# Pay Ratio Disclosure > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2015-19600 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** August 18, 2015 - **Citation:** 80 FR 50104 ## Text SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 229, 240, and 249 [Release Nos. 33-9877; 34-75610; File No. S7-07-13] RIN 3235-AL47 Pay Ratio Disclosure AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: We are adopting 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 a registrant (excluding the chief executive officer), the annual total compensation of that registrant'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 disclosure is 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 disclosure requirement does not apply to emerging growth companies, smaller reporting companies, or foreign private issuers. DATES: Effective Date: October 19, 2015. Compliance Date: Registrants must comply with the final rule for the first fiscal year beginning on or after January 1, 2017. FOR FURTHER INFORMATION CONTACT: John Fieldsend, Special Counsel 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 adopting amendments to Item 402 1 of Regulation S-K 2 and a conforming amendment to Form 8-K 3 under the Securities Exchange Act of 1934 (the “Exchange Act”). 4 1 17 CFR 229.402. 2 17 CFR 229.10 et seq. 3 17 CFR 249.308. 4 15 U.S.C. 78a et seq. Table of Contents I. Background A. Section 953(b) of the Dodd-Frank Act B. Summary of the Proposed Rule C. Summary of the General Comments on the Proposed Rule D. Summary of Changes in the Final Rule 1. Non-U.S. Employee Exemptions and Additional Permitted Disclosure 2. Employees of Consolidated Subsidiaries 3. Employed on Any Date Within Three Months of the Last Completed Fiscal Year 4. Identifying the Median Employee Once Every Three Years 5. Initial Compliance Date 6. Transition Period for New Registrants 7. Additional Transition Periods II. Discussion A. Scope of Final Rule 1. Pay Ratio Disclosure Requirements Under New Paragraph (u) to Item 402 of Regulation S-K a. Proposed Rule b. Comments on the Proposed Rule c. Final Rule 2. Pay Ratio Disclosure in Filings That Require Item 402 of Regulation S-K Information a. Proposed Rule b. Comments on the Proposed Rule c. Final Rule 3. Excluded Registrants—Smaller Reporting Companies, Foreign Private Issuers, MJDS Filers, and Emerging Growth Companies a. Proposed Rule b. Comments on the Proposed Rule c. Final Rule B. Requirements of Final Rule 1. “All Employees” Covered Under the Rule a. Types of Employees i. Proposed Rule ii. Comments on the Proposed Rule iii. Final Rule b. Employed on Any Date Within Three Months of the Last Completed Fiscal Year i. Proposed Rule ii. Comments on the Proposed Rule iii. Final Rule c. Employees Located Outside the United States i. Proposed Rule ii. Comments on the Proposed Rule iii. Final Rule (a) Non-U.S. Employees Generally (b) Foreign Data Privacy Law Exemption (c) De Minimis Exemption (d) Cost-of-Living Adjustment d. Employees of Consolidated Subsidiaries i. Proposed Rule ii. Comments on the Proposed Rule iii. Final Rule e. Any PEO Compensation in the Last Full Fiscal Year i. Proposed Rule ii. Comments on the Proposed Rule iii. Final Rule f. Additional Information is Permissible i. Proposed Rule ii. Comments on the Proposed Rule iii. Final Rule g. Annualizing Permanent Employees is Permissible, but Other Compensation Adjustments are Prohibited i. Proposed Rule ii. Comments on the Proposed Rule iii. Final Rule 2. Identifying the Median Employee and Calculating Annual Total Compensation a. Identifying the Median Employee i. Once Every Three Years (a) Proposed Rule (b) Comments on the Proposed Rule (c) Final Rule ii. Using Annual Total Compensation, Another Consistently Applied Compensation Measure, Statistical Sampling, Reasonable Estimates, or Other Reasonable Methods (a) Proposed Rule (b) Comments on the Proposed Rule (i) Flexibility (ii) Statistical Sampling (iii) Consistently Applied Compensation Measures (iv) The “Median” Employee (c) Final Rule (i) Flexibility (ii) Statistical Sampling (iii) Consistently Applied Compensation Measures (iv) The “Median” Employee b. Calculating Annual Total Compensation i. Proposed Rule ii. Comments on the Proposed Rule iii. Final Rule 3. Disclosure of Methodology, Assumptions, and Estimates a. Proposed Rule b. Comments on the Proposed Rule c. Final Rule 4. Meaning of “Annual” a. Proposed Rule b. Comments on the Proposed Rule c. Final Rule 5. “Filed” Not “Furnished” a. Proposed Rule b. Comments on the Proposed Rule c. Final Rule 6. Timing of Disclosure a. Updating Pay Ratio Disclosure for the Last Completed Fiscal Year i. Proposed Rule ii. Comments on the Proposed Rule iii. Final Rule b. Omitting Salary or Bonus Information for the PEO in Reliance on Instruction 1 to Item 402(c)(2)(iii) and (iv), and Technical Amendment to Item 5.02(f) of Form 8-K i. Proposed Rule ii. Comments on the Proposed Rule iii. Final Rule c. Initial Compliance Date i. Proposed Rule ii. Comments on the Proposed Rule iii. Final Rule d. Transition Period for New Registrants i. Proposed Rule ii. Comments on the Proposed Rule iii. Final Rule e. Additional Transition Periods i. Proposed Rule ii. Comments on the Proposed Rule iii. Final Rule III. Economic Analysis A. Background B. Baseline C. Economic Effects From Mandated Disclosure Requirements 1. Benefits 2. Costs a. General b. Compliance Cost Estimates in Comment Letters i. Center on Executive Compensation Survey ii. Chamber of Commerce Survey iii. Other Specific Comments c. Quantification of Compliance Costs d. Indirect Costs 3. Other Economic Effects D. Economic Effects From Exercise of Discretion 1. General 2. Implementation Choices and Alternatives a. Filings Subject to Pay Ratio Disclosure Requirements b. Registrants Subject to the Pay Ratio Disclosure Requirements c. Employees Included in the Determination of the Median i. Types of Employees ii. Workers Not Employed by the Registrant ( i.e., “Leased” Workers”) iii. Employees of Consolidated Subsidiaries iv. Employees Located Outside of the United States v. Foreign Data Privacy Law Exemption vi. De Minimis Exemption vii. Calculation Date d. Adjustments to the Compensation of Employees e. Frequency of Identifying the Median Employee f. Method of Identifying the Median Employee i. Consistently Applied Compensation Measure ii. Statistical Sampling g. Disclosure of Methodology, Assumptions, and Estimates h. Determination of Total Compensation i. Defining “Annual” j. Updating the Pay Ratio Disclosure for the Last Completed Fiscal Year k. Status of Disclosure as “Filed” l. Compliance Date m. Transition Periods IV. Paperwork Reduction Act A. Background B. Summary of Information Collections C. Summary of Comment Letters and Revisions to Proposal D. Revisions to PRA Reporting and Cost Burden Estimates 1. Estimated Internal Burden Hours 2. Estimated Cost Burdens 3. Estimated Cost and Hour Burdens for Each Collection of Information a. Regulation S-K b. Form 10-K c. Form 8-K d. Proxy Statements on Schedule 14A e. Information Statements on Schedule 14C f. Form S-1 g. Form S-4 h. Form S-11 i. Form N-2 j. Form 10 E. Summary to Changes to Annual Compliance Burden in Collection of Information V. Final Regulatory Flexibility Act Certification VI. Statutory Authority I. Background A. Section 953(b) of the Dodd-Frank Act Section 953(b)(1) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) 5 directs us to amend Item 402 of Regulation S-K (“Item 402”) 6 to require each registrant, other than an emerging growth company, as that term is defined in Section 3(a) of the Exchange Act, to disclose in any filing of the registrant described in Item 10(a) of Regulation S-K (or any successor thereto): 7 (A) The median of the annual total compensation of all employees of the registrant, except the chief executive officer (“CEO”) (or any equivalent position) of the registrant; (B) the annual total compensation of the CEO (or any equivalent position) of the registrant; and (C) the ratio of the median of the total compensation of all employees of the registrant to the annual total compensation of the CEO of the registrant. Section 953(b)(2) specifies that, for purposes of Section 953(b), “total compensation” of an employee of a registrant shall be determined in accordance with Item 402(c)(2)(x) of Regulation S-K as in effect on the day before the date of enactment of the Dodd-Frank Act. As discussed in detail below, we are adopting amendments to Item 402 to implement Section 953(b). 8 We refer to this disclosure of the median of the annual total compensation of all employees of the registrant, the annual total compensation of the principal executive officer (“PEO”) of the registrant, 9 and the ratio of the two amounts as “pay ratio” disclosure. 5 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 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. 6 17 CFR 229.402. As discussed in greater detail below, consistent with Section 953(b), the final rule requires a registrant to provide the pay ratio disclosure in any filing described in Item 10(a) of Regulation S-K that calls for executive compensation disclosure under Item 402, including 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 these forms require compliance with Item 402. Therefore, any company that provides such a filing is subject to the final rule. Section 953(b) refers to any such company as an “issuer.” In this release, to be consistent with other releases, we generally refer to such a company as a “registrant.” For the purposes of this release, unless otherwise expressly specified, these terms are used interchangeably. 7 17 CFR 229.10(a). 8 On September 18, 2013, we proposed amendments to implement Section 953(b). See Pay Ratio Disclosure, Release No. 33-9452 (Sept. 18, 2013) [78 FR 60560] (“Proposing Release”). 9 The term “CEO” in the executive compensation rules was replaced by the term “PEO” as part of the 2006 amendments to Item 402 in order to maintain consistency with the nomenclature used in Item 5.02 of Form 8-K. See Executive Compensation and Related Person Disclosure, Release No. 33-8732A, n. 326 (Aug. 29, 2006) [71 FR 53158] (“2006 Adopting Release”). Consistent with the language of current Item 402, both the proposed rule and the final rule use the term “PEO” in lieu of “CEO.” Congress did not expressly state the specific objectives or intended benefits of Section 953(b), and the legislative history of the Dodd-Frank Act also does not expressly state the Congressional purpose underlying Section 953(b). 10 As discussed below, based on our analysis of the statute and comments received, we believe Section 953(b) was intended to provide shareholders with a company-specific metric that can assist in their evaluation of a registrant's executive compensation practices. Accordingly, we have sought to tailor the final rule to meet that purpose while avoiding unnecessary costs. 10 See letters from National Association of Manufacturers (Jul. 6, 2015) (“NAM II”) (stating that it concurs with our conclusion in the Proposing Release that neither the statute nor the related legislative history directly states the objectives or intended benefits of the provision) and WorldatWork (Jul. 6, 2015) (“WorldatWork II”). In informing our understanding of the Congressional purpose of Section 953(b), we have considered the surrounding provisions of the Dodd-Frank Act 11 as well as the comments that we received during this rulemaking. Subtitle E of Title IX of the Dodd-Frank Act, headed —“Accountability and Executive Compensation” is, as explained in the Conference Report for the legislation, “designed to address shareholder rights and executive compensation practices.” 12 Its provisions, including Section 953(b), address various aspects of executive compensation with a focus on encouraging shareholder engagement in executive compensation matters by, among other things, increasing the transparency of compensation. In Section 951, for example, Congress required companies to provide for periodic shareholder votes on executive compensation. In implementing Congress's directive, we noted that a key function of the disclosures required incident to the new voting requirement was to “provide shareholders and investors with timely information” that was potentially useful to them “as they consider voting and investment decisions.” 13 Section 952 requires, in turn, that both compensation committee members of registrants and their advisors be independent. We noted that the rules implementing Section 952 could serve an informational purpose that benefits “investors to the extent they enable compensation committees to make better informed decisions regarding the amount or form of executive compensation.” 14 Further, as we noted in the release proposing implementation of Section 953(a), that section is intended to provide shareholders with metrics that will help them assess executive compensation relative to the registrant's performance. 15 The Section 953(a) information is intended, among other things, to assist shareholders when exercising their say-on-pay voting rights under Section 951. 11 See, e.g., Medtronic, Inc. v. Lohr, 518 U.S. 470, 496 (1996) (“Congress' intent, of course, primarily is discerned from the language of the . . . statute and the `statutory framework' surrounding it. Also relevant, however, is the `structure and purpose of the statute as a whole,' as revealed not only in the text, but through . . . reasoned understanding of the way in which congress intended the statute and its surrounding regulatory scheme to affect business, consumers, and law.”) and Maine Public Utilities Comm'n v. FERC, 545 F.3d 278, 282 (D.C. Cir. 2006) (“This court applies the traditional tools of statutory interpretation in determining congressional intent, looking to the text, structure, purpose, and legislative history of a statute.”). 12 Dodd-Frank Act, H.R. Rep. 111-517, at 872 (2010) (Conf. Rep.). 13 Shareholder Approval of Executive Compensation and Golden Parachute Compensation, Release No. 33-9178 (Jan. 25, 2011) [76 FR 6010, 6037 (Feb. 2, 2011)]. 14 Listing Standards for Compensation Committees, Release No. 33-9330 (June 20, 2012) [77 FR 38422, 38447 (Jun. 27, 2012)]. 15 Pay Versus Performance, Release No. 34-74835 (Apr. 29, 2015) [80 FR 26329 (May 7, 2015)]. We believe that Section 953(b) should be interpreted consonant with Subtitle E's general purpose of further facilitating shareholder engagement with executive compensation. Thus, we believe that Congress intended Section 953(b) to supplement the executive compensation information available to shareholders. Particularly, Section 953(b) provides new data points that shareholders may find relevant and useful when exercising their voting rights under Section 951. 