On September 21, 2017, the SEC released a BUNCH of guidance on the CEO Pay Ratio, including an interpretative release, Division of Corporation Finance guidance on calculating the pay ratio, and new, revised and withdrawn Compliance & Disclosure Interpretations.
The guidance in the release boils down to, “We meant what we said in the final rule.” But also includes a couple of additional examples
The interpretative release [ Release No. 33-10415; 34-81673; File No. S7-07-13] is focused on the Pay Ratio Disclosure, and provides guidance on:
- The use of reasonable estimates, assumptions, and methodologies and statistical sampling;
- Use of internal records to determine whether the 5% de minimis non-U.S. employee exemption is available;
- Use of internal records to identify the median employee;
- How companies can identify who is an employee for purposes of applying the CEO Pay Ratio Disclosure rule, i.e., can apply a widely recognized test under another area of law that the company otherwise uses to determine whether its workers are employees.
The guidance released by the Division of Corporation Finance focuses on the use of sampling and other reasonable methodologies to identify the median employee:
- The guidance makes clear that companies may combine the use of reasonable estimates with the use of statistical sampling or other reasonable methodologies.
- Provides examples of sampling methods that companies may use.
- Provides examples of situations where companies may use reasonable estimates.
- Provides examples of other reasonable methodologies companies may use and indicates that a combination of reasonable methodologies may be employed.
- Provides examples of the use of reasonable estimates, statistical sampling and other reasonable methods.
The C&DIs make clear that instead of calculating total annual compensation for all employees, companies can select another consistently applied compensation measure (CACM) to identify the median employee. Any measure that reasonably reflects the annual compensation of employees could serve as a CACM.
The C&DIs also permit companies to describe the pay ratio as a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K in their disclosures.