SEC Issues C&DIs on CEO Pay Ratio Rule

On October 20, 2016, in CEO Pay Ratio, SEC, by Ed Hauder

On October 18, 2016, the SEC issued five Compliance & Disclosure Interpretations (C&DIs) covering Regulation S-K, Item 402(u), the Pay Ratio Disclosure. Generally, these C&DIs address questions related to how companies can determine the median employee for purposes of determining the pay ratio and focus on the “consistently applied compensation measure” (CACM) that is permitted to be used instead of having to calculate total compensation in accordance with the Summary Compensation Table for all employees.

Link to the SEC website with the C&DIs (also appear below):

Section 128C — Item 402(u) Pay Ratio Disclosure

Question 128C.01

Question: If a registrant does not use annual total compensation calculated using Item 402(c)(2)(x) of Regulation S-K (“annual total compensation”) to identify the median employee, how should a registrant select another consistently applied compensation measure (“CACM”) to identify the median employee?

Answer: Item 402(u) requires registrants to identify the median employee using annual total compensation or another CACM, such as information derived from the registrant’s tax and/or payroll records. Because of concerns about the expected compliance costs if registrants had been required to calculate annual total compensation for all employees, the Commission permitted registrants to use a CACM other than annual total compensation as a reasonable alternative to identifying the median employee. Any measure that reasonably reflects the annual compensation of employees could serve as a CACM. The appropriateness of any measure will depend on the registrant’s particular facts and circumstances. For example, total cash compensation could be a CACM unless the registrant also distributed annual equity awards widely among its employees. Social Security taxes withheld would likely not be a CACM unless all employees earned less than the Social Security wage base. The registrant must also briefly disclose the compensation measure used. Although the CACM must reasonably reflect annual compensation, it is not expected that the CACM would necessarily identify the same median employee as if the registrant were to use annual total compensation. [October 18, 2016]

Question 128C.02

Question: May a registrant exclusively use hourly or annual rates of pay as its CACM?

Answer: No. Although an hourly or annual pay rate may be a component used to determine an employee’s overall compensation, the use of the pay rate alone generally is not an appropriate CACM to identify the median employee. Using an hourly rate without taking into account the number of hours actually worked would be similar to making a full-time equivalent adjustment for part-time employees, which is not permitted. Similarly, using an annual rate only, without regard to whether the employees worked the entire year and were actually paid that amount during the year, would be similar to annualizing pay, which the rule only permits in limited circumstances. [October 18, 2016]

Question 128C.03

Question: When a registrant uses a CACM to identify the median employee, what time period may it use? Must the period include the date on which the employee population is determined? Must it always be for an annual period? May it use the prior fiscal year?

Answer: To calculate the required pay ratio, a registrant must first select a date, which must be within three months of the end of its fiscal year, to determine the population of its employees from which to identify the median. Once the employee population is determined, the registrant must then identify the median employee from that population using either annual total compensation or another CACM. In applying the CACM to identify the median employee, a registrant is not required to use a period that includes the date on which the employee population is determined nor is it required to use a full annual period. A CACM may also consist of annual total compensation from the registrant’s prior fiscal year so long as there has not been a change in the registrant’s employee population or employee compensation arrangements that would result in a significant change of its pay distribution to its workforce. [October 18, 2016]

Question 128C.04

Question: When someone is furloughed on the date that the registrant uses to determine the population of its employees from which it is required to identify the median, must the registrant include the furloughed person in the employee population used to identify the median employee, and, if included in the population, how should the furloughed employee’s compensation be calculated?

Answer: Item 402(u) does not define or even address furloughed employees. Because a furlough could have different meanings for different employers, registrants will need to determine whether furloughed workers should be included as employees based on the facts and circumstances. If the furloughed worker is determined to be an employee of the registrant on the date the employee population is determined, his or her compensation should be determined by the same method as for a non-furloughed employee. Item 402(u)(3) of Regulation S-K identifies four classes of employees: full-time, part-time, temporary and seasonal. The registrant must determine in which class the employee belongs on that date and determine that individual’s compensation using annual total compensation or another CACM in accordance with Instruction 5 of Item 402(u). That instruction states that a registrant may annualize the total compensation for all permanent employees (full-time or part-time) that were employed by the registrant for less than the full fiscal year or who were on an unpaid leave of absence during the period. In contrast, a registrant may not annualize the total compensation for employees in temporary or seasonal positions. A registrant may not make a full-time equivalent adjustment for any employee. [October 18, 2016]

Question 128C.05

Question: Under what circumstances is a worker employed and his or her compensation determined by an unaffiliated third party such that the worker is considered an independent contractor or leased worker under the rule? When is a registrant considered to be determining the compensation of a worker?