16 Several commenters stated affirmatively that they would find the new data points, including pay ratio disclosure, relevant and useful when making voting decisions. 17 Some commenters in the pre-proposing period 18 suggested specifically that shareholders of public companies could use the pay ratio information, together with pay-versus-performance disclosure, to help inform their say-on-pay votes, which could also be a tool for shareholders to hold companies accountable for their CEO compensation. 19 A significant consideration for us in fashioning a final rule implementing Section 953(b), then, is the extent to which elements of the final rule further Congress's apparent goal of giving shareholders additional executive compensation information to enhance the shareholder engagement envisioned by Section 951. 20 16 We note that the say-on-pay votes extend to certain other senior officers at the registrant beyond the PEO while the pay ratio disclosure is solely focused on a comparison of the PEO's compensation to the median employee's compensation. However, we do not think that this diminishes the overall utility of the pay ratio disclosures to say-on-pay votes. The PEO will typically be the highest compensated officer at a registrant and, to the extent shareholders rely on the pay ratio disclosure to determine whether the PEO's compensation is appropriate or not, it also may inform shareholders' relative assessment of the compensation of the other senior officers whose compensation is subject to say-on-pay votes. 17 See, e.g., letters from AFL-CIO (Dec. 2, 2013) (“AFL-CIO I”); American Federation of State County and Municipal Employees (Nov. 27, 2013) (“AFSCME”); Amalgamated Bank (Nov. 25, 2013) (“Amalgamated”); Bricklayers & Trowel Trades International Pension Fund (Nov. 27, 2013) (“Bricklayers International”); California State Teachers' Retirement System (Dec. 2, 2013) (“CalSTRS”); Calvert Investments (Dec. 5, 2013) (“Calvert”); Chevy Chase Trust (Nov. 25, 2013) (“Chevy Chase Trust”); Corporate Governance (Nov. 25, 2013) (“CorpGov.net”); Form Letter C; Form Letter D; Form Letter E; Form Letter F; Laborers' International Union of North America (Oct. 10, 2013) (“LIUNA”); Local Authority Pension Fund Forum (Nov. 10, 2013) (“LAPFF”); New York State Comptroller (Nov. 27, 2013) (“NY State Comptroller”); Pax World Management LLC (Oct. 10, 2013) (“Pax World Funds”); Public Citizen (Nov. 26, 2013) (“Public Citizen I”); The Forum for Sustainable and Responsible Investment (Dec. 2, 2013) (“US SIF”); Trillium Asset Management, LLC (Dec. 2, 2013) (“Trillium I”); Trillium Asset Management, LLC (Jul. 31, 2014) (“Trillium II”); and UAW Retirement Medical Benefits Trust (Nov. 21, 2013) (“UAW Trust”). 18 To facilitate public input on rulemaking required by the Dodd-Frank Act, we provided a series of email links, organized by topic, on our Web site at http://www.sec.gov/spotlight/regreformcomments.shtml , so that the public could provide comments before we proposed a rule. The comments relating to Section 953(b) are located at http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml (“Pre-Proposing Release Web site”). Comments that we received after we published the Proposing Release are located at http://www.sec.gov/comments/s7-07-13/s70713.shtml . Our references to comment letters refer to the comments on the proposal unless otherwise specified. 19 See, e.g., letters from CtW Investment Group (Jun. 20, 2011) (“CtW Investment Group pre-proposal letter) and Steven Towns (Feb. 6, 2012) (“S. Towns pre-proposal letter). 20 We note that some commenters contended that the pay ratio disclosure is intended to publicly “shame” registrants concerning the size of the disparity between their CEO's compensation and their typical worker's compensation. See, e.g., letters from The Honorable Carolos Cardozo Campbell, Former Assistant Secretary of Commerce for Economic Development (Nov. 27, 2013) (“Former Assistant Secretary Campbell”); Center on Executive Compensation (Jul. 6, 2015) (“COEC III”); Hyster-Yale Materials Handling, Inc. (Dec. 2, 2013) (“Hyster-Yale”); NACCO Industries, Inc. (Dec. 2, 2013) (“NACCO”); and U.S. Chamber of Commerce (Dec. 2, 2013) (“Chamber I”). As discussed above, we have reached a different conclusion based on principles of statutory construction and have taken no such objective into account in framing the rule. In crafting the final rule, we have sought to carefully tailor the pay ratio disclosure requirement so that it provides shareholders with a company-specific metric that is relevant and useful to their say-on-pay voting. Consistent with this understanding of the Congressional purpose of Section 953(b), we believe the final pay ratio rule should be designed to allow shareholders to better understand and assess a particular registrant's compensation practices and pay ratio disclosures rather than to facilitate a comparison of this information from one registrant to another. 21 As we noted in the Proposing Release, we do not believe that precise conformity or comparability of the pay ratio across companies is necessarily achievable given the variety of factors that could cause the ratio to differ. Consequently, we believe the primary benefit of the pay ratio disclosure is to provide shareholders with a company-specific metric that they can use to evaluate the PEO's compensation within the context of their company. 21 See, e.g., letters from CalSTRS, LAPFF, RPMI Railpen Investments (Dec. 2, 2013) (“RPMI”), Rep. Keith Ellison et al. (Dec. 2, 2013) (“Rep. Ellison et al. I”), Rep. Keith Ellison et al. (Mar. 17, 2015) (“Rep. Ellison et al. II”), and Sen. Robert Menendez et al. (Dec. 16, 2014) (“Sen. Menendez et al. II”). On the other hand, some commenters asserted that the pay ratio disclosure would not provide meaningful or material information to shareholders in making voting or investment decisions. 22 In support of this contention, some of these commenters cited studies demonstrating that shareholders are not interested in this information, 23 some commenters cited shareholder votes indicating a high level of support for executive pay and little support for shareholder proposals advocating for pay ratio disclosure, 24 and some commenters contended that pay ratio disclosure would confuse shareholders because they would rely on it without fully considering a company's detailed narrative disclosures. 25 Notwithstanding the disagreement among commenters on the value of the pay ratio disclosure, in adopting the final rule we have sought to implement Congress's apparent determination that the pay ratio disclosure would be useful to shareholders. 22 See, e.g., letters from James J. Angel, Ph.D., CFA, Visiting Associate Professor, The Wharton School, University of Pennsylvania (Nov. 22, 2013) (“Prof. Angel”); Avery Dennison Corporation (Nov. 26, 2013) (“Avery Dennison”); Bill Barrett Corporation (Dec. 2, 2013) (“Bill Barrett Corp.”); Business Roundtable (Dec. 2, 2013) (“Business Roundtable I”); Center on Executive Compensation (Dec. 2, 2013) (“COEC I”); Center on Executive Compensation (Sep. 26, 2014) (“COEC II”); COEC III; Hyster-Yale; Mercer, Inc. (Dec. 2, 2013) (“Mercer I”); NACCO; and Pearl Meyer and Partners (Dec. 2, 2013) (“PM&P”). 23 See, e.g., letters from Chamber I (citing the Center for Audit Quality's 7th annual Main Street Investor Survey, which ranked CEO compensation last on the list of factors used by shareholders to make investment decisions, with only 16% saying it was essential to their decision); COEC I (acknowledging that, while some literature focuses on pay disparities among employees with comparable jobs, the study frequently cited for the impact of disparities on collaboration, “Pay Disparities Within Top Management Groups: Evidence of Harmful Effects on Performance of High-Technology Firms” by Phyllis Siegel and Donald C. Hambrick, concerns executive pay and pay disparities among top executives, it does not discuss pay disparities between the CEO and median employee), and International Bancshares Corporation (Nov. 25, 2013) (“IBC”) (citing a Wall Street Journal article that says only 10% of individuals polled believed pay ratio would have value to shareholders) . 24 See, e.g., letters from Chamber I (indicating that the average support for management compensation in public companies was 90.1%, and 97.6% of companies received majority shareholder support for executive compensation) and COEC I (noting that, since 2010, there have been 14 shareholder proposals advocating that companies provide pay ratio disclosure, and those proposals averaged 93% opposition from shareholders, with none receiving at least 10% support from shareholders). 25 See, e.g., letters from Bill Barrett Corp., COEC I, National Investor Relations Institute (Oct. 17, 2013) (“NIRI”), and Semtech Corporation (Nov. 27, 2013) (“Semtech”). Two of these commenters suggested specifically that we should undertake an education effort to help shareholders understand the limits of pay ratio disclosure and remind them that they can find other information, such as an executive summary of the Compensation Discussion and Analysis section of a company's proxy statement, which can provide a more complete understanding of corporate pay practices. See letters from NIRI and Semtech. We also recognize that many commenters raised significant concerns about the costs of providing the required pay ratio disclosure. In implementing the statutory requirements, we have exercised our exemptive authority and provided flexibility in a manner that we expect will reduce costs and burdens for registrants, while preserving what we perceive to be the purpose and intended benefits of the disclosure required by Section 953(b). 26 The significant cost estimates of the pay ratio disclosure submitted by some commenters support our view that some accommodations are appropriate. 27 The final rule, therefore, both maintains the flexibility and accommodations from the proposal (such as permitting the use of statistical sampling and a consistent compensation measure to identify the median employee and reasonable estimates to calculate total compensation) and provides additional flexibility as follows: The final rule takes a flexible approach to the methodology a registrant can use to identify its median employee and calculate the median employee's annual total compensation; provides a de minimis exemption for non-U.S. employees and an exemption for registrants where, despite reasonable efforts to obtain or process the information necessary for compliance with the final rule, they are unable to do so without violating a foreign jurisdiction's laws or regulations governing data privacy; permits cost-of-living adjustments for the compensation of employees in jurisdictions other than the jurisdiction in which the PEO resides so that the compensation is adjusted to the cost of living in the jurisdiction in which the PEO resides; gives registrants the ability to make the median employee determination only once every three years and to choose as a determination date any date within the last three months of a registrant's fiscal year; and provides transition periods for new registrants, registrants engaging in business combinations or acquisitions, and registrants that cease to be smaller reporting companies or emerging growth companies. 26 We are mindful of the principle that “no legislation pursues its purposes at all costs,” Rodriguez v. United States, 480 U.S. 522, 525-26 (1987), and we believe that the accommodations that we have included within the final rule reflect an appropriate balance. 27 The potential costs arising from the requirements of Section 953(b), as well as the potential costs relating to the final rule, are discussed in detail below in Section III of this release under the heading “Economic Analysis”. Overall, we think the final rule will provide investors with information Congress intended them to have to assess the compensation and accountability of a company's PEO while seeking to limit the costs and practical difficulties of providing the disclosure. Finally, we recognize the possibility that, based on the specific facts and circumstances of a registrant's work force and corporate operations, the pay ratio disclosure may warrant additional disclosures from a registrant to ensure that, in the registrant's view, the pay ratio disclosure is a meaningful data point for investors when making their say-on-pay votes. While Congress appears to have believed that the pay ratio disclosure would be a useful data point, we recognize that its relative usefulness—taken alone without accompanying disclosures to provide potentially important context—may vary considerably. Rather than prescribe a one-size-fits-all catalogue of additional disclosures that registrants should provide to put the pay ratio disclosure in context, we believe it is the better course to provide registrants the flexibility to provide additional disclosures that they believe will assist investors' understanding of the meaning of pay ratio disclosure when making say-on-pay votes. In this way, we believe we can best fulfill Congress's directive in Section 953(b) while avoiding unnecessary costs and complexities that might result from mandating additional disclosures. B. Summary of the Proposed Rule In September 2013, we proposed a new rule to implement Section 953(b) of the Dodd-Frank Act. 28 The proposal's goal was to implement the statutory directive, while minimizing costs. In response to public comments we received prior to the proposal about the significant potential costs of complying with this requirement, the proposed rule would allow registrants flexibility in developing the disclosure required by the statute. We recognized that a one-size-fits-all approach would not be appropriate, given the wide range of affected registrants and the disparate burdens that would be imposed on them based on such factors as their business types and the complexity of their payroll systems. We therefore proposed to implement Section 953(b) in a manner that we believed would lower the cost of compliance while remaining consistent with the requirements of Section 953(b). 