quantifying the costs to
smaller reporting companies of calculating PEO compensation under Item
402(c)(2)(x) instead of under Item 402(n)(2)(x), or of complying with
the requirements prescribed by Section 953(b), is not currently
feasible, we assume that such costs could be significant. Based on a
review of EDGAR filings for calendar year 2011, we estimate that there
are approximately 3,750 smaller reporting companies that would benefit
by not being required to comply with the proposed requirements.
We also considered whether to expand the coverage of the proposed
requirements to registrants, such as foreign private issuers and MJDS
filers, that are not currently required to provide Item 402 disclosure.
Foreign private issuers, for example, provide a modified version of
executive compensation disclosure under Form 20-F, while MJDS filers
follow the executive compensation requirements arising under Canadian
law. Although quantifying the costs to these registrants of calculating
PEO compensation under Item 402(c)(2)(x) or of complying with the
requirements prescribed by Section 953(b) is not currently possible, we
assume that such costs could be significant. Based on a review of EDGAR
filings for calendar year 2011, we estimate that there are
approximately 750 foreign private issuers filing on Form 20-F and 144
MJDS filers that would benefit from the exclusion from the proposed
requirements.
c. Employees Included in the Identification of the Median
Section 953(b) expressly requires disclosure of the median of the
annual total compensation of ``all employees.'' Consistent with that
mandate, the proposed requirements state that ``employee'' or
``employee of the registrant'' includes any full-time, part-time,
seasonal or temporary worker employed by the registrant or any of its
subsidiaries (including officers other than the PEO).\197\ Therefore,
under the proposed requirements, ``all employees'' covers all such
individuals. In contrast, workers who are not employed by the
registrant or its subsidiaries, such as independent contractors or
``leased'' workers or other temporary workers who are employed by a
third party, would not be covered.
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\197\ Rule 405 under the Securities Act states that the term
``employee'' does not include a director, trustee or officer. This
parenthetical in the proposed rules is intended to clarify that
officers, as that term is defined under Rule 405, are not excluded
from the definition of employee for purposes of the proposed pay
ratio disclosure requirements.
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We considered whether Section 953(b) is intended to cover employees
of the registrant alone, or also cover employees of the registrant's
subsidiaries. By directing the Commission to amend Item 402, we believe
that Section 953(b) is intended to cover employees on an enterprise-
wide basis, including both the registrant and its subsidiaries, which
is the same approach as that taken for other Item 402 information. This
interpretation could raise compliance costs for registrants that are
holding companies that have a significant portion of their workers
employed by operating subsidiaries rather than by the holding company.
We also note that allowing a holding company registrant to exclude
employees from the identification of the median solely on the basis of
its corporate structure could affect the potential meaningfulness of
the disclosure. Further, allowing holding company registrants to
exclude employees could provide a potential competitive advantage over
non-holding company registrants due to lower compliance costs
associated with having fewer workers covered by the rule.
Because Section 953(b) directs the Commission to amend Item 402, we
believe it is appropriate to apply the same definition of subsidiary
that is used for other disclosure under Item 402. We acknowledge that
compliance costs for some registrants potentially could be further
reduced if we limited the application of the proposed rules to
employees of wholly-owned subsidiaries, or some other definition of
subsidiary. We request comment on whether using a different definition
of subsidiary would reduce costs for registrants, or whether it would
raise costs by causing registrants to make a new, separate
determination of which entities are subsidiaries for purposes of pay
ratio requirements. Comment is also requested on whether a different
definition of subsidiary would affect any benefits expected to be
derived from the proposed rule. Because registrants already make the
determination of which entities are subsidiaries for purposes of Rule
405 and Rule 12b-2 in connection with other required disclosure, we
believe that using the same set of entities for purposes of the
proposed requirements would simplify compliance for most registrants
and make the information easier for users of the information to
understand.
We recognize that it is possible that a registrant could alter its
corporate structure or its employment arrangements in order to reduce
the number of employees covered by the rule, and, therefore, reduce its
costs of compliance or to alter the reported ratio to achieve a
particular objective with the ratio disclosure. For example, a
registrant could choose to use only independent contractors or
``leased'' workers instead of hiring its own employees. Or a registrant
could choose to outsource or franchise some aspects of its business,
either to lower compliance costs by having fewer employees subject to
the proposed pay ratio requirements or in an effort to ``improve'' its
pay ratio. One commenter has questioned the likelihood of this
behavior.\198\ To the extent that there is an incentive for companies
to change their business model to adjust their pay ratio, such an
incentive would arise wherever a prescriptive standard is used.
Therefore, we have sought to avoid adding prescriptive standards that
are not mandated by the Dodd-Frank Act.
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\198\ See AFL-CIO I (``It is simply not credible to suggest that
companies will dramatically restructure their operations to
manipulate this [pay ratio] data. Moreover, such a business decision
would be improper under state corporate laws that require boards of
directors to put the interests of shareholders before the interests
of company CEOs who may be potentially embarrassed by their
companies' Section 953(b) disclosures.'').
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As discussed in Section II.C.2.a., we acknowledge the concerns of
commenters that the inclusion of non-U.S. employees raises compliance
costs for multinational companies and introduces cross-border
compliance issues. We also recognize that these companies could suffer
competitively if they compete with companies that have lower costs of
compliance, due to, for example, fewer employees, fewer global
locations, or data systems that are more centralized. We have weighed
these considerations and are proposing that the requirement cover all
employees without carve-outs for specific categories of employees.
Although we believe that the inclusion of non-U.S. employees in the
calculation of the median is consistent with the statute, we considered
ways to address the costs of compliance that commenters attribute to
the provision's coverage of a registrant's global workforce. In
particular, we considered the concerns of commenters that data privacy
regulations in various jurisdictions could impact the ability of
registrants to gather and verify the data needed to identify the
median. We believe that the proposed flexibility
[[Page 60591]]
afforded to registrants in selecting a methodology to identify the
median, such as statistical sampling, the use of a consistently applied
compensation measure to identify a median employee, as well as the
ability of registrants to use reasonable estimates in the calculation
of total compensation of employees other than the PEO and the
identification of the median, could enable registrants to better manage
the costs and burdens arising from local data privacy regulations. We
specifically requested comment on these issues in order to gain more
information about appropriate ways to address these potential issues in
a way that is consistent with Section 953(b) and the costs and benefits
of any alternatives.
Section 953(b) does not prescribe a particular calculation date for
the determination of who should be treated as an employee for purposes
of the rule. We believe that a bright line calculation date for
determining who is an employee would ease compliance for registrants by
eliminating the need to monitor changing workforce composition during
the year, while still providing a recent snapshot of the entire
workforce. Accordingly, the proposed requirement includes a calculation
date for determining who is an employee for purposes of identifying the
median by defining ``employee'' as an individual employed as of the
last day of the registrant's last completed fiscal year.\199\ This
calculation date would be consistent with the one used for determining
the named executive officers under current Item 402 requirements.
---------------------------------------------------------------------------
\199\ Proposed Item 402(u)(4).
---------------------------------------------------------------------------
We believe that the potential benefits of the disclosure mandated
by Section 953(b) would not be significantly diminished by covering
only individuals employed at year-end, rather than covering every
individual employed during the year. Although we believe that this
approach could help contain compliance costs for registrants, by not
requiring registrants to monitor the composition of the workforce
during the year, we note that it could have other economic effects. For
example, this approach would not capture seasonal or temporary
employees that are not employed at year-end. In the case of a
registrant with a significant amount of such workers, the exclusion of
such workers from the median calculation could reduce the potential
benefits of the rule, as a median so calculated may not fully reflect
the workforce required to run the registrant's business. It could also
cause the proposed requirements to be costlier for, and thereby have an
anti-competitive impact on, registrants whose temporary or seasonal
workers are employed at year-end as opposed to at other times during
the year. Finally, it is possible that registrants could try to
structure their employment arrangements to reduce the number of workers
employed on the calculation date or to alter the reported ratio to
achieve a particular objective with the ratio disclosure, although it
is not known whether registrants will do so. Currently, it is not
possible to quantify whether any such restructuring of employee
arrangements would have a material impact on a registrant's reported
median annual total compensation. Comment is requested on this issue.
The proposed requirements also include an instruction that permits
a registrant to annualize the compensation for all permanent employees
(other than those in temporary or seasonal positions) who were employed
for less than the full fiscal year. We did not propose to require
registrants to perform this type of adjustment, however, because we do
not believe that the costs of requiring companies to make an extra
calculation would be justified.
We believe that this annualizing adjustment would not significantly
diminish the potential usefulness of the disclosure mandated by Section
953(b), particularly because the ratio uses median employee
compensation, not average employee compensation. For example, we would
not expect that annualizing the salary of a permanent new hire would
impact the potential ability of an investor to use the pay ratio
disclosure as an indicator of employee morale or to gain an
understanding of a registrant's investment in human capital, which some
commenters have identified as a benefit of the disclosure under Section
953(b).\200\ For annualizing adjustments to have any significant impact
on the reported pay ratio, both the fraction of permanent new hires to
all employees of the registrant and their annualized compensation would
have to be relatively large. We do not believe those factors are
typical of employment arrangements of many registrants. We also note
that some of the commenters that support Section 953(b) disclosure were
also supportive of allowing annualizing adjustments.\201\
---------------------------------------------------------------------------
\200\ See AFL-CIO I and letters from Calvert Investment
Management; CtW Investment Group; Group of International Investors;
Americans for Financial Reform; Drucker Institute; Institute for
Policy Studies; Social Investment Forum; Trillium Asset Management;
and UAW Retiree Medical Benefits Trust.
\201\ See AFL-CIO II and letters from Social Investment Forum
and Trillium Asset Management.
---------------------------------------------------------------------------
By permitting, but not requiring, registrants to annualize
compensation for these employees, the comparability of disclosure
across companies could be reduced. We do not believe that precise
comparability or conformity of disclosure from registrant to registrant
is necessarily achievable due to the variety of factors that could
cause the ratio to differ, and, accordingly, we do not believe that the
costs associated with promoting precise comparability would be
justified. We assume that comparability of disclosure would be promoted
at a lower cost to registrants by proscribing all annualizing
adjustments, rather than by prescribing rules for making such
adjustments for employees who were employed for less than the full
year.
d. Identifying the Median
Section 953(b) does not expressly set forth a methodology that must
be used to identify the median, nor does it mandate that the Commission
must do so in its rules. In order to allow the greatest degree of
flexibility while maintaining consistency with the statutory provision,
the proposed requirements do not specify any required calculation
methodologies for identifying the median.\202\
---------------------------------------------------------------------------
\202\ One of the difficulties in identifying a median arises
from the situation that a registrant with multiple business units,
geographical operations, or subsidiaries maintains payroll data at
each business unit or subsidiary. Calculating the average for the
consolidated entity only requires each subsidiary or business unit
to convey information on the total (or average) compensation and the
number of its employees to its parent entity, whereas identifying
the median requires transferring the entire set of compensation data
from each subsidiary to the parent entity. We recognized that
registrants with multiple operations are likely to maintain payroll
data at the business unit or subsidiary level, and thus allowing
them to use the average employee compensation could reduce their
compliance costs. Nevertheless, we believe that Section 953(b) is
clear in requiring the median rather than the average.
