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Dodd-Frank

Pay Ratio Disclosure Checklist

by and   |   December 27, 2017

Calculating pay ratios for public companies can be a difficult and time-consuming project. While recent interpretative guidance from the Commission  has provided additional flexibility in this process, public companies still need to consider appropriate disclosures regarding pay ratio calculations in addition to the disclosure of the pay ratio.  Our checklist of essential disclosure items to consider when drafting pay ratio disclosures is set forth blow.

1.    All registrants required to present a pay ratio should provide a brief description regarding general methodology used to calculate the ratio without technical analyses or formulas including:

  • the methodology used to identify the median employee
  • any material assumptions, adjustments (including any cost-of-living adjustments), or estimates used to identify the median employee or to determine total compensation or any elements of total compensation, which shall be consistently applied
  • clearly identify any estimates used (e.g., sample size and sampling methods where statistical sampling is used)
  • if a registrant changes its methodology or its material assumptions, adjustments, or estimates from those used in its pay ratio disclosure for the prior fiscal year, and if the effects of any such change are significant, the registrant shall briefly describe the change and the reasons for the change
  • describe if another employee was substituted for the originally identified median employee because of anomalous characteristics associated with the originally identified employee

2.   If the registrant relies on excluding employees because of privacy laws or regulations under S-K Item 402(u)(4)(i) disclose the following:

  • list the excluded jurisdictions
  • identify the specific data privacy law or regulation
  • explain how compliance with the pay ratio 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),
  • 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
  • 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 pay ratio rule without violating the jurisdiction’s laws or regulations governing data privacy, including the registrant’s inability to obtain an exemption or other relief under any governing laws or regulations
  • file the legal opinion as an exhibit to the filing in which the pay ratio disclosure is included

3.    If a registrant excludes non-U.S. employees under the de minimis exemption (i.e. less than 5%) under S-K Item 402(u)(4)(ii), it must disclose the following:

  • the jurisdiction or jurisdictions from which those employees are being excluded
  • the approximate number of employees excluded from each jurisdiction under the de minimis exemption
  • the total number of U.S. and non-U.S. employees irrespective of any exemption (data privacy or de minimis)
  • the total number of its U.S. and non-U.S. employees used for its de minimis calculation

4.    Disclosures regarding the date chosen for identifying the median employee (Instruction 1 to Item 402(u)):

  • a registrant shall disclose the date within the last three months of its last completed fiscal year that it selected pursuant to SK Item 402(u)(3) to identify its median employee
  • if the registrant changes the date it uses to identify the median employee from the prior year, the registrant shall disclose this change and provide a brief explanation about the reason or reasons for the change

5.    Disclosures for registrants that choose to identify a median employee once every three years (Instruction 2 to Item 402(u)):

  • if there have been no changes that the registrant reasonably believes would significantly affect its pay ratio disclosure, the registrant shall 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 it is no longer appropriate for the registrant to use the median employee identified in year one as the median employee in years two or three because of a change in the original median employee’s circumstances that the registrant reasonably believes would result in a significant change in its pay ratio disclosure, the registrant may use another employee whose compensation is substantially similar to the original median employee based on the compensation measure used to select the original median employee

6.    Disclosures for registrants that use a compensation measure other than annual total compensation to identify the median employee (Instruction 4 to Item 402(u)):

  • disclose the compensation measure used

7.    Disclosures for registrants that use cost-of-living adjustments (Instruction 4 to Item 402(u)):

  • the registrant may make cost-of-living adjustments to 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 in a jurisdiction other than the jurisdiction in which the PEO resides, the registrant must use the same cost-of-living adjustment in calculating the median employee’s annual total compensation and disclose the median employee’s jurisdiction
  • briefly describe the cost-of-living adjustments it used to identify the median employee
  • 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
  • disclose the median employee’s annual total compensation and pay ratio without the cost-of-living adjustment. To calculate this pay ratio, the registrant will need to identify the median employee without using any cost-of-living adjustments
  • disclose if the registrant changed from using the cost-of-living adjustment to not using that adjustment and if the registrant changed from not using the cost-of-living adjustment to using it

8.    Disclosures for registrants that include personal benefits that aggregate less than $10,000 and compensation under non-discriminatory benefit plans in calculating the annual total compensation of the median employee (Instruction 4 to Item 402(u)):

  • these items must also be included in calculating the PEO’s annual total compensation
  • explain any difference between the PEO’s annual total compensation used in the pay ratio disclosure and the total compensation amounts reflected in the Summary Compensation Table, if material

9.    Disclosures for registrants where PEO pay is not yet calculable and omitted from summary compensation table pursuant to Instruction 1 to Regulation S-K Item 402(c)(2)(iii) and (iv) (Instruction 6 to Item 402(u)):

  • disclose that the pay ratio is not calculable until the PEO salary or bonus, as applicable, is determined
  • disclose the date that the PEO’s actual total compensation is expected to be determined
  • once PEO salary or bonus is known, provide pay ratio disclosure by filing under Item 5.02(f) of Form 8-K

10.    Disclosures for registrants that omit employees as the result of the business combination or acquisition of a business for the fiscal year in which the transaction becomes effective (Instruction 7 to Item 402(u)):

  • disclose the approximate number of employees the registrant is omitting
  • identify the acquired business excluded for the fiscal year in which the business combination or acquisition becomes effective

11.    Disclosures for registrants that present additional information, including additional ratios, to supplement the required ratio (Instruction 9 to Item 402(u)):

  • any additional information shall be clearly identified, not misleading, and not presented with greater prominence than the required ratio

12.    Disclosures for registrants with multiple PEOs during the year (Instruction 10 to Item 402(u)):

  • either calculate the compensation provided to each person who served as PEO during the year for the time he or she served as PEO and combine those figures or look to the PEO serving in that position on the date it selects to identify the median employee and annualize that PEO’s compensation
  • disclose which option the registrant chose and how it calculated its PEO’s annual total compensation

13.    Disclosures regarding employees’ personally identifiable information (Instruction 11 to Item 402(u)):

  • do not disclose any personally identifiable information about the median employee other than his or her compensation
  • do not provide the median employees position if providing the information could identify any specific individual