28 See Proposing Release. The proposed rule would require companies to disclose the median of the annual total compensation of all its employees except the PEO, the annual total compensation of its PEO, and the ratio of the two amounts. The proposed rule would not have specified a single calculation methodology for identifying the median employee. Instead, it would permit registrants to select a methodology for identifying the median employee that was appropriate to the size and structure of their business and the way they compensate employees. Under the proposal, registrants could have chosen to identify the median employee by analyzing their full employee population or by using statistical sampling or another reasonable method. Also, to identify the median, registrants could have used “total compensation,” as defined in our existing rules, namely Item 402(c)(2)(x), or any consistently applied compensation measure, such as information derived from tax and/or payroll records. The proposed rule would not prescribe a particular methodology or specific computation parameters. Once the median employee was identified, the proposed rule would require the registrant to calculate the annual total compensation for that median employee in accordance with the definition of “total compensation” set forth in Item 402(c)(2)(x), which requires companies to provide extensive compensation information for the PEO and other named executive officers. “Total compensation” under Item 402(c)(2)(x) is not ordinarily calculated for all employees. The proposed rule, therefore, would permit registrants to use reasonable estimates in calculating any element of total compensation and in calculating the annual total compensation of the median employee. Also, the proposed rule would define “annual total compensation” to mean total compensation for the last completed fiscal year, which would be consistent with our existing executive compensation disclosure requirements. Under the proposal, if a registrant used a compensation measure other than annual total compensation to identify the median employee, it would be required to disclose the compensation measure it used. Also, the registrant would be required to briefly describe and consistently apply any methodology it used to identify the median and any material assumptions, adjustments, or estimates used to identify the median employee or determine total compensation or any elements of total compensation for that employee or the PEO, and the registrant would need to clearly identify any amounts it estimated. Finally, registrants would be permitted, but not required, to supplement their disclosure with a narrative discussion or additional ratios if they chose to do so. Section 953(b) does not define the term “employee.” The proposed rule would define that term, for purposes of pay ratio disclosure, to include any individual employed by the registrant or any of its subsidiaries as of the last day of the registrant's last completed fiscal year. The proposed definition would encompass any full-time, part-time, seasonal, or temporary employees of the registrant or any of its subsidiaries, including any non-U.S. employee. Also, a registrant would be permitted, but not required, to annualize the total compensation for a permanent employee who was employed at year-end but did not work for the entire year. In contrast, full-time equivalent adjustments for part-time employees, annualizing adjustments for temporary and seasonal employees, and cost-of-living adjustments for non-U.S. employees would not be permitted. Also, under the proposal, registrants would be required to provide the proposed pay ratio disclosure in registration statements, proxy and information statements, and annual reports required to include executive compensation information as set forth under Item 402. Registrants, however, would not be required to provide their pay ratio information in reports that did not include Item 402 executive compensation information, such as current and quarterly reports. Additionally, registrants would not be required to update their annual pay ratio disclosure until they filed their annual report on Form 10-K for their last completed fiscal year or, if later, their definitive proxy or information statement for their next annual meeting of shareholders (or written consents in lieu of such a meeting). Registrants, however, would still be required to file their pay ratio information no later than 120 days after the end of the last fiscal year as provided in General Instruction G(3) of Form 10-K. 29 29 17 CFR 249.310. The proposal would provide a transition period for newly public companies. For these companies, initial compliance would be required with respect to compensation for the first fiscal year commencing on or after the date the company became subject to the reporting requirements. Also, as provided by the Jumpstart Our Business Startups Act (“JOBS Act”), 30 the proposed rule would not apply to emerging growth companies. Finally, the proposed rule would not apply to smaller reporting companies or foreign private issuers. 30 15 U.S.C. 78c(a). C. Summary of the General Comments on the Proposed Rule In the Proposing Release, we requested comment on many aspects of the proposed rule, including whether the proposed rule would address sufficiently the practical difficulties of data collection, whether other alternative approaches consistent with Section 953(b) could provide the potential benefits of pay ratio information at a lower cost, and whether the proposed flexible approach would appropriately implement Section 953(b). We received a large volume of comment letters from a variety of stakeholders. We received more than 287,400 comment letters, including over 1,540 individual letters that reflected a wide range of views concerning the proposed rule and the potential costs and benefits associated with its requirements. We received comments that addressed the proposed rule as a whole (including commenters that supported or opposed the rule in its entirety) as well as comments directed toward particular requirements of the rule, such as its application to foreign, part-time, temporary, and seasonal employees. In this section, we summarize the general comments on the proposal as a whole. Comments on particular provisions of the proposed rule are addressed as part of the discussion of each specific provision of the rule in Section II below. Of the over 287,400 total comment letters we received, over 285,900 were form letters regarding the proposed rule. There were 12 types of form letters, 31 and these letters either supported our proposed rule or supported the idea of adopting a rule based on Section 953(b) without specifically referencing the proposal. 31 We have received 285,936 form letters. Form Letter A (19,965 letters) supporting a strong rule generally; Form Letter B (12,942 letters) supporting a strong rule generally; Form Letter C (20 letters) supporting the Proposed Rule; Form Letter D (5,428 letters) supporting the Proposed Rule; Form Letter E (1,688 letters) supporting the Proposed Rule; Form Letter F (1,167 letters) supporting the Proposed Rule; Form Letter G (15,304 letters) supporting the Proposed Rule; Form Letter H (70,338 letters) supporting a rule generally; Form Letter I (36,299 letters) supporting the adoption of a rule; Form Letter J (75,333 letters) supporting a strong rule; Form Letter K (15,247 letters) supporting a strong rule generally; and Form Letter L (32,275 letters) supporting a rule. For example, one form letter asserted that the pay ratio disclosure is material to investors because high pay disparities can impair employee morale and productivity and have negative consequences on a company's overall performance and because investors will have a “valuable additional” measure for evaluating executive compensation, including when making say-on-pay voting decisions. 32 Also, the letter supported the proposed rule's inclusion of all employees, including non-U.S. and part-time employees, and its flexibility in identifying the median employee. Other form letters also indicated that the pay ratio disclosure is material to investors, 33 including some that noted that the disclosure would aid them in making voting decisions. 34 32 See Form Letter C. 33 See letters from Form Letter A, Form Letter B, Form Letter D, Form Letter E, Form Letter F, and Form Letter G. 34 See letters from Form Letter D (“Pay ratio disclosure will help investors evaluate CEO pay levels when voting on executive compensation matters. The ratio of the CEO-to-worker pay is a valuable metric for investors, because it places CEO pay levels into a broader perspective.”), Form Letter E (“Pay ratio disclosure will help investors evaluate CEO pay levels when voting on executive compensation matters. The ratio of the CEO-to-worker pay is a valuable tool for investors in evaluating and voting on CEO pay; scrutinizing the performance of Boards of Directors; and, identifying possible investment risks.”), Form Letter F (“A pay ratio disclosure will help investors better evaluate CEO pay levels when voting on executive compensation matters. Compensation experts have found that there is a correlation between high CEO pay and poor performance. By mandating disclosure of the ratio of CEO to worker pay, inequities will be become more transparent.”). Additionally, the vast majority of the over 1,500 unique comment letters were from individual commenters who, like those submitting the form letters, supported the proposed rule or supported the idea of adopting a rule based on Section 953(b) without specifically referencing the proposal. Most of these individuals supported the proposed rule or the pay ratio disclosure because they believed it would: • Inform shareholders about executive compensation matters, especially with regard to say-on-pay voting; 35 35 See, e.g., letters from D.A. Alexander (Nov. 22, 2013) (“Alexander”), Jean M. Blair (Sep. 25, 2013) (“J. Blair”), Cathy Clemens (Sep. 25, 2013) (“Clemens”), Beth Finchler (Sep. 27, 2013) (“Finchler”), Amy Hevron (“Sep. 28, 2013) (“Hevron”), Emanuel Jacobowitz (Sep. 24, 2013) (“Jacobowitz”), Rachel LaBruyere (Oct. 17, 2013) (“LaBruyere”), Gabrielle Loperfido (Sep. 25, 2013) (“Loperfido”), Carol Nix (Sep. 24, 2013) (“Nix”), Bonnie Overcott (Jan. 4, 2014) (“Overcott”), Lynn Reilly (Sep. 22, 2013) (“Reilly”), Kendall Simmons (Sep. 24, 2013) (“Simmons”), Dory Storms (Sep. 24, 2013) (“Storms”), Amy Sullivan-Greiner (Sep. 24, 2013) (“Sullivan-Greiner”), Jackie Tortora (Oct. 21, 2013) (“Tortora”), and Bryan Taylor (Nov. 21, 2013) (“Taylor”). • demonstrate a company's focus on its long-term health as opposed to short-term gains that benefit its executives at the expense of its shareholders; 36 36 See, e.g., letters from Anonymous (Dec. 1, 2013) (“Anonymous”), Eric C. Gade (Sep. 18, 2013) (“Gade”), Linda Kranen (Oct. 20, 2013) (“Kranen”), Alyce Lomax (Dec. 2, 2013) (“Lomax”), Holly Schroeder (Nov. 5, 2013) (“Schroeder”), Erika Skornia-Olsen (Nov. 5, 2013) (“Skornia-Olsen”), and Calvin Vu (Oct. 26, 2013) (“Vu”). • discourage the pay practices that led to the 2008 financial crisis; 37 37 See, e.g., letters from Lisbeth Caccese (Sep. 25, 2013) (“Caccese”), Hope Carr (Sep. 24, 2013) (“Carr”), Sarah McKee (Sep. 24, 2013) (“McKee”), Thomas Motes (Sep. 24, 2013) (“Motes”), Karl David Reinhardt (Sep. 24, 2013) (“Reinhardt”), Cynthia Sommer (Sep. 24, 2013) (“Sommer”), Cody Spann (Sep. 24, 2013) (“Spann”), Kathy Van Dame (Sep. 24, 2013) (“Van Dame”), Marietta Whittlesey (Sep. 24, 2013) (“Whittlesey”), Susan Williams (Sep. 24, 2013) (“S. Williams”), Mary M. Williamson (Sep. 24, 2013) (“M. Williamson”), and Robin Wittrock (Sep. 24, 2013) (“Wittrock”). • reduce the inequitable wealth distribution in the U.S.; 38 and 38 See, e.g., letters from Paul Cohen (Oct. 3, 2013) (“Cohen”), Alan Harris (Sep. 19, 2013) (“Harris”), Liz A. King (Sep. 23, 2013) (“L. King”), Ben Leet (Oct. 27, 2013) (“Leet”), Laurie H. Norton (Sep. 18, 2013) (“Norton”), Debbie Notkin (Sep. 24, 2013) (“Notkin”), and Desmonde Printz (Sep. 19, 2013) (“Printz”). • highlight potential problems in a company due to the negative impact of a high pay ratio on employee morale and productivity. 39 39 See, e.g., letters from Daniel Grossman (Nov. 8, 2013) (“Grossman”), Peter Linton (Nov. 17, 2013) (“Linton”), Michael R.K. Mudd (Nov. 3, 2013) (“Mudd”), Vivian Rosati (Nov. 6, 2013) (“Rosati”), and Walden Asset Management (Nov. 15, 2013) (“Walden”). As discussed in greater detail below, many commenters supported the proposed rule's overall flexibility. 40 Some commenters asserted that the permitted flexibility would lessen the costs and burdens of the proposed rule without reducing the rule's benefits, 41 be consistent with the directives of Section 953(b), 42 and have minimal effect on the pay ratio disclosure. 43 Other commenters, however, opposed the proposed rule because they believed it provided too much flexibility, which they asserted would allow registrants to manipulate the ratio in their favor, 44 decrease the ratio's utility (especially for comparing the ratios of different companies), 45 and still lead to high costs. 46 One commenter suggested that the final rule consist of little more than “a simple restatement” of Section 953(b), doing “little more than rearranging a few commas and adding a word or two to the statutory language.” 