---------------------------------------------------------------------------
Several commenters recommended allowing companies to use total
direct compensation (such as annual salary, hourly wages and any other
performance-based pay) or cash compensation to first identify a median
employee.\203\ We agree that the costs of compliance could be reduced
if registrants were permitted to identify the median of a less complex,
more readily available figure, such as salary and wages, rather than
total compensation as determined in
[[Page 60592]]
accordance with Item 402(c)(2)(x). This approach could also help reduce
costs for registrants that are not able to reduce costs using
statistical sampling techniques. We are proposing to permit registrants
to use any consistently applied compensation measure to identify the
median employee and then calculate that median employee's annual total
compensation in accordance with Item 402(c)(2)(x). For purposes of
estimating the median employee, registrants may use the same annual
period that is used in the payroll or tax records from which the
compensation amounts are derived. We believe that registrants would be
in the best position to select a compensation measure that is
appropriate to their own facts and circumstances and that a
consistently applied compensation measure would result in a reasonable
estimate of a median employee. After identifying the median employee,
registrants would be required to calculate that employee's annual total
compensation in accordance with Item 402(c)(2)(x) for the last
completed fiscal year, which would provide comparability with the
calculation of the PEO's total compensation without imposing
significant costs.
---------------------------------------------------------------------------
\203\ See AFL-CIO II and letters from ABA; American Benefits
Council; Americans for Financial Reform; CtW Investment Group;
Protective Life Corporation; RILA; and SCSGP.
---------------------------------------------------------------------------
Allowing registrants to choose this alternative approach is likely
to reduce registrants' compliance costs significantly, compared to
requiring registrants to calculate total compensation in accordance
with Item 402(c)(2)(x) for all employees and then identify the median.
Registrants that choose this alternative approach would be able to
identify a median employee from employee compensation data that they
may already track or record or that may be less expensive for them to
acquire than acquiring and computing all of the Item 402(c)(2)(x)
compensation information for each employee. We acknowledge, however,
that some registrants would still incur costs if they have to combine
or sample from separately maintained payroll systems across segments
and/or geographic locations. In addition, the proposal specifically
permits registrants, in identifying a median employee, to use
compensation amounts reported in payroll or tax records. This approach
would reduce uncertainty for registrants and may also be less costly to
them, compared to other alternatives that may use various sources of
compensation data to generate reasonable estimates of total
compensation in accordance with Item 402(c)(2)(x).
We are proposing this flexible approach because we believe that the
appropriate and most cost effective methodology would necessarily
depend on a registrant's particular facts and circumstances, including,
among others, such variables as size and nature of the workforce,
complexity of the organization, the stratification of pay levels across
the workforce, the types of compensation the employees receive, the
extent that different currencies are involved, the number of tax and
accounting regimes involved, the number of payroll systems the
registrant has and the degree of difficulty involved in integrating
payroll systems to readily compile total compensation information for
all employees. We believe that these are likely the same factors that
would cause substantial variation in the costs of compliance. By not
prescribing specific methodologies that must be used, the proposed
requirements would allow registrants to choose a method to identify the
median that is appropriate to the size, structure and compensation
practices of their own businesses, including permitting a registrant to
identify the median employee using any consistently applied
compensation measure. In addition, this flexibility could enable
registrants to manage compliance costs more effectively than a more
prescriptive approach would allow. We also believe that, by allowing
registrants to minimize direct compliance costs, a flexible approach
could mitigate, to some extent, any potential negative effects of the
mandated requirements on competition. We recognize, however, that a
flexible approach could increase uncertainty for registrants that
prefer more specificity on how to comply with the proposed rules,
particularly for registrants that do not use statistical analysis in
the ordinary course of managing their businesses. In light of this
potential uncertainty, we have provided clarity to registrants that the
use of statistical sampling or other reasonable estimates in
identifying the median would be permitted, as well as identifying the
median employee based on any consistently applied compensation measure.
The reduction in compliance costs by using statistical sampling or
other reasonable estimates in determining median would ultimately
depend on a registrant's particular facts and circumstances. For
example, in the following figure and tables, we show that the variance
of underlying wage distributions can materially affect the appropriate
sample size for statistical sampling.\204\ Industries characterized by
the Bureau of Labor Statistics as having low wage variances, such as
Motor Vehicle Manufacturing, Electric Power Generation, Coal Mining,
have estimated minimum appropriate sample sizes for an accurate median
estimate of less than one hundred. In contrast, industries
characterized by the high wage variances, such as Offices of
Physicians, Spectator Sports, and Motion Picture and Video industries,
have estimated minimum appropriate sample sizes of more than 1,000
employees. Figure 2 shows the distribution of estimated minimum
appropriate sample sizes for each of the 290 4-digit NAICS industries
tracked by the BLS.
---------------------------------------------------------------------------
\204\ The analysis uses mean and median wage estimates from the
Bureau of Labor Statistics (BLS) at the 4-digit NAICS industry level
(290 industries) and assumes a lognormal wage distribution, a 95%
confidence interval with 0.5% margin of error in the estimate of the
median of the logarithm of wage. The lognormal wage distribution
assumption is supported by the following studies: F. Clementi, and
M. Gallegati, Pareto's law of income distribution: evidence for
Germany, the United Kingdom, and the United States. Econophysics of
Wealth Distributions, New Economic Window. 3-14 (2005), and J.
L[oacute]pez and L. Serv[eacute]n, A Normal Relationship? Poverty,
Growth and Inequality. World Bank Policy Research Working Paper 3814
(2006). Also, see M. Pinkovskiy and X. Sala-i-Martin, Parametric
Estimations of the World Distribution of Income, NBER Working Paper
15433, (2009). This analysis also assumes that when the sampling is
implemented, the sampling method would be a true random sampling,
i.e., it would not be biased by region, occupation, rank, or other
factor.
[[Page 60593]]
Table 2--The Industries With the Largest and Smallest Appropriate Sample Sizes
----------------------------------------------------------------------------------------------------------------
Median wage Appropriate
Industry Mean wage ($) ($) sample size
----------------------------------------------------------------------------------------------------------------
10 industries with smallest variance in wage distribution:
Electric Power Generation, Transmission and Distribution.... 67,950 65,790 81
Motor Vehicle Manufacturing................................. 56,160 54,430 81
Coal Mining................................................. 53,560 51,610 97
Support Activities for Water Transportation................. 57,220 55,080 99
Other Pipeline Transportation............................... 67,240 64,180 117
Metal Ore Mining............................................ 56,540 53,900 124
Natural Gas Distribution.................................... 68,630 64,930 139
Wired Telecommunications Carriers........................... 62,540 59,050 147
Software Publishers......................................... 91,050 85,290 156
Rail Transportation......................................... 56,020 52,560 166
10 industries with largest variance in wage distribution:
Offices of Physicians....................................... 69,710 38,960 1,601
Spectator Sports............................................ 40,550 25,720 1,357
Motion Picture and Video Industries......................... 61,280 38,580 1,276
Health and Personal Care Stores............................. 40,860 26,790 1,248
Home Health Care Services................................... 36,650 24,600 1,199
Cut and Sew Apparel Manufacturing........................... 34,530 23,280 1,199
Independent Artists, Writers, and Performers................ 63,560 41,550 1,156
Agents and Managers for Artists, Athletes, Entertainers, and 67,660 44,820 1,104
Other Public Figures.......................................
Other Professional, Scientific, and Technical Services...... 45,860 31,470 1,079
Electronic Shopping and Mail-Order Houses................... 43,710 30,230 1,065
----------------------------------------------------------------------------------------------------------------
[GRAPHIC] [TIFF OMITTED] TP01OC13.002
Because these estimated minimum appropriate sample sizes are based
on wage distributions measured by the BLS in standardized industries,
they may not correspond to the appropriate minimum sample size at
registrants with an
[[Page 60594]]
employee base that does not correspond precisely to one of these
industries. Even for registrants whose operations are wholly within one
of these standardized industries, their appropriate sample size may
also be different to the extent that their distribution of employee
wages is different than that of the industry. In these instances, a
registrant's appropriate sample size could be higher or lower than that
estimated for its industry.
Of the nearly 4,000 registrants that we believe will be subject to
the rule, we estimate that approximately 50% have an organizational
structure characterized by a compensation distribution that falls into
a tractable statistical distribution category, which would allow the
registrant use a simple random sampling method.\205\ Of these
registrants for which we have industry classifications that match the
BLS data, Table 3 shows estimated minimum appropriate sample sizes
assuming that each registrant's wage distribution is similar to the
BLS-measured industry distribution.
---------------------------------------------------------------------------
\205\ This estimate is based on data from Standard and Poor's
Compustat Segment database. Segment information is available for
approximately 65% of the potentially affected registrants. Among
these, 50% report having multiple business segments and 60% report
having multiple geographical segments. Also, 25% of the potentially
affected registrants self-report that they have both multiple
business segments and geographical segments. Because the segment
information is self-reported by the companies, it not based on
standardized definitions of geographic areas such as states,
countries or regions. Multiple geographical segments could represent
different geographies with similar operations and thus similar wage
distributions, for examples, different states within the United
States.
Table 3--Number of Registrants According to Sample Size Ranges
----------------------------------------------------------------------------------------------------------------
Number of Median wage
Sample size (n) ranges registrants Mean wage ($) ($)
----------------------------------------------------------------------------------------------------------------
n < 100......................................................... 77 62,281 60,245
100 <= n < 250.................................................. 149 50,269 46,298
250 <= n < 500.................................................. 441 45,154 39,232
500 <= n < 750.................................................. 682 41,736 33,410
750 <= n < 1000................................................. 119 46,997 34,897
n >= 1000....................................................... 29 61,221 37,906
-----------------------------------------------
Total....................................................... 1,497 .............. ..............
----------------------------------------------------------------------------------------------------------------
For the remaining 50% of the potentially affected registrants that
have multiple business segments, and thus are likely to maintain their
payroll systems separately for each segment, statistical sampling could
involve more steps and other assumptions. This may be particularly true
for approximately 25% of the potentially affected registrants that
self-report that they have both multiple business segments and
geographical segments.
