FINALLY: SEC GUIDANCE FOR PUBLIC COMPANIES ISSUED IN INTERPRETIVE GUIDANCE DOCUMENT. THE FIRST CEO-EMPLOYEE PAY RATIO DISCLOSURES COMING FIRST QUARTER 2018

SOURCE: HANK BOERNER, TRENDS CONVERGING!

In Chapter 9 of Trends Converging! we focused on: What Does My CEO Make? Why It Matter To Me.

The Dodd-Frank legislation of 2010 had a provision that quickly drew criticism in the corporate community -- the law required public companies to publish (annually) the ratio of total compensation, median employee to CEO comp. The rulemaking began and the Securities & Exchange Commission decided that the disclosures would begin January 1, 2017.

Not so fast, said the critics. And so the comments in support of and in opposition to the Rule flowed in to SEC. Finally, on September 22, 2017, the Interpretive Guidance was issued to public corporation managements -- the disclosures will begin in first quarter 2018 for companies whose Fiscal Year began January 1, 2017.

The disclosures (we believe) will inject new commentary around executive compensation, for many years now a hot button for some investors focused on corporate governance and related social/societal issues.

We explain the background for you in Chapter 9; here is the update:

As the Dodd-Frank legislation was passed by the Congress, a provision was inserted that called for public companies to annually disclose the ratio of compensation -- for the CEO (presumably the highest pay) and for the median compensation (of all employees). Was it going to be 100-to-1? 400-to-1? More?

This was one of the most broadly contentious provisions of Dodd-Frank (signed into law July 21, 2010, officially as the Dodd-Frank Wall Street Reform and Consumer Protection Act - Public Law 111-203 / H.R. 4173). Ever since that summer now seven years behind us, lobbyists have battled to roll back sections of, or the entirety of, D-F.

As with other financial reform initiatives in the Congress (like Sarbanes-Oxley in 2002), there are numerous titles and sections in the legislative package. In Dodd-Frank, Title IX -- Investor Protections and Improvements to the Regulation of Securities -- there is a Subtitle E 4.9.5: Accountability and Executive Compensation.

And within the Subtitle, there is the now familiar requirement for (at least every three years) shareholders to vote on the company's executive compensation.

And this: Shareholders must be informed...of the median of the annual compensation of all employees of the issuer, except the CEO...the annual total compensation of the median of the annual total with the total CEO compensation...

In 2015 the Securities & Exchange Commission did adopt a rule to implement the legislation but there was great pushback by industry and the implementation of the Rule stalled.

Last week, the SEC staff finally issued "Interpretive Guidance" on the Pay Ratio Rule. U.S. publicly-traded companies will begin making their Pay Ratio Disclosures early in 2018 (for companies with Fiscal Years beginning January 1, 2017). Highlights:

  • The SEC said it was seeking ways to reduce costs and burdens for corporate issuers while preserving what is perceived to be the purpose and benefits of statutorily-mandated disclosure.

  • Disclosure may be determined with appropriate methodologies to identify the median employee and calculate the median employee's annual total compensation.

  • Disclosure may be based on a company's "reasonable belief, reasonable estimates, assumptions, and reasonable efforts to prepare the disclosures..." We can see the lawyers now working in their office to fashion "reasonableness" in the coming disclosures. And, investors and stakeholders bracing themselves for disclosures they will take issues with in 2018 and beyond. The SEC acknowledges that pay disclosures may "involve a degree of imprecision."

The SEC will provide some leeway at least in the initial wave of disclosures "unless the disclosure was made or reaffirmed without a reasonable basis or was provided other than in good faith."

The SEC recognizes that most U.S. public companies are in some way or a big way "multinationals," with employees outside the United States. Employees outside the U.S. may be exempted if they comprise 5% or less of the total of U.S. and non-U.S. employees.

For purposes of enforcing the rule, SEC applies "employee" to individuals employed by the company and its consolidated subsidiaries. Excluded: independent contractors or "leased" workers provided to the company by a third party. Comments to the SEC when the Rule was passed questioned the term, "employee" -- SEC says a test for this might be guidance published by the Internal Revenue Service.

That is where we are today. The Pay Ratio Disclosure moves ahead; the first data will be coming into the public view in the first quarter of 2018.

Company executives and managers may find a ho-hum reaction to their published ratio; others in leadership may come under fire for such things as CEO over-payment and company under-performance (a frequent refrain from activist investors).