47 40 See, e.g., letters from Prof. Angel; Aon Hewitt (Dec. 3, 2013) (“Aon Hewitt”); Bâtirente, Canada et al. (Nov. 28, 2013) (“Bâtirente et al.” ); Best Buy Co., Inc., et al. (Dec. 17, 2013) (“Best Buy et al.” ), CalSTRS; Marcia K. Campbell, Trustee, Illinois Teachers Retirement System (Nov. 21, 2013) (“Trustee Campbell”); Capital Strategies Consulting, Inc. (Dec. 2, 2013) (“Capital Strategies”); Center for Effective Government (Nov. 26, 2013) (“CEG”); Cummins Inc. (Dec. 2, 2013) (“Cummins Inc.”); CUPE Employees' Pension Plan (Nov. 21, 2013) (“CUPE”); Davis Polk & Wardwell LLP (Dec. 4, 2013) (“Davis Polk,”); Ernst & Young LLP (Dec. 2, 2013) (“E&Y”); First Affirmative Financial Network (Nov. 12, 2013) (“First Affirmative”); Fonds de solidarité FTQ (Nov. 27, 2013) (“FS FTQ”); Freeport-McMoRan Copper & Gold Inc. (Dec. 2, 2013) (“Freeport-McMoRan”); Interfaith Center on Corporate Responsibility (Oct. 17, 2013) (“ICCR”); International Brotherhood of Teamsters (Oct. 9, 2013) (“Teamsters”); International Union of Bricklayers and Allied Craftworkers, Administrative District Council 1 of Illinois (Nov. 15, 2013) (“IL Bricklayers and Craftworkers Union”); International Union of Bricklayers and Allied Craftworkers, Local 5 New York (Nov. 15, 2013) (“NY Bricklayers and Craftworkers Union”); Intel Corporation (Nov. 27, 2013) (“Intel”); Johnson and Johnson (Dec. 4, 2013) (“Johnson & Johnson”); Marco Consulting Group (Nov. 15, 2013) (“Marco Consulting”); McMorgan & Company LLC (Dec. 2, 2013) (“McMorgan & Co.”); Mercer, Inc. (Dec. 2, 2013) (“Mercer I”); Meridian Compensation Partners, LLC (Dec. 2, 2013) (“Meridian”); Microsoft Corporation (Dec. 4, 2013) (“Microsoft”); Nathan Cummings Foundation (Nov. 21, 2013) (“Cummings Foundation”); Network for Sustainable Financial Markets (Dec. 2, 2013) (“NSFM”); New York City Bar Association (Dec. 5, 2013) (“NYC Bar”); Novara Tesija, PLLC (Nov. 6, 2013) (“Novara Tesija”); Organizational Capital Partners (Nov. 24, 2013) (“OCP”); Oxfam America (Oct. 16, 2013) (“Oxfam”); PGGM (Dec. 2, 2013) (“PGGM”); Public Citizen I; Public School Teachers' Pension and Retirement Fund of Chicago (Nov. 25, 2013) (“Chicago Teachers Fund”); Quintave (Dec. 1, 2013) (“Quintave”); Rep. Ellison et al. II, SEIU Master Trust (Dec. 2, 2013) (“SEIU”); Sen. Menendez et al. II, Socially Responsive Financial Advisors/First Affirmative Financial Network (Oct. 11, 2013) (“Socially Responsive Financial Advisors”); Society of Corporate Secretaries and Governance Professionals (Dec. 16, 2013) (“Corporate Secretaries”); Trillium I, UAW Trust; Vectren Corporation (Dec. 2, 2013) (“Vectren Corp.”); Washington State Investment Board (Nov. 26, 2013) (“WA State Investment Board”); and WorldatWork (Dec. 2, 2013) (“WorldatWork I”). 41 See, e.g., letters from American Bar Association (Mar. 7, 2014 (“ABA”), AFSCME, Chris Barnard (Nov. 6, 2013) (“Barnard”), Bricklayers International, Council of Institutional Investors (Nov. 6, 2013) (“CII”), Kenneth Fowler (Nov. 3, 2013) (“Fowler”), LIUNA, Walter Mirczak (Oct. 21, 2013) (“Mirczak”), PNC Financial Services Group, Inc. (Dec. 2, 2013) (“PNC Financial Services”), Sen. Menendez et al. II, US SIF, Vivient Consulting LLC (Dec. 2, 2013) (“Vivient”), and Walden. 42 See, e.g., letters from Domini Social Investments LLC (Nov. 27, 2013) (“Domini”) and PM&P. 43 See, e.g., letters from Capital Strategies and WorldatWork I. 44 See, e.g., letters from Sherry Bupp (Oct. 4, 2013) (“Bupp”), Chris Corayer (Oct. 8, 2013) (“Corayer”), Russell J. Fedewa (Oct. 4, 2013) (“Fedewa”), Eleanor J. Fox (Oct. 3, 2013) (“Fox”), Gary G. Friend II (Oct. 3, 2013) (“Friend”), Charles Grotzke (Oct. 3, 2013) (“Grotzke”), Bruce Hlodnicki (Sep. 19, 2013) (“Hlodnicki”), Karla Kizzort (Oct. 4, 2013) (“Kizzort”), Christine Maly (Sep. 25, 2013) (“Maly”), B. A. Petricoin (Oct. 3, 2013) (“Petricoin”), and Jasmine Van Pelt (Oct. 4, 2013) (“Van Pelt”). 45 See, e.g., letters from Amundi Asset Management (Nov. 28, 2013) (“Amundi”); British Columbia Investment Management Corporation (Dec. 2, 2013) (“BCIMC”); Paul Ciatto (Sep. 26, 2013) (“Ciatto”); Paul Glenn (Oct. 3, 2013) (“Glenn”); IBC; Karl T. Muth, Lecturer in Economics and Public Policy, Northwestern University (Sep. 24, 2013) (“Prof. Muth”); and NIRI. 46 See, e.g., letters from ABA (stating that registrants will still incur significant costs even with the ability to select a methodology) and Financial Services Roundtable (Dec. 2, 2013) (“FSR”). 47 See letter from Public Citizen (Jul. 6, 2015) (“Public Citizen II”). A number of commenters were critical of the proposed rule or particular aspects of it, as discussed in greater detail below. Some commenters stated specifically that they opposed the proposed rule or Section 953(b)'s requirement that we adopt any pay ratio rule. Some of these commenters asserted that the rule would not provide shareholders with material information. 48 Other commenters noted that the pay ratio disclosure would not allow for meaningful comparisons among registrants. 49 One commenter asserted that Section 953(b) and the proposed rule violate the First Amendment. 50 48 See, e.g., letters from American Benefits Council (Jan. 9, 2014) (“American Benefits Council”); Mark Appleby (Oct. 10, 2013) (“Appleby”); Avery Dennison; Sean Bearly (Nov. 7, 2013) (“Bearly”); Joe Beltran (Nov. 21, 2013) (“Beltran”); Renato Berzolla (Nov. 21, 2013) (“Berzolla”); Former Assistant Secretary Campbell; Jonnie Dodge (Nov. 7, 2013) (“Dodge”); FSR; Hyster-Yale; IBC (supporting Congressional efforts to repeal of Section 953(b)); Jim Meyer (Oct. 18, 2013) (“Meyer”); NACCO; National Association of Manufacturers (Dec. 2, 2013) (“NAM I”) (supporting Congressional efforts to repeal of Section 953(b)); NAM II (same); National Retail Federation (Nov. 26, 2013) (“NRF”) (expressing “concern” with the Proposed Rule); Elaine St. Miller (Nov. 21, 2013) (“St. Miller”); Towers Watson (Dec. 2, 2013) (“Towers Watson”) (discussing “reservations” about a pay ratio rule); and WorldatWork I. 49 See, e.g. , letters from ABA (stating that “the required disclosure will have little utility to investors other than to enable them to see the ratio of principal executive to employee compensation for a specific registrant from year to year”) and COEC I. 50 See letter from COEC I. We do not believe that the pay ratio disclosure that Congress has mandated is inconsistent with the First Amendment. We believe that, in passing Section 953(b), Congress determined that the disclosure advances an important government interest, and we have carefully tailored the disclosure through this rulemaking to further that interest. Moreover, consistent with Congress's apparent purpose, commenters have stated that the pay ratio disclosure would be useful to shareholders in making say-on-pay votes. Accordingly, we believe the disclosure fits comfortably within the class of securities law disclosures that have been deemed to be consistent with the First Amendment. See Dun & Bradstreet, Inc. v. Greenmoss Builders, Inc., 472 U.S. 749, 758, n.5 (1985) (citing Ohralik v. Ohio State Bar Ass'n, 436 U.S. 447, 456 (1978)). See also SEC v. Wall Street Publ'g Inst., 851 F.2d 365, 373 (D.C. Cir. 1988). A few commenters stated that we should not adopt a final rule until we demonstrate that the rule is consistent with our mission and fully explain the benefits and costs of the rule. 51 In this regard, one of these commenters criticized us for not making a statement about our precise goals or objectives for the rule, especially when Congress failed to hold hearings on Section 953(b). 52 The commenter also stated that, without this statement and further explanations as to why we rejected less costly options, commenters cannot be fully informed and provide constructive comments. Several commenters argued that the proposed rule would be very costly to implement though many of these did not provide specific cost estimates. 53 A majority of these commenters indicated that navigating their payroll systems and creating a single database of all their employees' compensation would be the most costly aspect of the proposed rule—especially with respect to non-U.S. employees. 54 Commenters also mentioned other activities that would contribute to the costs, including data privacy compliance, foreign exchange calculations, data testing, establishing corporate guidelines, obtaining legal services, auditing results, public relations tasks, and litigation risk. 55 As discussed below, some commenters provided specific cost and burden estimates about the proposed rule to demonstrate generally that it would impose high costs and burdens on registrants. 56 In addition, some commenters argued that the pay ratio disclosure would impose a burden on competition or would cause competitive disadvantages for particular types of companies. 57 Our analysis of the costs of the final rule, as well as an assessment of its impact on competition, is contained in the Economic Analysis section below. 51 See, e.g., letters from Chamber I and Technical Compensation Advisors (Dec. 2, 2013) (“TCA.”). 52 See letter from Chamber I. 53 See, e.g., letters from Aon Hewitt; Business Roundtable I; Chesapeake Utilities Corporation (Dec. 17, 2013) (“Chesapeake Utilities”); Garmin, Ltd. (Nov. 11, 2013) (“Garmin”); IBC; KBR, Inc. (Nov. 26, 2013) (“KBR”); McGuireWoods LLP (Nov. 7, 2013) (“McGuireWoods”); National Association of Corporate Dealers (Dec. 1, 2013) (“NACD”); NAM I; NAM II; NIRI; PNC Financial Services; and Semtech. 54 See, e.g., letters from Aon Hewitt: Avery Dennison; Business Roundtable I; Chamber I; COEC I; Corporate Secretaries; Eaton (Dec. 2, 2013) (“Eaton”); FEI Company (Oct. 16, 2013) (“FEI”); FuelCell Energy, Inc. (Nov. 8, 2013) (“FuelCell Energy”); IBC; KBR; NACCO; NAM I; NAM II; and NIRI. 55 See, e.g., letters from Aon Hewitt, Corporate Secretaries, and McGuireWoods. 56 See, e.g., letters from ASA; Avery Dennison; COEC I; COEC II; Corporate Secretaries; Dover Corporation (Nov. 26, 2013) (“Dover Corp.”); Eaton; Exxon Mobil Corporation (Dec. 2, 2013) (“ExxonMobil”); FEI; FuelCell Energy; General Mills, Inc. (Dec. 2, 2013) (“General Mills”); Hyster-Yale; Intel; NACCO; NRF; and U.S. Chamber of Commerce (May 22, 2014) (“Chamber II”). 57 See, e.g., letters from ABA; Prof. Angel; Former Assistant Secretary Campbell; Chamber I; COEC I; Corporate Secretaries; IBC; NAM I; NAM II; and Korok Ray, Assistant Professor of Accounting, The George Washington University (Dec. 2, 2013) (“Prof. Ray”). A number of commenters recommended that we take additional preliminary steps before adopting a final rule. Some commenters requested that we extend the proposed rule's comment period. 58 Another commenter suggested that we re-solicit comments after publishing the concerns it expressed. 59 A few commenters advocated that we involve stakeholders in the rulemaking process by holding a roundtable, engaging in negotiated rulemaking, and/or conducting pilot programs. 60 One of these commenters also recommended submitting the proposed rule to the Office of Information and Regulatory Affairs for an enhanced regulatory review. 61 A few commenters suggested that we defer adopting a final rule under Section 953(b) until we adopt other rules required under the Dodd-Frank Act, particularly the pay-versus-performance rule mandated by Section 953(a). 62 58 See, e.g., letters from American Insurance Association, et al. (Oct. 9, 2013) (“AIA et al. ”); Bill Barrett Corp.; COEC I; IBC; NIRI; and WorldatWork I. 59 See letter from Chamber I. 60 See, e.g., letters from Chamber I, Chamber II, IBC, and NIRI. 61 See letter from Chamber II. 62 See, e.g., letters from Chamber I and WorldatWork I. As discussed above, members of the public interested in making their views known were invited to submit comment letters in advance of the official comment period for the proposed rule. In addition, we have continued to review and consider all comment letters submitted during and after the end of the comment period. Also, as discussed further in the Economic Analysis section below, we have considered and analyzed the numerous comments received regarding the costs and complexities of the mandated disclosure and have taken them into account in the final rule. Finally, we added to this rulemaking's public comment file additional analyses by the Commission's Division of Economic and Risk Analysis staff on the potential effects of excluding different percentages of employees from the pay ratio calculation, and commenters were expressly invited to comment on the analyses. This robust and public debate has informed us in developing our final rule. Overall, we believe interested parties have had sufficient opportunity to review the proposed rule, as well as the comment letters submitted, and to provide views on the proposal and on the other comment letters and data to inform our consideration of the final rule. Accordingly, we do not believe it is necessary to solicit additional public input before adopting the final rule. D. Summary of Changes in the Final Rule The final rule we are adopting generally is consistent with the proposed rule. After considering all of the comments received on the proposal, however, and in particular, after considering specific suggestions from commenters on alternatives that could help to mitigate compliance costs and practical difficulties associated with the proposed rule, we are adopting a number of revisions in the final rule. We believe these revisions generally will preserve Congress's intent to require the disclosure of information that reflects the ratio of the PEO's compensation to the median employee's compensation while helping to minimize the expected costs and unintended consequences of the required disclosure. We summarize some of these changes here and discuss them in greater detail in Section II, below. 