While we believe that there is more than one statistical sampling
approach that could result in reasonable estimates of the median for
these registrants, all would be more complicated than simple random
sampling. The alternative approaches would require drawing observations
from each business or geographical segment with a unique distribution
of compensation and statistically inferring the registrant's overall
median based on the observations drawn. For example, the statistical
inference may involve a weighted sample median using a stratified
cluster sampling,\206\ or a numerically solved median estimate based on
their knowledge or assumptions on the size and distribution for each
segment and pre-estimated mean and variance of each business or
geographical segment. Some methods, however, may not easily generate
confidence intervals around the estimates or prescribe a minimum sample
size. As a result, generating reasonable estimates through statistical
sampling could result in a disproportionally higher cost to registrants
with more complicated payroll systems or organization structures.
Nevertheless, we believe that permitting registrants to use statistical
sampling may lead to a reduction in compliance costs as compared to
other methods of identifying the median.
---------------------------------------------------------------------------
\206\ See, e.g., S. Gross. Median estimation in sample surveys.
In Proceedings of the Section on Survey Research Methods. American
Statistical Association, 181-184. (1980).
---------------------------------------------------------------------------
We believe that a flexible approach would not significantly
diminish the potential benefits of the disclosure mandated by Section
953(b). Although the proposed flexible approach could reduce the
comparability of disclosure across registrants, we do not believe that
precise conformity or comparability of the ratio across companies is
necessary. As noted earlier in this release, some commenters believe
that a primary benefit of the pay ratio disclosure would be providing a
company-specific metric that investors could use to evaluate the PEO's
compensation within the context of his or her own company, rather than
a benchmark for compensation arrangements across companies.
Accordingly, we do not believe that improving the comparability of the
disclosure across companies by mandating a specific method for
identifying the median would be justified in light of the costs that
would be imposed on registrants by a more prescriptive rule. We do not
believe that mandating a particular methodology would necessarily
improve the comparability across companies because of the numerous
other factors that could also cause the ratios to be less meaningful
for company-to-company comparison. We also believe that greater
comparability across companies could increase the likelihood that a
registrant's competitors could infer proprietary or sensitive
information about the registrant's business. This in turn could
increase the indirect costs to registrants of the proposed
requirements, such as competitive harms in labor markets discussed in
the previous section or general costs arising from the mandated
disclosure requirement.
Finally, we recognize that allowing registrants to select a
methodology to identify the median, including identifying the median
employee using and allowing the use of reasonable estimates, rather
than prescribing a methodology or set of methodologies, could reduce
benefits for investors if that flexibility enables a registrant to make
its pay ratio appear more ``favorable'' and thus results in a pay ratio
that does not reflect a more precisely and consistently calculated
ratio. We are not able to determine, however, the extent to which the
flexibility allowed by the proposed requirements could actually enable
a registrant to adjust its pay ratio in any material respects.
[[Page 60595]]
e. Determination of Total Compensation
As mandated by Section 953(b), the proposed requirements would
define ``total compensation'' by reference to Item 402(c)(2)(x) as in
effect on the day before the date of enactment of the Dodd-Frank Act,
or July 20, 2010. We note that several commenters raised concerns about
the potential compliance costs that could arise from the complexity of
the ``total compensation'' calculation under Item 402(c)(2)(x).\207\
Commenters have observed that, because of this complexity, registrants
typically compile information required by Item 402(c) manually for the
named executive officers, which they have stated takes significant time
and resources.\208\ We also note that commenters have raised concerns
about the ability of companies to compile and verify the data needed to
calculate total compensation in accordance with Item 402(c)(2)(x) for
every employee and have asserted that the costs of doing so would be
significant and unwarranted in light of the potential benefits of the
disclosure, which such commenters anticipate to be minimal.\209\ To
address these concerns, some commenters recommended that registrants be
permitted to use reasonable estimates to determine the value of the
various elements of total compensation of employees in accordance with
Item 402(c)(2)(x).\210\ We generally support this recommendation and we
provided guidance about the use of estimates in this context.
---------------------------------------------------------------------------
\207\ See, e.g., COEC I and II; and letters from American
Benefits Council; Brian Foley & Co.; Group of Exec. Comp. Lawyers;
Group of Trade Associations; Protective Life Corporation; SCSGP; and
Towers Watson.
\208\ See letter from Davis Polk.
\209\ See, e.g., COEC I and II; and letters from ABA; American
Benefits Council; Protective Life Corporation; and R. Morrison.
\210\ See COEC I and letters from ABA and SCSGP.
---------------------------------------------------------------------------
We do not believe that the use of reasonable estimates would
diminish the potential usefulness of the pay ratio disclosure as a
general point of comparison of PEO pay to employee pay within a
company, and we do not believe that the use of reasonable estimates
would be inconsistent with Section 953(b). Furthermore, we believe that
requirements that allow registrants to use reasonable estimates in
these calculations would impose lower compliance costs than
requirements that prohibit the use of estimates. We acknowledge that,
however, to the extent that the use of estimates causes the ratio to be
an inaccurate reflection of the registrant's median compensation, it
could diminish the potential usefulness of the disclosure.
As discussed above, the proposal allows registrants to identify the
median employee using any consistently applied compensation measure and
then determine and disclose the Item 402(c)(2)(x) total compensation
for that median employee. A registrant would be permitted to calculate
compensation for all employees in accordance with Item 402(c)(2)(x),
but would only be required to calculate and disclose such information
for the median employee. The proposed rules also permit registrants to
use reasonable estimates in the calculation of annual total
compensation for the median employee that must be disclosed and used in
the pay ratio.
f. Disclosure of Methodology, Assumptions and Estimates; Additional
Disclosure
We are proposing instructions for the disclosure of the methodology
and material assumptions, adjustments and estimates used in the
identification of the median or the calculation of the annual total
compensation (or any elements of total compensation) of employees. The
proposed instruction provides that registrants must briefly disclose
and consistently apply any methodology used to identify the median and
any material assumptions, adjustments or estimates used to identify the
median or to determine total compensation or any elements of total
compensation, and registrants must clearly identify any estimated
amount as such. Registrants' disclosure of the methodology and material
assumptions, adjustments and estimates used should be designed to
provide information for a reader to be able to evaluate the
appropriateness of the estimates. For example, when statistical
sampling is used, registrants should disclose the size of both the
sample and the estimated whole population, any material assumptions
used in determining the sample size, which sampling method (or methods)
is used, and, if applicable, how the sampling method deals with
separate payrolls such as geographically separated employee populations
or other issues arising from multiple business or geographic segments.
In order to promote comparability from year to year, the instruction
also provides that, if a registrant changes methodology or material
assumptions, adjustments or estimates from those used in the previous
period, and if the effects of any such change are material, the
registrant must briefly describe the change, the reasons for the change
and an estimate of the impact of the change on the median and the
ratio. This approach is consistent with other Commission rules that
allow registrants flexibility to choose a methodology, such as the
valuation method for determining the present value of accrued pension
benefits in Item 402(h)(2) or the description of models, assumptions
and parameters in Item 305 of Regulation S-K (quantitative and
qualitative disclosures about market risk). Five commenters recommended
requiring this information in cases where the rules allowed registrants
to use estimation techniques.\211\
---------------------------------------------------------------------------
\211\ See AFL-CIO II and COEC I; and letters from Group of Exec.
Comp. Lawyers, Meridian Compensation Partners, LLC; and SCSGP.
---------------------------------------------------------------------------
Because we are concerned that disclosure about methodology,
assumptions, adjustments and estimates could become dense and overly
technical, which we believe would limit its usefulness, the instruction
asks for a brief overview and makes clear that it is not necessary to
provide technical analyses or formulas. We do not believe that a
detailed, technical discussion (such as statistical formulas,
confidence levels or the steps used in data analysis) would enhance the
potential usefulness of the pay ratio, as suggested by some
commenters,\212\ as a metric to evaluate the level of PEO compensation.
We expect that a succinct description of the methodology and material
assumptions, adjustments and estimates used would not be overly
burdensome for registrants and would be more informative for investors.
We expect that the costs of the additional disclosure on registrants
would be marginal, as these additional disclosures are intended to
simply describe what has already been done or assumed in the
calculations, and therefore will not require additional actions for
registrants. It is likely that some costs may be incurred in developing
and reviewing the appropriate language to describe the approach taken.
---------------------------------------------------------------------------
\212\ See, e.g., Senate Letter; House Letter; and AFL-CIO I; and
letters from CtW Investment Group and UAW Retiree Medical Benefits
Trust.
---------------------------------------------------------------------------
We considered the recommendations of commenters relating to
requirements for additional narrative discussion of the ratio and
supplemental information about a registrant's employee compensation
structures and policies.\213\ Section 953(b) does not mandate a
narrative discussion to accompany the pay ratio disclosure, and the
proposed requirements do not include a specific requirement for
narrative discussion of the ratio, its components or any supplemental
information that could provide context
[[Page 60596]]
for or explain the ratio. We believe that additional narrative
disclosure about the ratio would not, for many registrants, provide
useful information for investors that would justify the costs
associated with providing that additional narrative disclosure. While
some investors could find supplemental information about a registrant's
employment practices, the composition of its workforce and similar
topics (such as employment policies, use of part-time workers, use of
seasonal workers, outsourcing and off-shoring strategies) useful or
informative, we note that Section 953(b) does not call for that level
of detail. We note too, that, as with other mandated disclosure under
our rules, registrants would be permitted to supplement the required
disclosure with a narrative discussion if they choose to do so.
---------------------------------------------------------------------------
\213\ See AFL-CIO I and letter from Americans for Financial
Reform.
---------------------------------------------------------------------------
g. Defining ``Annual''
In order to provide clarity, the proposed requirement defines
``annual total compensation'' to mean total compensation for the last
completed fiscal year, consistent with the time period used for the
other Item 402 disclosure requirements. This clarification is intended
to address questions from commenters about the need to update the pay
ratio disclosure throughout the year and make clear that the disclosure
does not need to be updated more than once a year.
Two commenters suggested other possible alternatives for the
calculation of ``annual'' total compensation. One of these commenters
recommended that registrants should have flexibility to select a time
period for calculating the annual total compensation of employees,
noting that registrants without a calendar year fiscal year-end might
benefit from the flexibility to use the calendar year period since that
would be consistent with the registrant's tax reporting
obligations.\214\ Another commenter suggested two timing rules that
would grant registrants further flexibility to use the 12-month time
periods that their payroll systems use.\215\ We understand that these
suggestions are intended to reduce compliance costs for registrants by
giving registrants the ability to use information in the form that it
is currently compiled for other purposes, such as tax and payroll
recordkeeping. We believe, however, that it is appropriate for the time
period for the pay ratio disclosure to be the same as the time period
used for the registrant's other executive compensation disclosures,
although the proposed flexibility in identifying the median employee
could address the concerns raised by these commenters.
---------------------------------------------------------------------------
\214\ See letter from American Benefits Council.
\215\ See letter from Group of Exec. Comp. Lawyers
(recommending: ``Rule One--the registrant can select any date as of
which to calculate median compensation, provided the date is within
12 months of the proxy filing, and is the most recent practicable
date, and Rule Two--if different payroll systems are involved, the
12-month period for computing compensation data for each payroll
system's data will be acceptable so long as the period ends within
12 months of the date chosen under Rule One.'').
