The Pay Ratio Rule: Preparing for Compliance

Avrohom J. Kess is partner and head of the Public Company Advisory Practice at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher/FW Cook co-publication authored by Mr. Kess, Yafit Cohn, Bindu M. Culas, and Michael R. Marino, available here.

On August 5, 2015, the Securities and Exchange Commission (SEC) adopted its much-anticipated final rule implementing the pay ratio disclosure requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Section 953(b) of the Dodd-Frank Act instructed the SEC to adopt rules requiring reporting companies to disclose the median of the annual total compensation of all company employees other than the company’s chief executive officer (CEO), the CEO’s annual total compensation and the ratio between these two numbers.

The SEC has provided companies with a generous phase-in period for the pay ratio disclosure requirement. The first disclosure is due in 2018, covering a company’s fiscal year beginning on or after January 1, 2017. However, companies should not be lulled by this. The pay ratio disclosure requirement is complex and gives companies a great deal of flexibility. There are steps companies should take in the near future to ensure timely and seamless compliance with the pay ratio rule.

By starting the process early, companies can ensure they have sufficient time to evaluate the various options the pay ratio rule provides and address any issues that arise in applying those options. Preparing early will also enable management to consider how to draft pay ratio disclosure that provides useful information to the company’s shareholders and puts the company’s pay ratio in the proper context for shareholders, employees and other stakeholders. Against this background, the complete publication (available here), co-authored by Simpson Thacher attorneys and F.W. Cook principals:

  • Provides an overview of the pay ratio disclosure requirement.
  • Explains methodologies companies can use to carry out key tasks that are essential for determining elements of the pay ratio, including:
    • identifying the median employee; and
    • calculating annual total compensation.
  • Offers guidance on how to present pay ratio disclosure.
  • Suggests initial steps companies should take to prepare for compliance.

The complete publication is available here.

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