1. Non-U.S. Employee Exemptions and Additional Permitted Disclosure We proposed that an “employee” would include any U.S. and non-U.S. employee of a registrant. We acknowledged in the Proposing Release that the inclusion of non-U.S. employees would raise compliance costs for multinational companies, would introduce cross-border compliance issues, could raise additional comparability concerns, and could have an adverse impact on competition. We indicated, however, that the inclusion of non-U.S. employees in the calculation of the median is consistent with the “all employees” language of the statute. The final rule defines the term “employee” to include U.S. employees and employees located in a jurisdiction outside the United States (“non-U.S. employees”) of a registrant, as proposed. We continue to believe that this is most consistent with the statutory language of Section 953(b) and with the purpose of providing a company-specific metric that shareholders can use to evaluate a registrant's executive compensation. Including both U.S. and non-U.S. employees will result in pay ratio disclosure that reflects the actual composition of the registrant's workforce. Even assuming the statutory language could be viewed as ambiguous on this issue, we also believe that this approach is most consistent with the general nature of our disclosure regime, which does not limit registrants' disclosure obligations only to factors, events, or circumstances that exist in or take place within the United States. For example, a registrant must disclose the PEO's compensation whether or not the PEO actually works within the United States. To help address concerns about compliance costs, and consistent with the commenters' suggestions, the final rule provides two tailored exemptions from the definition of “employee,” which otherwise includes all of a registrant's U.S. and non-U.S. employees in the median employee determination. First, the final rule provides an exemption for circumstances in which foreign data privacy laws or regulations make registrants unable to comply with the final rule. Second, the final rule permits registrants to exempt non-U.S. employees where these employees account for 5% or less of the registrant's total U.S. and non-U.S. employees, with certain limitations. The Proposing Release acknowledged that data privacy laws or regulations in various foreign jurisdictions could affect a registrant's ability to gather the necessary data to identify its median employee. We did not propose any accommodation to address this concern, however, because we believed the flexibility of the proposed rule would permit registrants to manage any potential costs arising from these laws. In response to significant concerns expressed by a number of commenters over cross-border compliance issues that may arise from the pay ratio disclosure requirement, and consistent with commenters' suggestions, the final rule permits registrants to exclude from their determination of the median employee an employee who is employed in a foreign jurisdiction in which the laws or regulations governing data privacy are such that, despite its reasonable efforts to obtain or process the information necessary for compliance with the final rule, the registrant is unable to do so without violating such data privacy laws or regulations. The registrant's reasonable efforts must include using or seeking an exemption or other relief under any governing data privacy laws or regulations. If a registrant excludes any non-U.S. employees in a particular jurisdiction under this exemption, it must exclude all non-U.S. employees in that jurisdiction, list the excluded jurisdictions, identify the specific data privacy law or regulation, explain how complying with the final rule violates such data privacy law or regulation (including the efforts made by the registrant to use or seek an exemption or other relief under such law or regulation), and provide the approximate number of employees exempted from each jurisdiction based on this exemption. In addition, the registrant must obtain a legal opinion from counsel that opines on the inability of the registrant to obtain or process the information necessary for compliance with the final rule without violating that jurisdiction's data privacy laws or regulations, including the registrant's inability to obtain an exemption or other relief under any governing laws or provisions. In addition to the data privacy exemption for non-U.S. employees, the final rule includes a de minimis exemption for non-U.S. employees. Under the final rule, if a registrant's non-U.S. employees account for 5% or less of its total employees, it may exclude all of those employees when making its pay ratio calculations. In this circumstance, however, if the registrant chooses to exclude any non-U.S. employees, it must exclude all of them. If a registrant's non-U.S. employees exceed 5% of the registrant's total U.S. and non-U.S. employees, it may exclude up to 5% of its total employees who are non-U.S. employees. If a registrant excludes any non-U.S. employees in a particular jurisdiction, it must exclude all non-U.S. employees in that jurisdiction. The registrant must also disclose the jurisdictions from which its non-U.S. employees are being excluded, the approximate number of employees excluded from each jurisdiction under the de minimis exemption, the total number of its U.S. and non-U.S. employees irrespective of any exemption ( de minimis or data privacy), and the total number of its U.S. and non-U.S. employees used for its de minimis calculation. In calculating the number of non-U.S. employees that may be excluded under the de minimis exemption, a registrant must count any non-U.S. employee exempted under the data privacy exemption against the availability. A registrant may exclude any non-U.S. employee that meets the data privacy exemption, even if the number of excluded employees exceeds 5% of the registrant's total employees. If, however, the number of employees excluded under the data privacy exemption equals or exceeds 5% of the registrant's total employees, the de minimis exemption will not be available. Additionally, if the number of employees excluded under the data privacy exemption is less than 5% of the registrant's total employees, the registrant may use the de minimis exemption to exclude no more than the number of non-U.S. employees that, combined with the data privacy exemption, equals 5% of the registrant's total employees. Finally, the final rule permits registrants to make cost-of-living adjustments for the compensation of employees in jurisdictions other than the jurisdiction in which the PEO resides to identify the median and calculate annual total compensation. In identifying the median employee, whether using annual total compensation or any other compensation measure that is consistently applied to all employees included in the calculation, the registrant may, but is not required to, make cost-of-living adjustments for the compensation of employees in jurisdictions other than the jurisdiction in which the PEO resides so that the compensation is adjusted to the cost of living in the jurisdiction in which the PEO resides. If the registrant uses a cost-of-living adjustment to identify the median employee, and the median employee identified is an employee who does not reside in the same jurisdiction as the PEO, the registrant must use the same cost-of-living adjustment in calculating the median employee's annual total compensation and disclose the country in which the median employee is located. The registrant is also required to briefly describe the cost-of-living adjustments it used to identify the median employee and briefly describe the cost-of-living adjustments it used to calculate the median employee's annual total compensation, including the measure used as the basis for the cost-of-living adjustment. 63 To provide context for the Item 402(u)(1)(iii) disclosure, a registrant electing to present the pay ratio in this manner must also disclose the median employee's annual total compensation and pay ratio without the cost-of-living adjustments. To calculate this pay ratio, the registrant will need to identify the median employee without using any cost-of-living adjustments. 63 For example, registrants may use cost-of-living adjustments based on purchasing power parity (“PPP”) conversion factors. A PPP conversion factor is the ratio of PPP exchange rate to the nominal exchange rate. For example, conversion factors for the US dollar are available at http://data.worldbank.org/indicator/PA.NUS.PPPC.RF . This ratio provides the number of units of a country's currency required to buy the same amount of goods and services in the domestic market as a U.S. dollar would buy in the United States. In the Proposing Release, we noted that some comments received prior to the proposal requested that the rule allow registrants to present separate pay ratios covering U.S. and non-U.S. employees to mitigate concerns that the comparison of the PEO to non-U.S. employees could substantially affect the pay ratio disclosure. The proposal did not prohibit such disclosure but did not expressly state it was permitted. For clarification, therefore, the final rule states that registrants are permitted, but not required, to provide additional pay ratios as long as any additional pay ratios are not misleading and are not presented with greater prominence than the required ratio. 2. Employees of Consolidated Subsidiaries We proposed requiring a registrant's pay ratio disclosure to include the employees of any of its subsidiaries (including officers other than the PEO), in addition to its direct employees, in its pay ratio disclosure. Unlike the proposed rule, however, the final rule defines “employee” to include only the employees of the registrant's consolidated subsidiaries. As discussed in greater detail below, defining a “subsidiary” based on whether a registrant consolidates a company in its financial statements will likely decrease the costs and burdens on a registrant without significantly affecting the pay ratio because most registrants consolidate based on their ownership of over 50% of the outstanding voting shares of their subsidiaries and guidance is readily available on when consolidation is appropriate. 3. Employed on Any Date Within Three Months of the Last Completed Fiscal Year The proposed rule would define “employee” as an individual employed as of the last day of the registrant's last completed fiscal year because this calculation date would be consistent with the one used for the determination of the three most highly compensated executive officers under existing Item 402(a)(3)(iii). In the Proposing Release, we also noted our preliminary view that a bright line calculation date for determining who is an employee would ease compliance for registrants by eliminating the need to monitor changes in workforce composition during the year. Further, we assumed the potential benefits of the pay ratio disclosure would not be significantly diminished by covering only individuals employed at year-end, although we acknowledged that this approach could be costlier to registrants with seasonal or temporary employees who are employed at year end as opposed to other times during the year. Taking into consideration concerns raised by commenters about the desire for flexibility in choosing the calculation date, the final rule permits registrants to use any date within three months prior to the last day of their last completed fiscal year to identify the median employee. If in subsequent years the registrant changes the date it uses to identify the median employee, it must disclose this change and provide a brief explanation about the reason or reasons for the change. This provision provides consistency for individual registrants from year to year while also providing registrants with flexibility to choose the determination date. To provide additional transparency about how the pay ratio disclosure has been calculated, the final rule requires registrants to disclose the date used to identify the median employee. 4. Identifying the Median Employee Once Every Three Years The proposed rule would require registrants to identify the median employee every year. To help minimize compliance costs, we are revising the rule, as suggested by commenters, to allow registrants to identify the median employee every three years unless there has been a change in its employee population or employee compensation arrangements that the registrant reasonably believes would result in a significant change in the pay ratio disclosure. However, the registrant must still calculate the identified median employee's annual total compensation and use that figure in calculating its pay ratio every year. If there have been no changes that the registrant reasonably believes would significantly affect its pay ratio disclosure, the registrant must disclose that it is using the same median employee in its pay ratio calculation and describe briefly the basis for its reasonable belief. For example, the registrant could disclose that there has been no change in its employee population or employee compensation arrangements that it believes would significantly impact the pay ratio disclosure. If there has been such a change, the registrant must re-identify the median employee for that fiscal year. Under the final rule's approach, the registrant will identify its median employee for year one and then be permitted to use that employee or one who is similarly compensated (if, for example, the median employee is no longer in the same position or is no longer employed by the registrant) in the following two years for calculating the median employee's annual total compensation and the registrant's pay ratio. The registrant must calculate the median employee's annual total compensation in year one and then re-calculate the annual total compensation for that employee in year two and again in year three. If the median employee identified in year one is no longer in the same position or no longer employed by the registrant on the median employee determination date in year two or three, the final rule permits the registrant to replace its median employee with an employee in a similarly compensated position. 5. Initial Compliance Date We proposed that a registrant's first reporting period would begin in its first fiscal year commencing on or after the effective date of the final rule. Therefore, under the proposed rule, the registrant's initial pay ratio disclosure would be included in its first annual report on Form 10-K or proxy or information statement for its annual meeting of shareholders following the end of such year. Unlike the proposal, the compliance date set forth in this adopting release provides that the registrant's first reporting period for the pay ratio disclosure is its first full fiscal year beginning on or after January 1, 2017 (instead of on or after the effective date of the final rule). 6. Transition Period for New Registrants The proposed rule would not have required pay ratio disclosure by new registrants subject to the rule in a registration statement on Form S-1 or Form S-11 for an initial public offering or registration statement on Form 10. Consistent with the revised transition period for existing registrants, the final rule provides that the first pay ratio reporting period begins for new registrants with their first fiscal year commencing on or after January 1, 2017 that is after the date they first become subject to the requirements of Section 13(a) or 15(d) of the Exchange Act. In this way, new registrants will not become subject to the final rule sooner than existing registrants. Such registrants are also permitted to omit their initial pay ratio disclosure from their registration statements (or any other filing) made before their first annual report or proxy or information statement following the end of that reporting period, but not later than 120 days after the end of the fiscal year. 7. Additional Transition Periods We did not propose a transition period for registrants that cease to be smaller reporting companies or emerging growth companies, nor did we provide any special rules for registrants that engage in business combinations and/or acquisitions. We did, however, request comment on whether there should be transition periods in these situations and, if so, the appropriate length of time for any such transition period. One commenter requested that we include such a transition period. 