Answer: In the release, the Commission noted its belief that the primary benefit of the pay ratio disclosure is to provide shareholders with a company-specific metric that they can use to evaluate the compensation paid to the PEO within the context of their company. Therefore, in determining when a worker is an “employee” of the registrant under the rule, the registrant must consider the composition of its workforce and its overall employment and compensation practices. In furtherance of this, a registrant should include those workers whose compensation it or one of its consolidated subsidiaries determines regardless of whether these workers would be considered “employees” for tax or employment law purposes or under other definitions of that term. Frequently, a registrant will obtain the services of workers by contracting with an unaffiliated third party that employs the workers. When a registrant obtains services in this way, we do not believe it is determining the workers’ compensation for purposes of the rule if, for example, the registrant only specifies that those workers receive a minimum level of compensation. Further, an individual who is an independent contractor may be the “unaffiliated third party” who determines his or her own compensation. [October 18, 2016]


ISS Launches 2017 Policy Survey

On August 19, 2016, in ISS, ISS Policies, by Ed Hauder

ISS recently launched its annual policy survey for purposes of updating and refining its policies for 2017. The Press Release announcing the 2017 Policy Survey can be found at: The survey will close on August 30th at 5 pm Eastern.


The ISS 2017 Policy Survey can be accessed at:


The more interesting questions that could potentially impact ISS’ US policies are:

Q. 2. Overboarding: ISS is asking whether executive chairs should be evaluated for overboarding purposes using either the standard applied to sitting CEOs (no more than 3 total boards) or the standard applied to non-executive directors (no more than 5 total boards).

Q.4. Board Refreshment: ISS is asking whether there are any tenure factors that would cause concern with a board’s nominating and refreshment process. Possible concerns listed include: absence of newly-appointed independent directors in recent years; lengthy average tenure; high proportion of directors with long tenure. ISS also has “tenure is not a concern” and “other” listed as possible responses.

Q.7. Say-on-Pay Frequency: ISS is asking what Say on Pay frequency is favored and if the frequency depends on the company, what factors are considered, including: size of the company, financial performance, presence or absence of recent problematic executive pay practices; or, level of shareholder support for Say on Pay votes at past meetings.

Q.8. Executive Pay Assessments (Cross-border): ISS is asking which of several statements captures how the respondents think about cross-border compensation where a company is incorporated in one country but listed in another [ISS currently evaluates each compensation proposal under the policy fo the country whose laws or listing rules require the vote, but generally aligns the vote recommendations based on the policy perspective of the country in which the company is listed]. The possible views are: (1) vote recommendations for compensation proposals should be aligned so as to not produce inconsistent evaluations of a single pay structure; (2) where pay evaluations under one country’s policy would result in negative recommendation but, under the other country’s policy would result in a favorable recommendation, it is acceptable to have opposing recommendations if each reflects the underlying policy of the relevant country; or (3) other.

Q.10. Metrics Used in P4P Assessments: ISS is asking how much respondents would support the use of metrics other than TSR in quantitative P4P assessments: strongly support; support; neutral; oppose; strongly oppose. If a respondent indicates neutral to strongly support, ISS asks which financial metrics should be used: revenue metrics; earnings metrics; return metrics; return on investment metrics; cash flow metrics; economic profit metrics; or, other.

Based on these questions, I think we can expect some updates to ISS’s P4P analysis as part of its Say on Pay vote recommendations. However, I will be surprised if ISS significantly updates its policy with respect to Say on Pay Frequency since it appears that many investors prefer to see an annual vote which is currently the frequency ISS supports.


