Skadden: “SEC Adopts CEO Pay Ratio Disclosure Requirements”

On August 5, 2015, in a 3-2 vote, the U.S. Securities and Exchange Commission (SEC) adopted final rules implementing the controversial “CEO pay ratio” disclosure requirements that were proposed in 2013 and mandated by Congress pursuant to Section 953(b) of the Dodd-Frank Act. Despite much public debate and significant negative feedback on the proposed rules, the SEC adopted final requirements that are generally consistent with its initial proposal and largely without compromise on what were perceived as the most controversial issues. Some of the more notable changes to the proposed rules are:

•Companies are required to provide the new pay ratio disclosures for the first fiscal year commencing on or after January 1, 2017. As a result, companies with a fiscal year ending December 31, 2017, will need to disclose the pay ratio information (based on 2017 compensation) in their proxy or information statements for their 2018 shareholder meetings.

•Pay ratio disclosure is required annually, but the median employee calculation only needs to be performed once every three years, unless there is a change in employee population or employee compensation arrangements that could significantly skew the pay ratio. Companies also may select any date within the last three months of their last completed fiscal year to determine their employee population for purposes of identifying the median employee.

•Certain non-U.S. employees may be excluded pursuant to a foreign data privacy law exemption and/or a 5 percent de minimis exemption; reliance on either exemption requires additional disclosure.

•Compensation of employees may be adjusted to the cost of living in the jurisdiction where the CEO resides.

Other key terms of the new rules are outlined below.

Pay Ratio Disclosure Requirement. The SEC amended its existing executive compensation disclosure rules to require companies to disclose:

•the median annual total compensation of all employees of the company, except the CEO;

•the annual total compensation of the CEO; and

•the ratio of those two amounts.

The final rules require the pay ratio to be disclosed either as a ratio (e.g., 50:1 or 50 to 1) or narratively in terms of the multiple (e.g., “the CEO’s total compensation amount is 50 times that of the median of the annual total compensation of all employees”). These disclosures must be included in any filing that requires executive compensation disclosure, including annual reports, proxy and information statements, and registration statements that otherwise require such disclosure.

In addition to disclosing the pay ratio, companies will be required to briefly describe the methodology used to identify the median employee, as well as any material assumptions, adjustments (including cost-of-living adjustments) or estimates used to determine the median employee or annual total compensation. A company that chooses to use a consistently applied compensation measure must briefly describe the measure chosen. Companies also may supplement the required disclosure with additional discussion or ratios, as long as they are clearly identified, not misleading and not presented with greater prominence than the required pay ratio.

Exempted Companies. Emerging growth companies, smaller reporting companies and foreign private issuers are exempt from the pay ratio disclosure requirements. The final rules also provide transition periods for private companies that go public and companies engaging in business combinations or acquisitions…..

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