64 64 See letter from ABA (recommending a transition period for issuers that cease to be smaller reporting companies in which such registrants would not be required to provide their pay ratio disclosure until the first full fiscal year commencing on or after the first anniversary of the end of the fiscal year in which the issuer is no longer a smaller reporting company). The final rule provides that registrants that cease to be smaller reporting companies or emerging growth companies are not required to provide pay ratio disclosure until they file a report for the first fiscal year commencing on or after they cease to be a smaller reporting company or emerging growth company. The final rule also permits registrants that engage in business combinations and/or acquisitions to omit the employees of a newly-acquired entity from their pay ratio calculation for the fiscal year in which the business combination or acquisition occurs. In these cases, a registrant does not have to include these individual employees in its median employee calculation until the first full fiscal year following the acquisition. Registrants that exclude employees as a result of a business combination must disclose the relevant acquired business and the approximate number of employees that are excluded from the pay ratio calculation. II. Discussion A. Scope of Final Rule 1. Pay Ratio Disclosure Requirements Under New Paragraph (u) to Item 402 of Regulation S-K a. Proposed Rule We proposed new paragraph (u) of Item 402 to require disclosure of: (A) the median of the annual total compensation of all employees of the registrant, (except the registrant's PEO); (B) the annual total compensation of the registrant's PEO; and (C) the ratio of the amount in (A) to the amount in (B), presented as a ratio in which the amount in (A) equaled one, or, alternatively, expressed narratively in terms of the multiple that the amount in (B) bears to the amount in (A). Although Section 953(b) calls for a ratio showing the median of the annual total compensation of all employees to the PEO's annual total compensation, it does not specify how the ratio should be expressed. To promote consistent presentation and address the potential for confusion, therefore, the proposed rule specified that registrants must express the ratio as one in which the median of the annual total compensation of all employees is equal to one. b. Comments on the Proposed Rule No commenters objected to use of the term PEO or including the pay ratio disclosure requirements in new paragraph (u) to Item 402, and commenters discussing other aspects of the proposal did so on the assumption that we would include the pay ratio disclosure requirements in Item 402(u). Several commenters agreed that the pay ratio should show the PEO's compensation divided by the median employee's compensation because it would be easier to understand. 65 65 See, e.g., letters from FEI and Dr. Sue Ravenscroft, Professor of Accounting, Iowa State University (Sep. 20, 2013) (“Prof. Ravenscroft I”). c. Final Rule After considering the comments, we are adopting the final rule as proposed. The final rule adds new paragraph (u) to Item 402 and requires disclosure of: (A) The median of the annual total compensation of all employees of the registrant (except the registrant's PEO); (B) the annual total compensation of the registrant's PEO; and (C) the ratio of the amount in (B) to the amount in (A), 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). 66 66 We did not propose to require that the pay ratio disclosure be provided in interactive data format, and are not adopting such a requirement for this disclosure. To the extent that we consider more generally the tagging of disclosures in XBRL format in our rules, we may consider revisiting the format in which the pay ratio disclosure is provided. Consistent with the proposal, the final rule also requires registrants to disclose the ratio such that the PEO's annual total compensation is always compared to the median employee's annual total compensation. Registrants may not present the median employee's annual total compensation as a percentage of the PEO's compensation. We believe expressing the ratio as “a factor rather than a fraction” makes the ratio easier to understand because allowing the inverse may be confusing. 67 In other words, the ratio must always show how much larger or smaller the PEO's annual total compensation is as compared to the median employee's annual total compensation. We believe that requiring registrants to present the ratio in this manner will make it easier for shareholders to comprehend and allow them to use it in making voting decisions on executive compensation. 68 67 See letter from FEI. See also letter from Prof. Ravenscroft I (stating that “the ratio of CEO compensation to median worker would be easier for most people to grasp than the ratio of median worker compensation to CEO compensation, a switch that I would see as not changing the intent of the law”). 68 In the rare cases in which the PEO's yearly compensation is nominal (or is otherwise less than the median employee's compensation), the resulting ratio will be a number smaller than one. Despite this anomalous result, we believe that in the vast majority of cases setting the median compensation equal to one will result in a ratio that is easier to understand than the inverse. See generally Illinois Commerce Comm'n v. I.C.C., 776 F.2d 355, 359 (D.C. Cir. 1985) (“General rules need not work perfectly in all their applications”). We also note that registrants are permitted to provide additional narrative discussion in cases where they feel the disclosed pay ratio may be confusing or incomplete without further explanation. The final rule permits registrants to choose one of two options to express the ratio. Registrants may disclose the pay ratio with the median of the annual total compensation of all employees equal to one and the PEO's compensation as the number compared to one. 69 For example, if a registrant's median annual total compensation for employees is $50,000 and the annual total compensation of the PEO is $2,500,000, the PEO's compensation is 50 times larger than the median employee's compensation. The registrant may describe the pay ratio as 50 to 1 or 50:1. Alternatively, registrants may disclose the pay ratio narratively by stating how many times higher (or lower) the PEO's annual total compensation is than that of the median employee. For example, the registrant may state that “the PEO's annual total compensation is 50 times that of the median of the annual total compensation of all employees.” 69 We note that some commenters recommended that the final rule include a safe harbor or simplified reporting method such that a registrant may stipulate that its pay ratio exceeds 300-to-1. See letters from Hyster-Yale and NACCO. Under this suggestion, registrants would be permitted to forgo calculating and disclosing their company-specific pay ratio and would instead be permitted to simply disclose that the ratio exceeds the stipulated 300-to-1 statistic. We have not adopted the suggestion to allow a registrant to disclose that its pay ratio exceeds a stipulated statistic, such as 300-to-1, because we do not believe that it would be consistent with Congress's apparent intent to provide a useful, relevant, company-specific pay ratio disclosure for investors to utilize when undertaking their say-on-pay votes. 2. Pay Ratio Disclosure in Filings That Require Item 402 of Regulation S-K Information a. Proposed Rule The proposed rule required registrants to include their pay ratio disclosure in any filing described in Item 10(a) that requires executive compensation disclosure under Item 402, including annual reports on Form 10-K, 70 Securities Act and Exchange Act registration statements, and proxy and information statements, to the same extent that these forms require compliance with Item 402. Section 953(b) does not direct us to amend any of our forms to add the pay ratio disclosure requirements to filings that do not already require disclosure of Item 402 information, and we did not propose to do so. Additionally, we proposed not to require registrants to update their pay ratio disclosure for the most recently completed fiscal year until they file their annual reports on Form 10-K, or, if later, their proxy or information statements for their next annual meeting of shareholders (or written consents in lieu of such a meeting) but, in any event, not later than 120 days after the end of such fiscal year. 70 17 CFR 249.310. b. Comments on the Proposed Rule All of the commenters discussing the issue agreed that we should limit pay ratio disclosure to the filings described in Item 10(a) that require executive compensation disclosure under Item 402, as proposed. 71 One commenter suggested, however, that the final rule should allow registrants to include their pay ratio disclosure in other filings if they choose to do so. 72 71 See, e.g., letters from ABA, AFL-CIO I, California Public Employees' Retirement System (Dec. 2, 2013) (“CalPERS”), Calvert, Capital Strategies, CII, Connecticut State Treasurer (Dec. 2, 2013) (“CT State Treasurer”), Davis Polk, Intel, Johnson & Johnson, McGuireWoods, NIRI, NRF, Pax World Funds, PM&P, Prof. Ray, and WorldatWork I. 72 See letter from Capital Strategies. c. Final Rule We are adopting the final rule as proposed. It requires registrants to include their pay ratio disclosure in any filing described in Item 10(a) that calls for executive compensation disclosure under Item 402, including 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 these forms require compliance with Item 402, consistent with the statutory directive. Registrants must 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. 73 The final rule does not require registrants to include the pay ratio disclosure in any filings that are not required to include Item 402 information, but registrants can voluntarily include non-mandated information in any of their filings if they choose to do so and the information is not misleading in the context of that filing. Further, registrants do not need to update their pay ratio disclosure for their most recently completed fiscal year until they file their annual report on Form 10-K, or, if later, their proxy or information statement for their next annual meeting of shareholders (or written consents in lieu of such a meeting) but, in any event, not later than 120 days after the end of such fiscal year. 73 See, e.g., 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 registrants. We do not read Section 953(b) to require pay ratio disclosure in filings that do not contain other executive compensation information. In our view, the most meaningful way to present pay ratio disclosure is 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. In this manner, the pay ratio information will be presented in the same context as other information that shareholders can use in making their voting decisions on executive compensation. Finally, although we understand the primary purpose of the pay ratio disclosure to be to inform shareholder's say-on-pay votes under Section 951, we acknowledge that some commenters indicated the disclosure could be useful to investors in making investment decisions. For that reason, and in light of the statutory language of Section 953(b), the final rule retains the requirement to include this disclosure in registration statements under the Securities Act. 74 74 Although the final rule requires registrants to include the pay ratio disclosure in registration statements under the Securities Act, as discussed below, the final rule permits new registrants to delay compliance so that the pay ratio requirement is not required in a registration statement on Form S-1 or Form S-11 for an initial public offering or registration statement on Form 10. 3. Excluded Registrants—Smaller Reporting Companies, Foreign Private Issuers, MJDS Filers, and Emerging Growth Companies a. Proposed Rule In the Proposing Release, we noted that the reference to “each issuer” in Section 953(b) could be read to apply to all registrants, including smaller reporting companies, 75 foreign private issuers, 76 U.S.-Canadian Multijurisdictional Disclosure System filers, 77 and emerging growth companies. Because Section 953(b) refers specifically to the definition of total compensation in Item 402(c)(2)(x), and is silent on whether pay ratio disclosure should be required for registrants not previously subject to Item 402(c) requirements, however, we proposed to limit the pay ratio disclosure requirement to registrants required to provide Item 402(c) disclosure. As a result, the proposed rule stated that smaller reporting companies, foreign private issuers, and MJDS filers did not have to provide pay ratio disclosure in any of their filings. 75 A “smaller reporting company” is an issuer that had a public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter or had annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available. 17 CFR 229.10(f)(1). 76 A “foreign private issuer” is any foreign issuer other than a foreign government, except for a registrant 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. 17 CFR 240.3b-4(c). 77 A U.S.-Canadian Multijurisdictional Disclosure System (“MJDS”) filer is a registrant that files reports and registration statements with us in accordance with the requirements of the MJDS. Also, the JOBS Act, 78 which was passed by Congress subsequent to the Dodd-Frank Act but prior to publication of the Proposing Release, specifically excluded registrants that qualify as emerging growth companies, as that term is defined in Section 3(a) of the Exchange Act, 79 from the requirements of Section 953(b). To give effect to the statutory exemption, we proposed an instruction to Item 402(u) providing that a registrant that is an emerging growth company is not required to comply with Item 402(u). 78 See Section 102(a)(3) of the JOBS Act. 79 An “emerging growth company” is an issuer that had total annual gross revenues of less than $1 billion during its most recently completed fiscal year, has not reached the fifth anniversary of the date of the first sale of its common equity securities pursuant to an effective registration statement under the Securities Act, had not issued $1 billion in non-convertible debt during the previous 3-year period, or is deemed to be a “large accelerated filer.” 