Pay Ratio Disclosure

Federal RegisterOct 1, 2013

Ask Donna

What actually matters in this document.

Text

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.

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

rule-comments@sec.gov.

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

of Regulation S-K

and a conforming amendment to Form 8-K

under the Securities Exchange Act of 1934 (the “Exchange Act”).

17 CFR 229.303.

17 CFR 229.10

et seq.

17 CFR 249.220f.

15 U.S.C. 78a

et seq.

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”)

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.

Public Law 111-203, 124 Stat. 1376 (2010), as amended by Public Law 112-106,126 Stat. 306 (2012).

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.

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”)

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

statutory requirements and the need for additional interpretive guidance.

15 U.S.C. 77a

et seq.

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.

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.

We have considered these comments in proposing the rules described in this release.

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.

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.

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.

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.

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.

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.

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”).

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.

See, e.g.,

AFL-CIO II and letters from ABA; American Benefits Council; COEC II; Protective Life Corporation; and Davis Polk.

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.

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.

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.

We do not expect that many registrants, if any, currently disclose or track total compensation as determined pursuant to Item 402 for their workforce.

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).

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,

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.

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.

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].

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.

See

letter from Davis Polk.

See also

letter from R. Morrison.

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.”).

“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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.”).

In light of the significant potential costs articulated by commenters,

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).

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.

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,

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.

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.

17 CFR 249.310.

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.

Although some commenters suggested that Section 953(b)(1) requires pay ratio disclosure in every Commission filing,

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.

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,

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.

See, e.g.,

COEC I and letters from American Benefits Council; Compensia, Inc.; Davis Polk; SCSGP; and Towers Watson.

See, e.g.,

letters from ABA and RILA.

See, e.g.,

AFL-CIO I, House Letter and Senate Letter; and letters from CtW Investment Group and UAW Retiree Medical Benefits Trust.

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

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,

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).

15 U.S.C. 78c(a).

See

proposed Instruction 6 to Item 402(u).

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)

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),

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).

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.

17 CFR 229.10(f)(1).

See

Item 402(

). 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.

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).

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 (

) 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.

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.

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.

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?

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).

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).

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.

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).

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.

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.”).

Although Section 953(b) calls for a ratio showing the median of the annual total compensation of all employees

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,

and the annual total compensation of a registrant's PEO is $12,260,000,

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”).

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.

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.

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,

to investors of the proposed pay ratio disclosure.

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.

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

(including officers other

than the PEO).

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.

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.

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.

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.

We note that commenters were split in their support for a rule that would include all employees of the issuer,

rather than only covering full-time U.S. workers.

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.

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.

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.

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.

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.

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.

See, e.g.,

letter from Group of Exec. Comp. Lawyers.

Id.

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.

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.

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.

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.”).

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.”).

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.”).

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.

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.

See

COEC II and letters from Davis Polk; Group of Exec. Comp. Lawyers; and SCSGP.

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.

In some EU Member States, employee consent is required, while in others, consent may not be sufficient.

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.

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.

See

letter from Group of Exec. Comp. Lawyers.

Id.

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

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?

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?

See

AFL-CIO I and letters from Americans for Financial Reform; Walden Asset Management; and Social Investment Forum.

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.

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

402(a)(3)(iii). Two commenters expressly supported this approach.

Proposed Item 402(u)(3).

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…The last day of the prior year would seem an obvious choice.”).

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.

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.

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.

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.

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.

See

AFL-CIO I (“The disclosure of compensation data under Section 953(b) will not have unintended consequences on public company employment decisions.”).

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.

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.

See, e.g.,

letters from Davis Polk; Frederick W. Cook & Co.; Social Investment Forum; RILA, Walden Asset Management; and Trillium Asset Management.

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.

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.

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.

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

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).

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.

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.

See

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. As discussed elsewhere in this release,

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.

See

Section IV of this release.

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.

See

proposed Item 402(u)(3).

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.

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.

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?

Should we allow cost-of-living adjustments for non-U.S. employees as recommended by some commenters?

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?

See

letters from Americans for Financial Reform; Frederick W. Cook & Co., Inc.; and RILA.

See generally

letter from CtW Investment Group.

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.

We note that Congress

specifically chose “median” as the point of comparison for Section 953(b), rather than the average,

and, therefore, the proposed pay ratio requirements also require the median to be used.

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.”).

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.

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.

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:

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.

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.

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.

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.

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.

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

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.

See

American Benefits Council.

See

letter from Group of Exec. Comp. Lawyers.

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.

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.

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.

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.

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.”).

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.”).

See

letter from M. Ohlrogge.

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.

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.

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.

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.

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.

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.

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).

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.

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,

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

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.”).

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.

See

AFL-CIO II and letters from ABA; American Benefits Council; Americans for Financial Reform; CtW Investment Group; Protective Life Corporation; RILA; and SCSGP.

Registrants would be permitted to use a consistently-applied compensation measure to identify the median employee regardless of whether they use statistical sampling.

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).

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.

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.

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.

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,

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 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,

which could increase the costs to registrants of the proposed requirements.

See, e.g.,

Senate Letter; House Letter; and AFL-CIO I; and letters from CtW Investment Group and UAW Retiree Medical Benefits Trust.

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.

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.

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

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.

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.

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].

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.

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.

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.

See

letter from Davis Polk.

See also

letter from R. Morrison.

See

COEC I and letters from American Benefits Council; Brian Foley; Group of Exec. Comp. Lawyers; Protective Life Corporation; SCSGP; and Towers Watson.

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.

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).

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

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.

See

COEC I and letters from ABA and SCSGP.

100

See

proposed Instruction 2 to Item 402(u).

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

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”).

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).

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.

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.

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.”

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).

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.”).

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

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).

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.

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.

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).

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?

117

See

letter from RILA.

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

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.

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.

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.

119

See, e.g.,

Senate Letter; House Letter; and AFL-CIO I; and letters from CtW Investment Group and UAW Retiree Medical Benefits Trust.

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.

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.

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.

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.

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

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.

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,

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

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.”).

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.

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.”).

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.

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.

To address this issue, some commenters recommended 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.

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.

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).

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.

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).

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

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?

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.

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.

136

See

Proposed Instruction 4 to Item 402(u).

In proposing this instruction, we have assumed that the potential benefits of the disclosure could be diminished if the pay ratio w

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.