---------------------------------------------------------------------------
As discussed above, we propose to allow a registrant that is
identifying the median employee by reference to compensation amounts
derived from its payroll or tax records to use the same annual period
that is used in the payroll or tax records from which the compensation
amounts are derived. We also did not propose to define or limit what
would qualify as payroll or tax records so that registrants would be
able to use information that they already track and report for tax
purposes. We believe that permitting companies to identify the median
employee using compensation information in the form that it is
maintained in their own books and records would reduce compliance
costs, yet still yield a reasonable estimate of the median employee.
Registrants using that approach to identify the median employee would
be required to calculate the Item 402(c)(2)(x) total compensation for
that median employee for the last completed fiscal year, in order to
maintain consistency with other Item 402 information.
h. Updating the Pay Ratio Disclosure for the Last Completed Fiscal Year
The proposed requirements include instructions to clarify the
timing for updating pay ratio disclosure after the end of a
registrant's fiscal year. Without the proposed instructions, a
registrant could be required to include pay ratio disclosure in an
annual report or registration statement filed after the end of the
fiscal year, but before it has compiled the executive compensation
information for that fiscal year for inclusion in its proxy statement
relating to its annual meeting of shareholders, which could raise
additional incremental costs for registrants that elect to provide
executive compensation disclosure in their annual proxy statement
rather than their annual report and for registrants that are conducting
registered offerings at the beginning of their fiscal year.
To address this, we considered the recommendation of commenters
that pay ratio disclosure not be required to be updated for the most
recently completed fiscal year until the registrant files its proxy
statement for its annual meeting of shareholders. The proposed
requirements generally follow this approach, but the proposed
instructions provide a similar accommodation for registrants that do
not file annual proxy statements \216\ and align the proposed
requirement to the timing rules for providing Item 402 disclosure in
annual reports and proxy and information statements. We believe that
the proposed instruction would provide certainty to registrants as to
when the updated information is required and would allow sufficient
time after the end of the fiscal year to identify the median. We
believe that such an approach would not diminish the potential
usefulness of the disclosure.
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\216\ Based on a review of EDGAR filings in calendar year 2012,
approximately 250 registrants that would be subject to the proposed
requirements do not file proxy or information statements in
connection with annual meetings of shareholders, including 15D
filers (other than smaller reporting companies and ABS issuers) and
registrants that are not corporate entities required to hold annual
meetings of shareholders.
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We also believe that this approach could reduce additional costs
for registrants in connection with filings made or required to be made
before the filing of the proxy or information statement for the annual
meeting of shareholders (or written consents in lieu of such a meeting)
that would typically contain the registrant's other Item 402 disclosure
covering the most recently completed fiscal year. In addition, under
the proposed approach, updating the pay ratio disclosure would not be
an additional hurdle for a registrant that requests effectiveness of a
registration statement after the end of its fiscal year and before the
filing of the proxy statement for its annual meeting of shareholders.
In this regard, the proposed approach could alleviate some of the
potential impact on capital formation from Section 953(b).
i. Instructions for Registrants Relying on Instruction 1 to Items
402(c)(2)(iii) and (iv)
We have also proposed instructions to provide consistency with
current executive compensation disclosure rules in cases where a
registrant cannot compute the total compensation of the PEO because the
salary or bonus of the PEO is not calculable until a later date.
Similar to existing requirements for the disclosure of PEO total
compensation under those circumstances, the proposed requirements
permit the registrant to omit pay ratio disclosure until those elements
of the PEO's total compensation are determined and to provide the pay
ratio disclosure in the same filing under Item 5.02(f) of Form
[[Page 60597]]
8-K in which the PEO's salary or bonus is disclosed. In taking the
proposed approach, we have assumed that the potential benefits of the
disclosure could be diminished if the pay ratio were to be calculated
using less than the entire amount of the PEO's total compensation for
the period, because the ratio would be lower than if it reflected the
full PEO total compensation, and that this could justify the potential
costs to investors of a delay in the timing of the disclosure.
Instead of this approach, we considered whether to require
registrants to report pay ratio disclosure using a reasonable estimate
of the elements of PEO compensation that are not calculable. We also
considered whether registrants should be permitted to use an incomplete
amount, comprising only the elements of total compensation that are
calculable at the time.
In some cases, the amount of compensation that is omitted under the
Instruction 1 to Items 402(c)(2)(iii) and (iv) could be significant.
Therefore, the pay ratio could be lower if it were presented using an
amount of PEO total compensation that fails to adequately account for
the amounts of salary or bonus ultimately included in the PEO's actual
total compensation, including the alternative approach of using
estimated PEO compensation, and such an approach could incentivize
registrants to give their PEOs more of these types of compensation in
order to achieve a more favorable ratio at the time of the proxy
statement or annual report. We believe that the potential incentive to
change compensation practices could be exacerbated by an alternative
approach that permitted or required calculation using incomplete total
compensation amounts.
Based on the number of registrants that have historically relied on
Instruction 1 to Items 402(c)(2)(iii) and (iv),\217\ we do not expect
that the proposed instruction would impact a significant number of
registrants each year.
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\217\ For example, based on a review of EDGAR filings in 2012,
only 22 registrants relied on Instruction 1 to Items 402(c)(2)(iii)
and (iv) in connection with the total compensation of their PEO.
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j. Status of Disclosure as Filed Not Furnished
Some commenters suggested that pay ratio information be deemed
``furnished'' and not ``filed'' for purposes of the Securities Act and
the Exchange Act.\218\ We note that Section 953(b) states that the pay
ratio information be disclosed in the registrant's ``filings'' with the
Commission. We further note that one of the reasons that commenters
recommended treating the information as furnished and not filed is
because of the difficulty that some companies may have in determining
and verifying the information, which must be covered by the
certifications required for Exchange Act filings under the Sarbanes-
Oxley Act of 2002. We also recognize that some registrants could have
more difficulty in gathering and verifying the information than others.
Nevertheless, we believe that the flexibility afforded to registrants
in connection with identifying the median could reduce some of the
difficulties of compiling the required information, because registrants
would be able to tailor the methodology to reflect their own facts and
circumstances. The ability to use reasonable estimates in connection
with the calculation of annual total compensation for employees other
than the PEO could also alleviate some of these concerns. In addition,
we believe that the proposed transition periods discussed below, which
are designed to give registrants sufficient time to develop and
implement compliance procedures, could mitigate some concerns about
compiling and verifying the information.
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\218\ See COEC I and letters from ABA; Protective Life
Corporation; and RILA.
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k. Proposed Compliance Date
Section 953(b) does not specify a date when registrants must begin
to comply with the requirements that we implement under the provision.
We are proposing to require that a registrant must begin to comply with
proposed Item 402(u) with respect to compensation for the registrant's
first fiscal year commencing on or after the effective date of the
rule, and, as proposed, a registrant would be permitted to omit this
initial pay ratio disclosure from its filings until the filing of its
annual report on Form 10-K for that fiscal year or, if later, the
filing of a proxy or information statement for its next annual meeting
of shareholders (or written consents in lieu of a meeting) following
the end of such year. Similar to the proposed instructions for updating
pay ratio disclosure, the proposed transition instructions also require
that this initial pay ratio disclosure must, in any event, be filed as
provided in connection with General Instruction G(3) of Form 10-K not
later than 120 days after the end of such fiscal year.
Several commenters noted that companies will need a long transition
period to enable them to implement systems to compile the disclosure
and verify its accuracy.\219\ We understand that this time would likely
be needed by large, multinational registrants and any registrants that
currently do not have a centralized, consolidated payroll, benefits and
pension system that captures the information necessary to identify the
median of the annual total compensation of all employees,\220\ however,
we seek comment on whether the flexibility in the proposed rules would
reduce the need for a lengthy transition period. We expect that it will
take registrants one full reporting cycle to implement and test any
necessary systems,\221\ and we have designed the initial transition
period to provide that time for transition and implementation.
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\219\ See letters from ABA; American Benefits Council; Brian
Foley & Co.; Group of Exec. Comp. Lawyers; Davis Polk; NACD; SCSGP;
RILA; and Towers Watson.
\220\ See letters from ABA; American Benefits Council; Brian
Foley & Co.; Group of Exec. Comp. Lawyers; Davis Polk; NACD; SCSGP;
RILA; and Towers Watson.
\221\ See letters from American Benefits Council and Group of
Exec. Comp. Lawyers.
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l. Proposed Transition Periods
The proposed requirements also include a transition period for new
registrants because we are sensitive to the impact that the proposed
rules could have on capital formation. We note that the requirements of
Section 953(b), as amended by the JOBS Act, distinguish between certain
newly public companies and all other issuers by providing an exemption
for emerging growth companies. We also note that the incremental time
needed to compile pay ratio disclosure could cause companies that are
not emerging growth companies to delay an initial public offering,
which could have a negative impact on capital formation. In this
regard, we expect that, in order to be disqualified for emerging growth
company status, these companies are likely to be businesses with more
extensive operations or a greater number of employees than many
emerging growth companies, which could increase the initial efforts
needed to comply with the proposed requirements. We believe that
providing a transition period for these newly public companies could
mitigate this potential impact on capital formation.
Accordingly, the proposed requirements also include instructions
that would permit new registrants to delay compliance, so that pay
ratio disclosure would not be required in a registration statement on
Form S-1 or S-11 for an initial public offering or a registration
statement on Form 10. Instead, such a registrant would be
[[Page 60598]]
required to first comply with proposed Item 402(u) with respect to
compensation for the first fiscal year commencing on or after the date
the registrant first becomes subject to the requirements of Section
13(a) or Section 15(d) of the Exchange Act.
We note that commenters did not address the impact of pay ratio
disclosure requirements on newly public companies. Although investors
might benefit from pay ratio information in connection with an initial
public offering or Exchange Act registration, we believe it is
appropriate to give companies time to develop any needed systems to
compile the disclosure and verify its accuracy. The transition period
for new registrants is similar to the proposed time frame provided for
other registrants to comply with pay ratio disclosure requirements
following the effective date of the final rules. The proposed approach
is also similar to the current phase-in for newly public companies in
connection with Item 308 of Regulation S-K, for management's report on
the registrant's internal control over financial reporting. We seek
comment in this release on whether these timing and transition rules
are sufficient to address the burdens on capital formation that could
arise due to the mandated pay ratio disclosure requirements.