15 U.S.C. 78c(a). b. Comments on the Proposed Rule Most commenters concurred with the proposed rule's exclusion of emerging growth companies, consistent with the JOBS Act. 80 One commenter noted specifically that, while it “believes all registrants accessing U.S. capital markets should be subject to comparable financial regulation,” including smaller reporting companies, foreign private issuers, and MJDS filers, the pay ratio information “is best viewed in the context of other compensation disclosures and the pay ratio disclosure should be limited to those registrants required to provide a summary compensation disclosure.” 81 80 See, e.g., letters from CalPERS; Davis Polk; Hay Group, Inc. (Dec. 2, 2013) (“Hay Group”); NY State Comptroller; PM&P; and US SIF. Some commenters, however, disagreed or were uncomfortable with this exclusion. See letters from CII and Andrew Kushner (Nov. 12, 2013) (“Kushner”). 81 See letter from CalPERS. Additionally, most of the commenters who addressed the issue agreed that we should exclude smaller reporting companies from the pay ratio requirements. 82 One commenter reasoned that, by excluding emerging growth companies, Congress demonstrated its intent to relieve this category of registrants from the costs and burdens of compliance, and because both emerging growth companies and smaller reporting companies are subject to scaled executive compensation disclosure, it would be consistent with Congressional intent to exclude smaller reporting companies. 83 Another commenter recommended that the final rule exempt any business with revenues of less than $500 million or a market capitalization of less than $1 billion. 84 82 See, e.g., letters from ABA, Prof. Angel, CalPERS, Capital Strategies, Davis Polk, Hay Group, NIRI, NY State Comptroller, PM&P, Vivient, and WorldatWork I. 83 See letter from ABA. 84 See letter from Hay Group. By contrast, a few commenters asserted that the final rule should include smaller reporting companies. 85 One of these commenters asserted that Congress did not expressly exclude smaller reporting companies because the phrase “each issuer” in Section 953(b)(1) signals its intent that there should be no exemption for any particular registrant and that excluding certain registrants from the disclosure would defeat the purpose and policy of Section 953(b). 86 85 See, e.g., letters from CII; Ashley Ray, University of Idaho College of Law (Nov. 13, 2013) (“Ray”); and US SIF. 86 See letter from Ray. Finally, some commenters agreed that the proposed rule should exclude foreign private issuers and MJDS filers, 87 while a few other commenters disagreed with excluding them. 88 One commenter noted that, in “view of the Commission's long-standing rules allowing foreign private issuers and MJDS filers to provide information about their executive compensation programs based on the applicable disclosure requirements of their home jurisdiction, we would find it anomalous to single out this specific Item 402-based disclosure requirement for mandatory application to these registrants without regard to important policy considerations that have led the Commission for decades to permit disclosure in this area based on home-country law.” 89 87 See, e.g., letters from ABA, CalPERS, Capital Strategies, Davis Polk, Hay Group, and PM&P. 88 See, e.g., letters from CII, Ray, and US SIF. 89 See letter from ABA. c. Final Rule After considering the comments, we are adopting the final rule as proposed. The final rule, therefore, does not require pay ratio disclosure by smaller reporting companies, foreign private issuers, MJDS filers, and emerging growth companies. 90 90 Registered investment companies will also not be required to provide Item 402(u) disclosure. Business development companies are a category of closed-end investment company that are not registered under the Investment Company Act [15 U.S.C. 80a-2(a)(48) and 80a-53-64]. Business development companies will be treated in the same manner as issuers other than registered investment companies and therefore will be subject to the pay ratio disclosure requirement. As stated above, Congress explicitly excluded emerging growth companies from the pay ratio disclosure requirement. Regarding smaller reporting companies, Section 953(b)(2) requires total compensation to be calculated in accordance with Item 402(c)(2)(x). Smaller reporting companies, however, are permitted to follow the scaled disclosure requirements set forth in Items 402(m)-(r), 91 and therefore are not required to calculate compensation in accordance with Item 402(c)(2)(x). Also, 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 the same types of compensation required to be included in total compensation for other registrants under Item 402(c)(2). 92 Congress's express reference to Item 402(c)(2)(x) to calculate total compensation (without mentioning Item 402(n)(2)(x)) is consistent with the exclusion of smaller reporting companies from the pay ratio disclosure requirement. 91 See Item 402( l ). 92 See Item 402(n)(2)(viii) (indicating that 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)). Requiring smaller reporting companies to provide the pay ratio disclosure would compel them to collect data and calculate compensation for the PEO in ways that they otherwise are not required to do. Nothing in the statute indicates that was Congress's intent, and no commenters indicated that they believed there was such an intent. To clarify further that smaller reporting companies are excluded from the final rule, we are making a technical amendment to paragraph (l) of Item 402 to add Item 402(u), as proposed, to the list of items that are not required for smaller reporting companies. 93 93 Smaller reporting companies are permitted to choose whether they want to comply with either the scaled disclosure requirements or the larger company disclosure requirements on an “a la carte” basis. As we 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. The final rule similarly does not apply to foreign private issuers and MJDS filers, which we believe is consistent with excluding registrants that are not currently required to provide Summary Compensation Table disclosure pursuant to Item 402(c). Foreign private issuers file annual reports and registration statements on Form 20-F 94 and MJDS filers file annual reports and registration statements on Form 40-F. 95 Neither of these forms requires Item 402 disclosure. As with smaller reporting companies, requiring foreign private issuers and MJDS filers to provide the pay ratio disclosure would require these registrants to collect data and calculate compensation for the PEO in ways they otherwise would not be required to do. The final rule, therefore, does not apply to foreign private issuers or MJDS filers. 94 17 CFR 249.220f. 95 17 CFR 249.240f. Finally, for the same reasons, the final rule, consistent with the proposal, does not change existing Item 402(a)(1) with respect to foreign private issuers. Item 402(a)(1) states that a “foreign private issuer will be deemed to comply with Item 402 if it provides the information required by Items 6.B and 6.E.2 of Form 20-F, with more detailed information provided if otherwise made publicly available or required to be disclosed by the registrant's home jurisdiction or a market in which its securities are listed or traded.” Foreign private issuers that file annual reports on Form 10-K, therefore, are still able to satisfy Item 402 requirements by following Items 6.B and 6.E.2 of Form 20-F and are not required to provide the pay ratio disclosure mandated by Section 953(b). B. Requirements of Final Rule 1. “All Employees” Covered Under the Rule The final rule defines “employee” to include a registrant's U.S. and non-U.S. employees, as well as its part-time, seasonal, and temporary employees, as proposed. We believe that the “all employees of the issuer” language in Section 953(b) is best implemented by including rather than excluding broad categories of employees. Further, even assuming there was any ambiguity in the statutory language, we believe that a more inclusive approach better serves Section 953(b)'s purpose of providing shareholders with additional information about a registrant's compensation practices that can be used in making voting decisions on executive compensation because it results in a pay ratio that is more reflective of the actual composition of the registrant's workforce. 96 As discussed in greater detail below, however, in response to particular issues and concerns raised by comments, we have provided two tailored exemptions from the general requirement to include all employees. In particular, for the reasons discussed below, we have provided an exemption for employees in foreign jurisdictions in which it is not possible for a registrant to obtain or process information necessary to comply with the rule without violating the data privacy laws or regulations of that jurisdiction and a de minimis exemption for non-U.S. employees. 96 As discussed below, commenters have made competing arguments that the pay ratio disclosure would be “distorted” in one way or another if the final rule included (or excluded) various categories of employees. See, e.g., letter from Prof. Ray (asserting that the pay ratio will be distorted depending on whether the final rule includes non-U.S. employees). We appreciate that a particular registrant's pay ratio information may vary—perhaps, in some cases, significantly—depending on whether the final rule includes or excludes these employee categories ( e.g., non-U.S. employees; part-time, temporary and seasonal employees; and leased workers). We do not, however, view the choices made on these issues as involving a “distortion” of the pay ratio disclosure that Congress directed should be provided to investors. As noted elsewhere in this release, we have been guided by our general view that Section 953(b) reflects Congress's intention that the pay ratio disclosure should be broadly inclusive of all types of a registrant's employees; thus, absent a reason that takes into account the statutory objective, we have declined to make choices in the final rule that would exclude broad categories of employees from the process of identifying the median employee. At the same time, however, in an effort to mitigate the potential costs and burdens of the final rule, we have built in some flexibility and provided several other accommodations to elements of the final rule, where we have concluded that these measures would not result in any undue impact on the required pay ratio disclosure. a. Types of Employees i. Proposed Rule The proposed rule included in the definition of “employee” all of a registrant's full-time, part-time, seasonal, and temporary workers, including officers other than the PEO. In the Proposing Release, we reasoned that these individuals should be included in the rule because Section 953(b)(1)(A) expressly requires disclosure of the median of the annual total compensation of “all employees,” which would encompass full-time, part-time, seasonal, and temporary workers. Also, we proposed to include all of a registrant's officers other than the PEO in the definition of “employee.” Workers not employed by a registrant (or its subsidiaries), however, such as independent contractors, “leased” workers, or other workers who are employed by a third party, were not covered by our proposed definition of “employee.” As an example, we noted that, 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, these workers should not be considered employees of the registrant for purposes of the disclosures required by Section 953(b) of the Dodd-Frank Act. ii. Comments on the Proposed Rule A number of commenters supported the proposed rule's requirement that registrants include their part-time, temporary, and seasonal employees in addition to their full-time employees in their median employee determination. 97 Some commenters asserted that the reference in Section 953(b) to “all employees” demonstrates Congress's intent was not to limit the pay ratio to only full-time employees. 98 Some commenters contended that including temporary employees would cost registrants very little because they routinely develop that information for their own internal use. 99 Commenters supporting the proposed rule also contended that, if part-time, temporary, and seasonal employees were excluded from the pay ratio, the disclosure would be incomplete, inaccurate, and/or misleading. 100 One commenter suggested that the exclusion of part-time, seasonal, and temporary employees would not reduce the regulatory burdens on registrants because registrants with such employees would have substantial flexibility in identifying the median employee. 101 97 See, e.g., letters from AFSCME, CalPERS, Calvert, Chicago Teachers Fund, Cummings Foundation, CUPE, Domini, Susan A. Estep (Nov. 15, 2013) (“Estep”), Frank Gould (Oct. 4, 2013) (“Gould”), ICCR, IL Bricklayers and Craftworkers Union, Marco Consulting, McMorgan & Co., Novara Tesija, NY State Comptroller, Oxfam, Pax World Funds, Sen. Robert Menendez et al. (Nov. 26, 2013) (“Sen. Menendez et al. I”), Sen. Menendez et al. II, Socially Responsive Financial Advisors, Teamsters, Trillium I, Trustee Campbell, US SIF, and Walden. 98 See letters from AFL-CIO (Jul. 6, 2015) (“AFL-CIO II”), Institute for Policy Studies (Oct. 30, 2013) (“IPS”), and Sen. Menendez et al. II. 99 See, e.g., letters from Virginia Fischer (Oct. 3, 2013) (“Fischer”) and Public Citizen II. 100 See, e.g., letters from AFL-CIO I, AFL-CIO II, Americans for Financial Reform (Dec. 2, 2013) (“AFR”), Bâtirente et al., Bricklayers International, CII, CT State Treasurer, FS FTQ, Public Citizen I, Public Citizen II, and John Theodore (Nov. 5, 2013) (“Theodore”). 101 See letter from AFL-CIO II. Other commenters contended that the final rule should include only full-time employees. 102 Many of these commenters claimed that applying the rule to part-time, temporary, and seasonal employees would make the pay ratio disclosure less meaningful because the compensation of these different types of employees are not comparable to each other or to the PEO's compensation. 103 Some commenters also asserted that including employees other than full-time employees would be burdensome and increase costs. 