by Cydney Posner

The SEC may adopt final pay-ratio rules, mandated by Dodd-Frank, possibly as early as next week.  More significantly, according to the WSJ, the final rules will be adopted “without broad exclusions sought by companies.”

The pay-ratio proposal requires most public companies to disclose the relationship of CEO pay to the median pay of other employees. How that median is calculated, however, has been a subject of much controversy, particularly with respect to the need to include part-time and foreign employees.  Companies have argued that inclusion of these employees will be costly and time-consuming and improperly skew the ratio.  However, those opposing any carve-outs contend that the Dodd-Frank does not permit any exclusions.

Perhaps in anticipation of an almost certain court challenge to the pay-ratio rules, the SEC’s Division of Economic and Risk Analysis performed additional economic/statistical analyses of the pay-ratio calculation, which considered the potential effects of excluding different percentages of employees from the calculation. The analysis excluded different percentages ranging between 1% and 20%. The results showed that the exclusion of 5% of employees could cause the pay ratio to decrease by up to 3.4% or to increase by up to 3.5% under two different scenarios studied. By comparison, with a 20% exclusion, the pay ratio may decrease by up to 13% or increase by up to 15%, depending on the scenario considered. (See this post.) All that activity led some to hope that the SEC was contemplating allowing broad exclusions for overseas and part-time employees.

According to the WSJ: “In a setback to corporations and their trade groups, the Securities and Exchange Commission is expected to allow companies to exclude 5% of their overseas workers from the pay-ratio calculation…. Companies had pressed to exclude a much larger percentage of foreign workers, which likely would have narrowed the pay gap some businesses report…..People familiar with the matter said the vote date and the contours of the rule could still change.” According to commentators cited in the article, that percentage exclusion will have limited benefit for many companies with significant overseas presence.


Posted by Cydney Posner