We have not proposed a separate transition period for companies
that cease to qualify as emerging growth companies. We acknowledge that
companies exiting emerging growth status could need additional time to
implement systems to compile and verify their pay ratio disclosure,
particularly because registrants may not be able to predict in advance,
depending on which of the four conditions occurs, when they will cease
to be an emerging growth company. By exempting emerging growth
companies from the scope of Section 953(b), the JOBS Act essentially
provides a transition period for companies for as long as they qualify
for emerging growth company status. In connection with other executive
compensation provisions, the JOBS Act includes specific transition
periods for companies exiting emerging growth company status.\222\ It
does not, however, include a similar transition provision in the case
of Section 953(b). Therefore, we are not proposing any additional
transition period for compliance after a company ceases to qualify as
an emerging growth company. We seek comment in this release on whether
additional transition periods are needed for these companies.
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\222\ See, e.g., Section 102(a)(1)(B) (providing such a
transition for say-on-pay compliance).
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E. Request for Comment
Throughout this release, we have discussed the anticipated costs
and benefits of the proposed rules. We request data to quantify the
costs and the value of the benefits described throughout this release.
We seek estimates of these costs and benefits, as well as any costs and
benefits not described, that may result from the adoption of these
proposed amendments. We also request comments on the qualitative
benefits and costs we have identified and any benefits and costs we may
have overlooked.
61. We request comment on all aspects of the costs and benefits of
the proposed rules, including identification and assessment of any
costs and benefits not already discussed. We seek comment and data on
the magnitude and the value of the benefits identified. We also welcome
comments on the accuracy of the cost estimates and request that
commenters provide data that may be relevant to these cost estimates.
In addition, we seek estimates and views regarding these costs and
benefits for particular covered registrants, including small
registrants, and, where relevant, for particular categories of covered
registrants, as well as any other costs or benefits that may result
from the adoption of these proposed amendments.
62. What are the characteristics of employee compensation data that
current payroll systems (or other management information systems)
maintain? Would it be necessary for registrants to change such systems
or other employee compensation records in order to track the
information needed to comply with the proposed pay ratio rules? What
would the transition costs be to make any such changes? How generally
are payroll systems maintained across business or geographic segments
and how would the separate payroll information across segments be
aggregated to comply with the proposed rules? What are the initial and
ongoing costs to comply and what activities incur those costs, such as
burden hours/wages of company personnel, development and maintenance of
computer systems, use of third-party service providers and other
professionals? How would the use of reasonable estimates or statistical
sampling affect these costs generally, including the need to change
current payroll systems? Please also describe benefits, if any, to the
registrant, beyond compliance with the proposed rules, from
implementing changes to current payroll systems or management
information systems.
63. How would allowing registrants to choose an approach for
determining the median influence potential costs? How would allowing
registrants to choose an approach that permits registrants to use any
consistently applied measure of compensation and/or statistical
sampling to identify the median employee and then calculate that
employee's total compensation in accordance with Item 402(c)(2)(x)
affect compliance costs, particularly as compared to requiring
registrants to calculate total compensation in accordance with Item
402(c)(2)(x) for all employees to identify the median? Comparisons of
the costs of each approach would be particularly helpful. Would
allowing for alternative approaches retain the benefits of Section
953(b)? If not, please provide specific information or data on what
benefits would not be achieved under the proposed rules.
64. What are the transition costs that will be imposed on
registrants as a result of the proposals, if adopted? Please be
detailed and provide quantitative data or support, as practicable.
Where applicable, please also distinguish between costs that are
initial, non-recurring implementation costs and the costs of ongoing
compliance.
65. What impact would the proposed rules have on the incentives of
boards, senior executives and shareholders? Would the proposed rules be
likely to change the behavior of registrants, investors or other market
participants? Should we alter the proposed requirements to address that
impact? If so, describe any changes that would address that impact and
discuss any related costs and benefits that would arise from such a
change.
66. What impact would the proposed rules have on competition? Would
the expected compliance costs put registrants subject to the rule at a
competitive disadvantage? Are there particular industries or types of
registrants that would be more likely to be impacted? If so, what
changes to the proposed requirements could mitigate the impact?
67. What impact would the proposed rules have on market efficiency?
Are there any positive or negative effects of the proposed rules on
efficiency that we may have overlooked? How could the rules be changed
to promote any positive effect or to mitigate any negative effect on
efficiency, while still satisfying the mandate of Section 953(b)?
[[Page 60599]]
68. Could a registrant's competitors infer proprietary or sensitive
information about the registrant's business operations, strategy or
labor cost-structure from the proposed pay ratio disclosure? If so,
please tell us what type of information could be inferred and how that
could be determined. Please also tell us what changes to the proposed
requirements could mitigate that concern?
69. What impact would the proposed rules have on capital formation?
How could the rules be changed to promote capital formation or to
mitigate any negative effect on capital formation resulting from the
rules, while still satisfying the mandate of Section 953(b)?
V. Paperwork Reduction Act
A. Background
Certain provisions of the proposed amendments contain ``collection
of information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (the ``PRA''). \223\ We are submitting the
proposed amendments to the Office of Management and Budget (``OMB'')
for review in accordance with the PRA.\224\ The titles for the
collection of information are:
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\223\ 44 U.S.C. 3501 et seq.
\224\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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``Regulation S-K'' (OMB Control No. 3235-0071); \225\
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\225\ The paperwork burden from Regulation S-K is imposed
through the forms that are subject to the disclosures in Regulation
S-K and is reflected in the analysis of those forms. To avoid a
Paperwork Reduction Act inventory reflecting duplicative burdens,
for administrative convenience, we estimate the burdens imposed by
Regulation S-K to be a total of one hour.
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``Form 10-K'' (OMB Control No. 3235-0063);
``Regulation 14A and Schedule 14A'' (OMB Control No. 3235-
0059); \226\
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\226\ As described below, our estimates for Form 10-K take into
account the burden that would be incurred by including the proposed
disclosure in the annual report directly or incorporating by
reference from a proxy or information statement. To avoid a
Paperwork Reduction Act inventory reflecting duplicative burdens, we
estimate that the proposed disclosure would not impose an
incremental burden for proxy statements on Schedule 14A.
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``Regulation 14C and Schedule 14C'' (OMB Control No. 3235-
0057); \227\
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\227\ As described below, our estimates for Form 10-K take into
account the burden that would be incurred by including the proposed
disclosure in the annual report directly or incorporating by
reference from a proxy or information statement. To avoid a
Paperwork Reduction Act inventory reflecting duplicative burdens, we
estimate that the proposed disclosure would not impose an
incremental burden for information statements on 14C.
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``Form 8-K'' (OMB Control No. 3235-0060);
``Form S-1'' (OMB Control No. 3235-0065); \228\
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\228\ As described below, we have assumed that the burden
relating to the proposed disclosure requirements would be associated
primarily with Form 10-K rather than Forms S-1, S-4, S-11 or N-2 as
applicable (because registrants would incorporate the disclosure
from Form 10-K). To avoid a Paperwork Reduction Act inventory
reflecting duplicative burdens, we estimate that the proposed
disclosure would not impose an incremental burden for registration
statements on Form S-1.
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``Form S-4'' (OMB Control No. 3235-0324) \229\
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\229\ As described below, we have assumed that the burden
relating to the proposed disclosure requirements would be associated
primarily with Form 10-K rather than Forms S-1, S-4, S-11 or N-2 as
applicable (because registrants would incorporate the disclosure
from Form 10-K). To avoid a Paperwork Reduction Act inventory
reflecting duplicative burdens, we estimate that the proposed
disclosure would not impose an incremental burden for registration
statements on Form S-4.
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``Form S-11'' (OMB Control No. 3235-0067); \230\
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\230\ As described below, we have assumed that the burden
relating to the proposed disclosure requirements would be associated
primarily with Form 10-K rather than Forms S-1, S-11 or N-2 as
applicable (because registrants would incorporate the disclosure
from Form 10-K). To avoid a Paperwork Reduction Act inventory
reflecting duplicative burdens, we estimate that the proposed
disclosure would not impose an incremental burden for registration
statements on Form S-11.
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``Form 10'' (OMB Control No. 3235-0064); \231\ and
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\231\ As described below, because we have assumed that all new
registrants would take advantage of the transition period afforded
to them under the proposed requirements, we estimate no annual
incremental increase in the paperwork burden associated with Form 10
as a result of the proposed requirements.
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``Form N-2'' (OMB Control No. 3235-0026).\232\
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\232\ Only Forms N-2 filed by business development companies
would be subject to the proposed disclosure requirements, because
Form N-2 requires business development companies, and not other
investment companies, to provide Item 402 disclosure. As described
below, we have assumed that the burden relating to the proposed
disclosure requirements would be associated primarily with Form 10-K
rather than Forms S-1, S-11 or N-2 as applicable (because
registrants would incorporate the disclosure from Form 10-K). To
avoid a Paperwork Reduction Act inventory reflecting duplicative
burdens, we estimate that the proposed disclosure would not impose
an incremental burden for registration statements on Form N-2.
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These regulations, schedules and forms were adopted under the
Securities Act and the Exchange Act, and in the case of Form N-2,\233\
the Investment Company Act of 1940.\234\ They set forth the disclosure
requirements for periodic and current reports, registration statements
and proxy and information statements filed by companies to help
investors make informed investment and voting decisions. The hours and
costs associated with preparing, filing and sending each form or
schedule constitute reporting and cost burdens imposed by each
collection of information. An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a currently valid OMB control number.
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\233\ 17 CFR 239.14 and 274.11a-1.
\234\ 15 U.S.C. 80a-1 et seq.
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The proposals discussed in this release are intended to satisfy the
requirements of Section 953(b) of the Dodd-Frank Act, which directs the
Commission to amend Item 402 of Regulation S-K to add the pay ratio
disclosure requirements specified by that provision. Compliance with
the proposed requirements will be mandatory for affected registrants.
Responses to the information collections will not be kept confidential,
and there will be no mandatory retention period for the information
disclosed.
B. Summary of Collection of Information Requirements
In order to satisfy the legislative mandate in Section 953(b), we
are proposing to add new paragraph (u) to Item 402 of Regulation S-K.
This new paragraph (u) would require registrants to disclose:
The median of the annual total compensation of all
employees of the registrant (excluding the principal executive
officer),
the annual total compensation of the registrant's
principal executive officer, and
the ratio between these two amounts.
For this purpose, Section 953(b) specifies that total compensation
is to be determined in accordance with Item 402(c)(2)(x). Item 402
already requires registrants to disclose the annual total compensation
of the principal executive officer in accordance with Item
402(c)(2)(x).\235\ The median of the annual total compensation of all
employees and the ratio would be new, incremental disclosure burdens
and would require affected registrants to collect compensation
information for employees that is not currently required to be
disclosed.
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\235\ As of the date of this proposal, the requirements for the
calculation of total compensation under Item 402(c)(2)(x) are the
same as those in effect on July 20, 2010. Therefore, for purposes of
this PRA analysis, we have assumed that registrants would not need
to recalculate the annual total compensation for the principal
executive officer in connection with the proposed pay ratio
disclosure.