104 One commenter noted that, according to a survey it conducted of companies with more than 10,000 employees, “86 percent of the average employer's employees are full-time, with the median employer having 95 percent of its workforce as full-time employees.” This commenter asserted that the incremental information that would be obtained from including part-time or seasonal employees does not justify the effort to collect it and could provide a distorted picture of the employee's annual income. 105 102 See, e.g., letters from Best Buy et al., Brian Foley & Company, Inc. (Dec. 2, 2013) (“Brian Foley & Co.”), Chamber I, FuelCell Energy, Garmin, Hyster-Yale, Mercer I, NACCO, PM&P, Semtech, Steven Hall and Partners (Dec. 2, 2013) (“SH&P”), Vectren Corp., WorldatWork I, and WorldatWork II. 103 See, e.g., letters from American Apparel & Footwear Association (Dec. 2, 2013) (“AAFA I”), American Apparel & Footwear Association (Dec. 23, 2013) (“AAFA II”), American Benefits Council, COEC I, Corporate Secretaries, Davis Polk, Dover Corp., ExxonMobil, FSR, General Mills, Hay Group, IBC, KBR, Meridian, NACD, NIRI, NRF, NYC Bar, Retail Industry Leaders Association (Dec. 2, 2013) (“RILA”), and WorldatWork I. 104 See, e.g., letters from American Benefits Council, COEC I, Corporate Secretaries, Davis Polk, and General Mills. 105 See letter from COEC I. Another commenter asserted that the final rule should exclude part-time, seasonal, and temporary employees unless a majority of a registrant's employees work on a part-time, temporary, and/or seasonal basis. 106 A few commenters recommended that the rule should allow registrants to exclude any employee who was not employed for at least four months during the calendar year. 107 Other commenters indicated that, if the rule is not limited to full-time employees, registrants should be able to annualize or make full-time equivalent adjustments to the compensation of part-time, seasonal, and/or temporary employees. 108 One commenter suggested, in the alternative, that if the rule includes part-time, seasonal, and temporary employees, it should only include such employees who have been employed during the 90-day period ending on the last day of the registrant's fiscal year. 109 Finally, another commenter suggested, in the alternative, that the rule should require a “primary disclosure” that compares only full-time employees to the PEO's compensation. 110 106 See letter from ABA. 107 See, e.g., letters from Hyster-Yale and NACCO (stating that such a provision could contain a consistency requirement to prevent companies from selectively choosing which employees to include or exclude). 108 See, e.g., letters from AAFA II, American Benefits Council, Brian Foley & Co., Corporate Secretaries, Hay Group, KBR, NIRI, and NYC Bar. 109 See letter from Meridian. 110 See letter from NRF. Some commenters noted that neither Section 953(b) nor its legislative history states explicitly that Congress intended for the “all employees” term to include part-time, seasonal, and temporary employees. These commenters contended we could thus interpret the “all employees” language to exclude such employees from the final rule. 111 Some commenters believed that the minimal effect these employees would have on the pay ratio would not justify the high costs required to include those employees in determining the pay ratio. 112 Conversely, commenters in support of including part-time, seasonal, and temporary employees in the pay ratio contended that failing to do so would distort registrants' pay ratios because many of their employees would not be included in the median calculation. 113 111 See, e.g., letter from ABA. 112 See, e.g., letters from COEC I (stating that two-thirds of respondents to a survey it conducted indicated that limiting the application of the rule to full-time employees would reduce their costs, that the “average savings for these respondents would be approximately 20 percent,” and that the burden imposed by including “global, full-time, part-time and seasonal employees” is not offset by other benefits) and General Mills (“We would expect moderate cost savings from limiting the analysis to full-time employees, versus covering our entire workforce, but the savings could be significant for registrants in other industries. . . Conversely, there has been little or no evidence to suggest that the benefits of the Proposed Rule would be diminished as a result of limiting its scope to full-time employees.”). 113 See, e.g., letters from AFL-CIO I, AFR, Bâtirente et al., Bricklayers International, CII, CT State Treasurer, FS FTQ, Public Citizen I, and Theodore. Several commenters agreed that a registrant's pay ratio should exclude “leased” workers. 114 One of these commenters noted that including “leased” workers would add significant costs and distort the pay ratio. 115 Also, according to this commenter, such workers are not “statutory” employees and the third parties employing these workers may be unwilling to provide the information. A few commenters recommended that the final rule require a registrant to include such workers in its pay ratio. 116 One commenter asserted that a registrant should be required to clearly describe its reliance on “leased” workers if they comprise more than 40% of its workforce. 117 114 See, e.g., letters from ABA; American Staffing Association (Nov. 21, 2013) (“ASA”); CalPERS; CII; Corporate Secretaries; Emergent BioSolutions, Inc. (Nov. 27, 2013) (“Emergent”); ExxonMobil; Hyster-Yale; Intel; McGuireWoods, NACCO; and WorldatWork I. 115 See letter from ABA. 116 See, e.g., letters from Demos (Nov. 22, 2013) (“Demos I”), Fischer (referring to “independent contractors”), and Vectren Corp. (arguing that the rule should include full-time, U.S.-based contractors if they make up a significant portion of the registrant's workforce). 117 See letter from LAPFF. iii. Final Rule After considering the public comments, we have concluded that the final rule's definition of “employee” should include the full-time, part-time, seasonal, and temporary employees employed by the registrant or any of its consolidated subsidiaries. Because this definition refers to workers “employed by the registrant,” workers who provide services to the registrant or its consolidated subsidiaries as independent contractors or “leased” workers are excluded from the definition as long as they are employed, and their compensation is determined, by an unaffiliated third party. The final rule includes in the definition of “employee” all of a registrant's officers other than the PEO, as proposed. Section 953(b)(1)(A) expressly directs disclosure of the median of the annual total compensation of “all employees of the issuer, except the chief executive officer (or any other equivalent position) of the issuer.” We believe this statutory language indicates that Congress intended the final rule to include all types of a registrant's employees, including part-time, seasonal, and temporary workers, and we do not think it is appropriate to provide a wholesale exemption for those broad categories of employees that are not employed full-time. 118 Any such exemption would risk producing pay ratio disclosure that is significantly different than the pay ratio disclosure that Congress expressly directed us to require when it said “all employees.” Further, as noted above, we have generally limited our use of discretionary or exemptive authority to those items that would not have an appreciable effect on the information that Congress intended that shareholders have when they make their say-on-pay votes. To the extent there is any statutory ambiguity, we would still elect this inclusive approach because we believe that it is more reflective of the actual composition of the registrant's workforce and thus furthers the purpose of providing shareholders with useful information about a registrant's overall compensation practices. While we are sensitive to concerns raised by some commenters that inclusion of these broad categories of employees means that compliance with the final rule will be more costly than if we adopted a broad exemption, we note that the final rule provides other types of flexibility and accommodations designed to reduce compliance costs while remaining faithful to our understanding of the statutory directive and purpose of Section 953(b). 118 See, e.g., County of Oakland v. Federal Housing Finance Agency, 716 F.3d 935, 940 (6th Cir. 2013) (explaining that “a straightforward reading of the statute leads to the unremarkable conclusion that when Congress said `all taxation,' it meant all taxation”) (emphasis in original); Marie O. v. Edgar, 131 F.3d 610, 620 (7th Cir. 1997) (interpreting the phrase “all infants and toddlers” and explaining that “[a]ll is unambiguous; it means every eligible child”); cf. GEICO v. Fetisoff, 958 F.2d 1137, 1142 (D.C. Cir. 1992) (describing “the word `all'” as “one of the least ambiguous words in the English language”). A registrant can supplement its pay ratio disclosure or provide additional pay ratios for its shareholders to consider if it wants to explain the effect of including part-time, seasonal and temporary employees on its pay ratio disclosure. While we do not believe a purpose of the rule is to facilitate comparisons among registrants, the opportunity to supplement the pay ratio disclosure and to provide additional pay ratios should help mitigate some concerns that shareholders may draw unwarranted conclusions from comparing one registrant's disclosed ratio to the ratio of others. In addition, our change to the proposed rule to allow a registrant some flexibility in selecting the date for identifying the median employee may enable registrants that employ temporary or seasonal employees only during a very limited period at the end of their fiscal year to choose a date that allows them to exclude these employees. One commenter pointed out that Item 402 does not contain a reference to hourly or overtime compensation and contended, therefore, that the rule should not apply to non-salaried employees who receive “wages plus overtime,” rather than salary. 119 We believe that the “all employees” language is not limited to salaried employees. Moreover, we are concerned that a contrary reading would be arbitrary and would eliminate an entire category of employees from the pay ratio disclosure, potentially depriving shareholders of a more complete understanding of the median employee's compensation when making their say-on-pay votes. Thus, we believe that it is appropriate to include these employees as part of a registrant's pay ratio disclosure to reflect the manner in which the registrant establishes its workforce. 119 See letter from Chamber I. The final rule excludes from the definition of “employee” those workers who are employed, and whose compensation is determined, by an unaffiliated third party but who provide services to the registrant or its consolidated subsidiaries as independent contractors or “leased” workers. Although it is unclear whether Congress intended to include these workers as “employees of the issuer,” or even considered the issue, we believe, as a matter of policy, these workers should not be included as “employees of the issuer.” While one commenter stated that “leased employees and other workers employed by a third party are not “statutory” employees of a registrant,” 120 some definitions of “employee” may include workers who are not employed directly by the registrant or its consolidated subsidiaries, such as independent contractors or “leased” or “borrowed” workers, if they are employed by a third party. 121 We note that the statute specifies employees “of the issuer,” and in light of this, to the extent there is any ambiguity on this point, we believe that the better reading of the statute is to exclude from the final rule's definition of “employee” workers who are not employed by the registrant or its consolidated subsidiaries, such as independent contractors or “leased” workers, if they are employed, and their compensation is determined, by an unaffiliated third party. 120 See, e.g., letter from ABA. 121 See, e.g., Black's Law Dictionary 602 (9th ed. 2009) (defining “employee” as a “person who works in the service of another person (the employer) under an express or implied contract of hire, under which the employer has the right to control the details of work performance,” and defines a “borrowed employee” as an “employee whose services are, with the employee's consent, lent to another employer who temporarily assumes control over the employee's work”). We believe excluding such workers is appropriate because registrants generally do not control the level of compensation that these workers are paid. Instead, the registrant provides a payment for their services to an unaffiliated third party, which determines the compensation for the employees. As one commenter noted, there can be no assurance, therefore, that the registrant even has access to the workers' compensation information, which could make it difficult or impossible to obtain the information. 122 122 See letter from ABA. We do not believe it is appropriate for registrants to voluntarily include workers employed by third parties in their required pay ratio disclosure “if such persons make up a significant portion of the workforce,” as one commenter suggested, even if doing so may add to the “flexibility” of the final rule. 123 For the reasons described above, we have not included these workers within the definition of employee, and we are concerned that allowing registrants the option to elect to include them in their required disclosures would introduce the potential for registrants to manipulate the pay ratio disclosure. Registrants, however, may discuss their reliance on “leased” workers, as suggested by another commenter, in their narrative disclosure. 124 Also, they may provide additional ratios that factor in those workers, as long as any additional ratios are not misleading and are not more prominently displayed than the required ratio. 123 See letter from Vectren Corp. 124 See letter from LAPFF. b. Employed on Any Date Within Three Months of the Last Completed Fiscal Year i. Proposed Rule The proposed rule would define “employee” as an individual employed as of the last day of the registrant's last completed fiscal year. We proposed this calculation date for determining who is an employee because it is consistent with the one used for the determination of PEO and principal financial officer and the other three most highly compensated executi [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2015-19600. Public record. Not legal advice.