According to this BNA blog (, the SEC has proposed to eliminate the Regulation S-K, Item 201(d) disclosure, i.e., the Equity Compensation Plan Information Table that is included in the proxy or annual report depending on whether a compensation plan is being put to shareholder vote.  This table provides the outstanding and available shares for shareholder approved and non-shareholder approved equity compensation plans, as well as weighted average exercise price for the outstanding equity awards.

The rationale appears to be that given current financial accounting standards, much of this information is now contained in a company’s publicly-filed financial statements.  While that is true to some extent, in my experience, the financial statements are not always the picture of clarity on such disclosure and I believe less information will ultimately be reported about equity plans if this proposal passes.

We will have to watch where this SEC proposal ends up when the final regulations gets issued.

ISS and Equilar both recently opened up their peer group submission periods. This will enable companies to update the peer groups that they will report in their next proxy statement to ensure that these groups are reflected in both ISS’s and Equilar’s records (Note: Equilar uses this information to determine the Equilar Market Peer Group that is used by Glass Lewiss in its pay for performance analysis and the proxy voting groups of a number of institutional shareholders).

ISS’s peer group submission runs from 9 am EST on Tuesday, November 24th until 8 PM EST on Friday December 11th.

  • Only companies with shareholder meetings between February 1, 2016 and September 16, 2016 are invited to participate.
  • For the first time ISS will include companies in the Russell MicroCap Index.
  • Only companies that have made changes to their peer groups (from the peer groups disclosed in their last proxy) need to submit information to ISS
  • Peers submitted should be the peers used to set compensation for the fiscal year that will be disclosed in the next proxy.
  • Companies can begin the peer group submission process at: ISS Peer Group Submission
  • Companies submitting new peer companies must follow-up their submissions with a letter on company letterhead (in PDF) with the full list of peers submitted online.

Equilar’s peer group update window runs from November 16th through December 31st.

  • The peer group update is recommended for companies that file proxy statements between January 15, 2016 and July 15, 2016.
  • More information about the Equilar peer group validation process can be found here: Equilar Peer Group Validation
  • Equilar has also published a FAQ on its Peer Group Update process, available at: Equilar Peer Group Update FAQ



Both ISS and Glass Lewis have issued their 2016 policy updates.  Glass Lewis issued its 2016 policy with little fanfare in early November and ISS issued its updated policies for 2016 on November 20, 2015.  Links to both firms’ 2016 policies are as follows:

ISS at the same time issued an updated FAQ on its Equity Plan Scorecard (EPSC) Policy: 2016 U.S. Equity Plan Scorecard, Frequently Asked Questions:

The ISS policy updates and FAQs apply to shareholder meetings held on or after February 1, 2016.

Taking a look at the specific policy updates of each for 2016 concerned with compensation, we see the following:

Glass Lewis

Glass Lewis now indicates that if it identifies egregious compensation practices, it may not only recommend against the Say-on-Pay vote but also recommend against the compensation committee based on the practices or actions of the committee during the year. Glass Lewis identifies as possible egregious practices: large one-off payments; the inappropriate, unjustified use of discretion; or, sustained poor pay performance practices.


ISS’ 2016 policy updates did not directly impact the majority of its compensation policies. Of note is that ISS did revise its policy with respect to compensation-related votes at externally-managed issuers. Now, ISS will generally recommend against the Say-on-Pay proposal where there is an external management structure in place and there is insufficient detail in the company’s disclosures for ISS to perform a comprehensive pay-for-performance analysis. ISS also changed the way ti will approach shareholder proposals to adopt holding periods and will now “strongly consider retention ratio and holding period duration among several other factors.”

In regard to directors, ISS also modified its policy with respect to overboarding. ISS is providing a 1-year transition period for companies to comply with the new overboarding policy and will only issue “warnings” in its proxy reports.  After that period, ISS will issue negative vote recommendations on directors who are not public company CEOs and who sit on more than five (5) public company boards. ISS will issue such negative vote recommendations until the director sits on five (5) or fewer public company boards. ISS decided not to further restrict the number of boards on which an acting CEO can sit (Sitting CEOs will not be overboarded unless they sit on more than three public company boards–their own board and up to two (2) other public company boards).