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Investors and other market participants interested in executive
compensation disclosure have indicated that the proposed disclosure
would be
[[Page 60600]]
useful in informing investment and voting decisions, particularly for
say-on-pay votes and in director elections.\236\ In this regard, pay
ratio information could be used by shareholders for purposes of
evaluating the actions of the board of directors in fulfilling its
responsibilities to the company and its shareholders.\237\ Pay ratio
information could also be used to enhance an investor's understanding
of a registrant's compensation practices applicable to non-executive
employees relative to the named executive officers.\238\
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\236\ See, e.g., letters from CtW Investment Group and S. Towns.
\237\ See, e.g., letters from CtW Investment Group and UAW
Retiree Medical Benefits Trust.
\238\ See, e.g., letters from CtW Investment Group and UAW
Retiree Medical Benefits Trust.
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The proposed disclosure under new paragraph (u) of Item 402 would
be required in registration statements and annual reports that require
executive compensation information under Item 402 of Regulation S-K and
in proxy and information statements relating to an annual meeting of
shareholders or written consents in lieu of such a meeting.\239\ In
addition, the proposed requirements would allow certain new registrants
to omit the disclosure otherwise required by Item 402(u) from filings
made during a specified transition period.
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\239\ Consistent with the scope of Section 953(b), the proposed
requirements would not apply to the annual reports and proxy and
information statements of emerging growth companies, smaller
reporting companies or foreign private issuers. In addition,
consistent with the instructions J and I of Form 10-K, the proposed
requirements would not apply to the annual reports of issuers of
asset-backed securities or to wholly-owned subsidiary registrants.
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Finally, in order to conform the proposed requirements to current
rules for the disclosure of PEO compensation when certain elements are
not yet known, the proposals include a conforming amendment to Item
5.02 of Form 8-K. This proposed amendment would require registrants
that are disclosing PEO total compensation in accordance with Item 5.02
of Form 8-K to also provide in that filing the updated pay ratio
disclosure required by Item 402(u). Because Item 5.02 of Form 8-K
provides a delayed method of filing information that would otherwise be
required in the registrant's proxy or information statement or annual
report, the PRA analysis assumes that the burden and cost of compliance
with proposed Item 402(u) would be associated primarily with those
forms and schedules rather than Form 8-K.
C. Burden and Cost Estimates Related to the Proposed Amendments
We anticipate that the proposed amendments, if adopted, would
increase the burdens and costs for registrants that are subject to the
proposed disclosure requirements. For purposes of the PRA, we estimate
that the total annual increase in the paperwork burden for all affected
registrants to comply with the proposed collection of information
requirements to be approximately 545,792 hours of company personnel
time and total costs of approximately $72,772,200 for the services of
outside professionals.\240\ These estimates include the time and the
cost of implementing data gathering systems and disclosure controls and
procedures, compiling necessary data, preparing and reviewing
disclosure, filing documents and retaining records.
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\240\ We describe how we derived the three-year average hour and
cost burdens per response below. For administrative convenience, the
presentation of the totals related to the paperwork burden hours
have been rounded to the nearest whole number and the cost totals
have been rounded to the nearest hundred.
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In deriving these estimates, we have assumed that:
Registrants subject to the proposed requirements would
satisfy the proposed requirements by either including the information
directly in annual reports on Form 10-K or incorporating the
information by reference from a proxy statement on Schedule 14A or
information statement on Schedule 14C. Our estimates assume that
substantially all of the burden relating to the proposed disclosure
requirements would be associated with Form 10-K;
For registrants that would be permitted to provide their
pay ratio disclosure in a filing made in accordance with Item 5.02 of
Form 8-K, rather than in Form 10-K, the burden relating to the proposed
disclosure requirements would be associated primarily with Form 10-K
rather than Form 8-K; \241\
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\241\ Our PRA estimates for Form 8-K include an estimated one
hour burden to account for the inclusion of the proposed pay ratio
disclosure.
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100% of new registrants would use the proposed transition
provisions allowing them to omit the proposed disclosure from their
filings and, for follow-on offerings by these registrants, the burden
relating to the proposed disclosure requirements would be associated
primarily with Form 10-K rather than Forms S-1, S-11 or N-2 as
applicable (because registrants would incorporate the disclosure from
Form 10-K); and
For Form 10-K and Form 8-K, 75% of the burden would be
carried by the company internally and that 25% of the burden would be
carried by outside professionals retained by the company at an average
cost of $400 per hour. \242\
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\242\ The portion of the burden carried by outside professionals
is reflected as a cost, while the portion of the burden carried by
the company internally is reflected in hours. We recognize that the
costs of retaining outside professionals may vary depending on the
nature of the professional services, but for purposes of this PRA
analysis we estimate that such costs would be an average of $400 per
hour. This is the rate we typically estimate for outside legal
services used in connection with public company reporting.
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As discussed above in this release, we understand from commenters
that the costs of compliance will likely vary among individual
companies based on a number of factors, including the size and
complexity of their organizations, the nature of their operations, the
nature of their workforce, the location of their operations, and,
significantly, the extent that their existing payroll systems collect
the information necessary to identify the median of the annual total
compensation of their employees (including whether a single,
centralized computer system covers all employees of the registrant and
whether the company's benefits and cash compensation records reside in
the same system). Because the proposed requirements would allow
registrants some flexibility in identifying the median and the annual
total compensation of employees, the actual burden could be lower if
the methodology used is able to reduce the effort needed to collect the
data or if the registrant is able to use information that it uses for
other purposes.\243\ We believe that the actual burdens will likely
vary significantly among individual companies based on these
factors.\244\ Our estimates reflect average burdens, and, therefore,
some companies may experience costs in excess of our estimates and some
companies may experience costs that are lower than our estimates.\245\
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\243\ See Section II of this release for a discussion of the
proposed requirements.
\244\ We also note that companies could address these factors in
a variety of ways. For example, some companies might perform the
data collection and consolidation manually, while others may incur
the cost of implementing an information technology solution for
collecting the data. In addition, some companies might outsource
some of the burden hours to consultants or third party payroll
management providers, which could increase the costs to the
registrant while decreasing the burden hours of company personnel.
\245\ Although we received some information from commenters and
stakeholders regarding the time and costs to comply with Section
953(b), in light of the limitations of that information described
above in Section IV of this release, we did not that information as
the basis for our PRA estimates. We received various hours
estimates, including estimates of approximately 201 to 500 hours,
and another estimate of 4,000 hours (based on 50 hours per country
where employees are located). We received four cost estimates,
including $7.6 million, $6.5 million, $4.725 million and $350,000
per registrant. We note that all of these estimates are estimates
based on the commenter's initial reading and interpretation of the
statute and do not reflect the discretionary choices we have made in
the proposed rule implementing the statute. For instance these
estimates do not take into account the ability to use statistical
sampling. We also note that the estimates do not represent the full
breadth of the registrant population. As noted in our economic
analysis section, we anticipate that the PRA estimates will be
revised in light of further information we receive on estimated
costs.
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[[Page 60601]]
We have derived our burden estimates by estimating the average
number of hours it would take a registrant to prepare and submit the
required data. In determining these estimates, we considered the burden
estimates for similar disclosure requirements. We believe the burden
hours associated with the preparation of the proposed pay ratio
disclosure may be comparable to a registrant's preparation of the
summary compensation table and other executive compensation disclosures
required by the 2006 amendments to Item 402.\246\ We recognize that, in
this proposal, the burden reflects the compilation of data covering the
entire workforce rather than only the named executive officers. We note
that the proposal allows for a broad use of any consistently applied
compensation measure and statistical sampling and the use of other
reasonable estimates to identify the median. As noted above, the actual
burden will vary depending on factors including the size of the
company, the number of employees and how many are located outside of
the United States. For a company with a medium-sized workforce, located
primarily in the United States, that is able to identify a median
employee from a sample of its employee population using a consistently
applied compensation measure, the burden hours could be less than the
estimated burden hours for the 2006 amendments to Item 402.\247\ In
contrast, for a large, multi-national registrant with hundreds of
thousands of employees, the burden hours could be more than the
estimated burden hours for the 2006 amendments to Item 402.\248\ We
believe, therefore, that it is reasonable to assume that the burden
hours will be a multiple of the average burden hours associated with
the 2006 amendments to Item 402. We also expect that, similar to the
2006 amendments, the proposed rules' burden would be greatest during
the first year of their effectiveness and diminish in subsequent years.
Accordingly, to derive our estimates, we multiplied the average burden
estimate for the 2006 amendments by two, yielding an estimated burden
of 340 hours in year one, 160 hours in year two and 70 hours in year
three and thereafter, for a three-year average burden of 190 hours.
---------------------------------------------------------------------------
\246\ See 2006 Adopting Release, supra note 14, at 53215 (which
we estimated to be a three-year average of 95 hours, based on 170
hours in year one, 80 hours in year two and 35 hours in year three
and thereafter).
\247\ We expect that such a company would be determining total
compensation under Item 402(c)(2)(x) for only one additional
employee.
\248\ For these companies, we considered the estimated burden of
other international reporting regimes, such as the Commission's
rules implementing Section 1502 of the Dodd-Frank Act. See Conflict
Minerals, Release No. 34-67716 (Aug. 22, 2012) [77 FR 56273] (which
we estimated to be a three year average of 495 hours). In that
regard, we assume this proposal would be less burdensome because the
underlying information would be under the control of the registrant
rather than data that must be gathered from unrelated third parties
in the registrant's supply chain.
---------------------------------------------------------------------------
We used this three-year average hour burden to estimate the cost
and hour burden for each collection of information as follows:
1. Regulation S-K
While the proposed amendments would make revisions to Regulation S-
K, the collection of information requirements for that regulation are
reflected in the burden hours estimated for the forms and schedules
listed below. The rules in Regulation S-K do not impose any separate
burden. Consistent with historical practice, we are proposing to retain
an estimate of one burden hour to Regulation S-K for administrative
convenience.
2. Form 10-K
Only Forms 10-K that are filed by registrants that are not smaller
reporting companies or emerging growth companies would be required to
include the proposed disclosure. For purposes of our PRA estimates, we
have assumed that 100% of asset-backed securities issuers would omit
Item 402 disclosure from Form 10-K pursuant to Instruction J of Form
10-K and 100% of wholly-owned subsidiary registrants would omit Item
402 disclosure from Form 10-K pursuant to Instruction I of Form 10-K,
and, accordingly, these registrants would also not be subject to the
proposed disclosure requirements. Based on a review of EDGAR filings in
calendar year 2011, we estimate that of the approximately 8,870 annual
reports filed in that year, approximately 3,830 annual reports are
filed by registrants that would be subject to the proposed disclosure
requirements.\249\ We estimate that the proposed disclosure
requirements would add an average of 190 burden hours to the total
burden hours required to produce each Form 10-K that is subject to the
proposed requirements (143 hours in-house personnel time and a cost of
approximately $19,000 for outside professionals).
---------------------------------------------------------------------------
\249\ Based on a review of EDGAR filings in 2011, approximately
3,750 annual reports were filed by smaller reporting companies,
approximately 290 were filed by ABS issuers and approximately 100
were filed by wholly-owned subsidiaries of other registrants. We
have also reduced the total number of Form 10-K filings by 900 to
reflect the approximate number of emerging growth companies that
have identified themselves as such in their EDGAR filings as of May
2013.
---------------------------------------------------------------------------
We estimate that the preparation of annual reports currently
results in a total annual compliance burden of 21,430,988 hours and an
annual cost of outside professionals of $2,857,465,000. If the
proposals were adopted, we estimate that the incremental cost of
outside professionals for annual reports would be approximately
$72,770,000 per year and the incremental company burden would be
approximately 545,775 hours per year.
3. Form 8-K
As described in this release, we are proposing to require a
registrant that is filing its PEO total compensation on a delayed basis
due to the unavailability of certain components of compensation on Form
8-K (in accordance with Instruction 1 to Items 402(c)(2)(iii) and (iv)
of Regulation S-K and Item 5.02(f) of Form 8-K) to provide the proposed
pay ratio disclosure at the same time. We have proposed a conforming
amendment to Item 5.02 of Form 8-K that would require a registrant to
include updated pay ratio disclosure in the Form 8-K that it files to
disclose its PEO total compensation information.\250\ We estimate that
the burden for adding the pay ratio disclosure to that Form 8-K filing
would be one hour per registrant.\251\ We also estimate that the
proposed Form 8-K amendment would not result in additional Form 8-K
filings because registrants who omit disclosure in reliance on
Instruction 1 to Items 402(c)(2)(iii) and (iv) are already required to
file a Form 8-K. The proposed amendments would, however, add pay ratio
disclosure requirements to that Form 8-K filing.
---------------------------------------------------------------------------
\250\ See Section II.C.7.b. above.
\251\ As noted above, we have assumed that the burden relating
to the proposed pay ratio requirements would remain associated with
the registrant's proxy or information statement or annual report,
and, therefore, our PRA estimates for those forms reflect that
burden.
---------------------------------------------------------------------------
Based on a review of EDGAR filings for calendar years 2011 and
2012, we estimate that approximately 29 Forms
[[Page 60602]]
8-K are filed pursuant to Item 5.02(f) annually and approximately 75%
of these relate to disclosure of PEO compensation. As a result, we
estimate that 22 of the Forms 8-K filed in a given year would spend 1
additional hour preparing the disclosure required by the amendments
(0.75 hours of internal personnel time and a cost of approximately $100
for professional services), in addition to the total burden hours
required to produce each Form 8-K. We estimate that the preparation of
current reports on Form 8-K currently results in a total annual
compliance burden of 507,665 hours and an annual cost of outside
professionals of $67,688,700. If the proposals were adopted, we
estimate that the incremental company burden would be approximately
16.5 hours per year and approximately $2,200 in the incremental cost of
outside professionals for current reports on Form 8-K.
4. Proxy Statements on Schedule 14A
Only proxy statements on Schedule 14A that are required to include
Item 402 information, and that are not filed by smaller reporting
companies or emerging growth companies, would be required to include
the proposed pay ratio disclosure. For purposes of our PRA estimates,
consistent with past amendments to Item 402,\252\ we have assumed that
all of the burden relating to the proposed disclosure requirements
would be associated with Form 10-K, even if registrants include the
proposed disclosure required in Form 10-K by incorporating that
disclosure by reference from a proxy statement on Schedule 14A.
---------------------------------------------------------------------------
\252\ We took a similar approach in connection with the rules
for Summary Compensation Table disclosure required by the 2006
amendments to Item 402. See 2006 Adopting Release, supra note 14.
---------------------------------------------------------------------------
5. Information Statements on Schedule 14C
Only information statements on Schedule 14C that are required to
include Item 402 information, and that are not filed by smaller
reporting companies or emerging growth companies, would be required to
include the proposed pay ratio disclosure. For purposes of our PRA
estimates, consistent with past amendments to Item 402, we have assumed
that all of the burden relating to the proposed disclosure requirements
would be associated with Form 10-K, even if registrants include the
proposed disclosure required in Form 10-K by incorporating that
disclosure by reference from an information statement on Schedule 14C.
6. Form S-1
Because we have assumed that all new registrants would take
advantage of the transition period afforded to them under the proposed
requirements, we estimate that approximately 70 registration statements
on Form S-1 would be required to include the proposed disclosure.\253\
In addition, because we assume that all of these Forms S-1 will
incorporate by reference the registrant's disclosure from its annual
report, we have assumed that all of the burden relating to the proposed
disclosure requirements would be associated with Form 10-K.
---------------------------------------------------------------------------
\253\ Based on a review of EDGAR filings for calendar year 2012,
we estimate that approximately 70 Forms S-1 would be filed in
connection with follow-on offerings (rather than initial public
offerings) by companies that are not emerging growth companies or
smaller reporting companies.
---------------------------------------------------------------------------
7. Form S-4
We have assumed that registrants filing on Form S-4 for whom
executive compensation information under Item 402 is required pursuant
to Items 18 or 19 of Form S-4 will incorporate by reference the pay
ratio disclosure contained in the registrant's annual report. Thus, we
have assumed that all of the burden relating to the proposed disclosure
requirements would be associated with Form 10-K.
8. Form S-11
Because we have assumed that all new registrants would take
advantage of the transition period afforded to them under the proposed
requirements, we have assumed that five registration statements on Form
S-11 would be required to include the proposed disclosure.\254\ In
addition, because we assume that these Forms S-11 will incorporate by
reference the registrant's pay ratio disclosure contained in its annual
report, we have assumed that all of the burden relating to the proposed
disclosure requirements would be associated with Form 10-K.
---------------------------------------------------------------------------
\254\ Based on a review of EDGAR filings for calendar year 2012,
we estimate that approximately five Forms S-11 would be filed in
connection with follow-on offerings by registrants that are not
emerging growth companies.
---------------------------------------------------------------------------
9. Form N-2
Only Forms N-2 filed by business development companies would be
subject to the proposed disclosure requirements. Based on a review of
EDGAR filings for calendar year 2011, our best estimate of the total
number of business development companies is 41 and that 28 of these
have no employees.\255\ Therefore, of the 205 Forms N-2 that are filed
annually, we estimate that approximately 41 are filed by business
development companies and approximately 13 of these business
development companies have employees. In addition, because we assume
that all of these Forms N-2 will incorporate by reference the
registrant's disclosure in its annual report, we have assumed that all
of the burden relating to the proposed disclosure requirements would be
associated with Form 10-K.
---------------------------------------------------------------------------
\255\ As discussed in this release, the proposed requirements
for identifying the median apply to workers who are employees of the
registrant. Business development companies are often externally
managed rather than having their own employees.
---------------------------------------------------------------------------
10. Form 10
Because we have assumed that all new registrants would take
advantage of the transition period afforded to them under the proposed
requirements, we estimate no annual incremental increase in the
paperwork burden associated with Form 10 as a result of the proposed
requirements.
D. Summary of Proposed Changes to Annual Compliance Burden in
Collection of Information
Tables 1 and 2 below illustrate the total annual compliance burden
of the collection of information in hours and in cost under the
proposed amendments for annual reports on Form 10-K and current reports
on Form 8-K under the Exchange Act. The burden estimates were
calculated by multiplying the estimated number of annual responses by
the estimated average number of hours it would take a company to
prepare and review the proposed disclosure. We recognize that some
registrants may need to include the pay ratio disclosure in more than
one filing covering the same period, accordingly actual numbers may be
lower than our estimates.
As discussed above, there is no change to the estimated burden of
the collection of information under Forms S-1, S-4, S-11 or N-2 or
under Schedule 14A and 14C because we have assumed that the burden
relating to the proposed disclosure requirements would be associated
primarily with Form 10-K. In addition, there is no change to the
estimated burden of the collection of information under Form 10,
because we have assumed that all new registrants would take advantage
of the proposed transition period. There is no change to the estimated
burden of the collection of information under Regulation S-K because
the burdens that Regulation S-K imposes are
[[Page 60603]]
reflected in our revised estimates for the forms.
Table 1--Calculation of Increases in Burden Estimates Due to the Rule Proposal
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimated
aggregate cost
Estimated annual Estimated hour Estimated 25% Outside of outside
responses subject burden per aggregate 75% Company professional professions in
to proposed response incremental hour (hours) (hours) connection with
requirements burden proposed
requirements
(A) (B) (C) = (A) * (B) (D) = (C) * 0.75 (E) = C * 0.25 (F) = (E) * $400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form 10-K............................. 3,830 190 898,700 545,775 181,925 $72,770,000
Form 8-K.............................. 22 1 22 16.5 5.5 2,200
-----------------------------------------------------------------------------------------------------------------
Total............................. 3,852 191 898,722 545,792 181,931 72,772,200
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table 2--Calculation of Total PRA Burden Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current Proposed Current Increase in Proposed Current Increase in Proposed
annual annual burden burden burden professional professional professional
responses responses hours hours hours costs costs costs
(A) (B) (C) (D) \256\ (E) = C + D (F) (G) = F + G
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form 10-K.......................... 14,296 14,296 21,430,988 545,775 22,105,013 $2,857,465,000 $72,770,000 $2,930,235,000
Form 8-K........................... 118,387 118,387 507,665 16.5 507,681.5 67,688,700 2,200 67,690,900
--------------------------------------------------------------------------------------------------------------------
Total.......................... 132,683 132,683 21,938,653 545,792 22,612,694 2,925,153,700 72,772,200 2,997,925,900
--------------------------------------------------------------------------------------------------------------------------------------------------------
E. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order
to:
---------------------------------------------------------------------------
\256\ The increase in burden hours reflected in the table is
based on the aggregate incremental burden hours per form multiplied
by the annual responses that would be required to include additional
disclosure under our rules as proposed. As explained in the
discussion above, for purposes of determining the total increase in
burden hours, we have reduced the current number of annual responses
to reflect that the proposed disclosure requirements will not apply
to all forms filed. See Table 1 for estimates per response.
---------------------------------------------------------------------------
Evaluate whether the proposed collections of information
are necessary for the proper performance of the functions of the
Commission, including whether the information would have practical
utility;
Evaluate the accuracy of our estimates of the burden of
the proposed collections of information;
Determine whether there are ways to enhance the quality,
utility and clarity of the information to be collected;
Evaluate whether there are ways to minimize the burden of
the collections of information on those who respond, including through
the use of automated collection techniques or other forms of
information technology; and
Evaluate whether the proposed amendments would have any
effects on any other collections of information not previously
identified in this section.
Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
the burdens. Persons who desire to submit comments on the collection of
information requirements should direct their comments to the OMB,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Room 10102, New Executive
Office Building, Washington, DC 20503, and send a copy of the comments
to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission,
100 F Street NE., Washington, DC 20549-1090, with reference to File No.
S7-07-13. Requests for materials submitted to the OMB by us with regard
to these collections of information should be in writing, refer to File
No. S7-07-13 and be submitted to the Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE., Washington, DC
20549-2736. Because the OMB is required to make a decision concerning
the collections of information between 30 and 60 days after
publication, your comments are best assured of having their full effect
if the OMB receives them within 30 days of publication.
VI. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\257\ we solicit data to determine whether the
proposed amendments constitute a ``major'' rule. Under SBREFA, a rule
is considered ``major'' where, if adopted, it results or is likely to
result in:
---------------------------------------------------------------------------
\257\ Public Law 104-121, tit. II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------
An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease);
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment or
innovation.
Commenters should provide comment and empirical data on (a) the
potential annual effect on the U.S. economy; (b) any increase in costs
or prices for consumers or individual industries; and (c) any potential
effect on competition, investment or innovation.
VII. Regulatory Flexibility Act Certification
The Commission hereby certifies, pursuant to 5 U.S.C. 605(b), that
the amendments contained in this release, if adopted, would not have a
significant economic impact on a substantial number of small entities.
The proposed amendments would provide that a registrant (other than a
smaller reporting company or an emerging growth company) would be
required to disclose a pay ratio (showing the median of the
[[Page 60604]]
annual total compensation of all employees of the registrant and its
subsidiaries to the annual total compensation of the principal
executive officer of the registrant) in filings that are required to
include executive compensation information pursuant to Item 402 of
Regulation S-K. Section 953(b) does not apply to smaller reporting
companies and does not apply to emerging growth companies, and,
consistent with Section 953(b), the proposed requirements would not
apply to smaller reporting companies or emerging growth companies.
Because smaller reporting companies and emerging growth companies are
not subject to the proposed requirements, we believe the proposed rules
would not have a significant economic impact on a substantial number of
small entities.
VIII. Statutory Authority and Text of Amendments
The amendments contained herein are being proposed pursuant to
Sections 7, 10 and 19(a) of the Securities Act, Sections 3(b), 12, 13,
14, 15(d) and 23(a) of the Exchange Act, Section 953(b) of the Dodd-
Frank Act, as amended, and Section 102(a)(3) of the JOBS Act.
List of Subjects
17 CFR Part 229
Reporting and recordkeeping requirements, Securities.
17 CFR Part 249
Brokers, Reporting and recordkeeping requirements, Securities.
Text of Proposed Amendments
In accordance with the foregoing, title 17, chapter II of the Code
of Federal Regulations, is proposed to be amended as follows:
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933 AND SECURITIES EXCHANGE ACT OF 1934--REGULATION S-K
0
1. The general authority citation for part 229 is revised to read as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll,
78 mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-
38(a), 80a-39, 80b-11 and 7201 et seq.; 18 U.S.C. 1350; Sec. 953(b)
Pub. L. 111-203, 124 Stat. 1904; and Sec. 102(a)(3) Pub. L. 112-106,
126 Stat. 309, unless otherwise noted.
0
2. Amend Sec. 229.402 by:
0
a. In paragraph (l) removing ``(k) and (s)'' and adding in its place
``(k), (s) and (u)''; and
0
b. Adding paragraph (u) directly after the Instructions to Item 402(t).
The addition reads as follows:
Sec. 229.402 (Item 402) Executive Compensation.
* * * * *
(u) Pay ratio disclosure. (1) Disclose:
(i) The median of the annual total compensation of all employees of
the registrant, except the PEO of the registrant;
(ii) The annual total compensation of the PEO of the registrant;
and
(iii) The ratio of the amount in paragraph (u)(1)(i) of this Item
to the amount in paragraph (u)(1)(ii) of this Item. For purposes of the
ratio required by this paragraph (u)(1)(iii), the amount in paragraph
(u)(1)(i) of this Item shall equal one, or, alternatively, the ratio
may be expressed narratively as the multiple that the amount in
paragraph (u)(1)(ii) of this Item bears to the amount in in paragraph
(u)(1)(i) of this Item.
(2) (i) For purposes of this paragraph (u), the total compensation
of employees of the registrant (including the PEO of the registrant)
shall be determined in accordance with paragraph (c)(2)(x) of this Item
402. In determining the total compensation, all references to ``named
executive officer'' in this Item 402 and the instructions thereto may
be deemed to refer instead, as applicable, to ``employee'' and, for
non-salaried employees, references to ``base salary'' and ``salary'' in
this Item 402 and the instructions thereto may be deemed to refer
instead, as applicable, to ``wages plus overtime.''
(ii) For purposes of this paragraph (u), annual total compensation
means total compensation for the registrant's last completed fiscal
year.
(3) For purposes of this paragraph (u), employee or employee of the
registrant means an individual employed by the registrant or any of its
subsidiaries as of the last day of the registrant's last completed
fiscal year. This includes any full-time, part-time, seasonal or
temporary worker employed by the registrant or any of its subsidiaries
on that day (including officers other than the PEO).
Instruction 1 to Item 402(u)--Updating for the last completed
fiscal year. Pay ratio information (i.e., the disclosure called for by
paragraph (u)(1) of this Item) with respect to the registrant's last
completed fiscal year is not required to be disclosed until the filing
of its annual report on Form 10-K for that last completed fiscal year
or, if later, the filing of a definitive proxy or information statement
relating to its next annual meeting of shareholders (or written
consents in lieu of such a meeting) following the end of such fiscal
year; provided that, the required pay ratio information must, in any
event, be filed as provided in General Instruction G(3) of Form 10-K
(17 CFR 249.310) not later than 120 days after the end of such fiscal
year. In any filing made by a registrant after the end of its last
completed fiscal year and before the filing of such Form 10-K or proxy
or information statement, as applicable, a registrant that was subject
to the requirements of paragraph (u) of this Item for the fiscal year
prior to the last completed fiscal year shall include or incorporate by
reference the information required by paragraph (u) of this Item for
that prior fiscal year.
Instruction 2 to Item 402(u)--Methodology and use of estimates. (i)
Registrants may use (A) a methodology that uses reasonable estimates to
identify the median and (B) reasonable estimates to calculate the
annual total compensation or any elements of total compensation for
employees other than the PEO.
(ii) In determining the employees from which the median is
identified, a registrant may use (A) its employee population or (B)
statistical sampling or other reasonable methods.
(iii) A registrant may identify the median employee using (A)
annual total compensation or (B) any other compensation measure that is
consistently applied to all employees included in the calculation, such
as amounts derived from the registrant's payroll or tax records. In
using a compensation measure other than annual total compensation to
identify the median employee, if that measure is recorded on a basis
other than the registrant's fiscal year (such as payroll or tax
information), the registrant may use the same annual period that is
used to derive those amounts. Where a compensation measure other than
annual total compensation is used to identify the median employee, the
registrant must (A) disclose the compensation measure used and (B)
calculate and disclose the annual total compensation for that median
employee.
(iv) Registrants must briefly disclose and consistently apply any
methodology used to identify the median and any material assumptions,
adjustments or estimates used to identify the median or to determine
total compensation or any elements of total compensation, and
registrants must clearly identify any estimated amount. This disclosure
should be a brief overview; it is not
[[Page 60605]]
necessary to provide technical analyses or formulas. If a registrant
changes methodology or material assumptions, adjustments or estimates
from those used in its pay ratio disclosure for the prior fiscal year,
and if the effects of any such change are material, the registrant
shall briefly describe the change and the reasons for the change, and
shall provide an estimate of the impact of the change on the median and
the ratio.
Instruction 3 to Item 402(u)--Permitted annualizing adjustments. A
registrant may annualize the total compensation for all permanent
employees (other than those in temporary or seasonal positions) that
were employed by the registrant for less than the full fiscal year
(such as newly hired employees or permanent employees on an unpaid
leave of absence during the period).
Instruction 4 to Item 402(u)--PEO compensation not available. A
registrant that is relying on Instruction 1 to Item 402(c)(2)(iii) and
(iv) in connection with the salary or bonus of the PEO for the last
completed fiscal year, shall disclose that the pay ratio required by
paragraph (u) of this Item is not calculable until the PEO salary or
bonus, as applicable, is determined and shall disclose the date that
the PEO's actual total compensation is expected to be determined. The
disclosure required by paragraph (u) of this Item must then be
disclosed in the filing under Item 5.02(f) of Form 8-K (17 CFR 249.308)
that discloses the PEO's salary or bonus in accordance with Instruction
1 to Item 402(c)(2)(iii) and (iv).
Instruction 5 to Item 402(u)--Transition period. A registrant must
comply with paragraph (u) of this Item with respect to compensation for
the first fiscal year commencing on or after the date the registrant
first becomes subject to the requirements of Section 13(a) or 15(d) of
the Exchange Act (15 U.S.C. 78m or 78o(d), and may omit such pay ratio
disclosure from any filing until it the filing of its annual report on
Form 10-K for such fiscal year or, if later, the filing of a proxy or
information statement relating to its next annual meeting of
shareholders (or written consents in lieu of such a meeting) following
the end of such year, provided that, such pay ratio disclosure must, in
any event, be filed as provided in General Instruction G(3) of Form 10-
K (17 CFR 249.310) not later than 120 days after the end of such fiscal
year.
Instruction 6 to Item 402(u)--Emerging growth companies. A
registrant is not required to comply with paragraph (u) of this Item if
it is an emerging growth company as defined in Section 3(a) of the
Exchange Act (15 U.S.C. 78c(a)).
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
3. The general authority citation for part 249 is revised to read as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b) Pub. L. 111-203, 124 Stat.
1904; and Sec. 102(a)(3) Pub. L. 112-106, 126 Stat. 309, unless
otherwise noted.
* * * * *
0
4. Form 8-K (referenced in Sec. 249.308) is amended by revising
paragraph (f) of Item 5.02, designating paragraph (f) as (f)(1) and
adding paragraph (2).
The revisions and additions read as follows:
Note: The text of Form 8-K does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 8-K
* * * * *
Item 5.02 Departure of Directors or Certain Officers; Election of
Directors; Appointment of Certain Officers; Compensatory Arrangements
of Certain Officers.
* * * * *
(f)(1) * * *
(2) As specified in Instruction 4 to Item 402(u) of Regulation S-K
(17 CFR 229.402(u)), disclosure under this Item 5.02(f) with respect to
the salary or bonus of a principal executive officer shall include pay
ratio disclosure pursuant to Item 402(u) of Regulation S-K calculated
using the new total compensation figure for the principal executive
officer. Pay ratio disclosure is not required under this Item 5.02(f)
until the omitted salary or bonus amounts for such principal executive
officer become calculable in whole.
* * * * *
Dated: September 18, 2013.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-23073 Filed 9-30-13; 8:45 am]
BILLING CODE 8011-01-P