As an executive compensation team member at a large, public company, you have spent some time familiarizing yourself with the Securities and Exchange Commission’s proposed pay ratio disclosure rule. The rule would implement the Dodd-Frank Act’s requirement that public companies disclose the ratio between the CEO’s annual total compensation and the median annual total compensation of all other employees. While you know the rule is still in the proposed stage and that changes could be forthcoming, what steps can you take now to help your organization prepare?
According to Mercer, employers may want to take some preliminary actions to determine potential approaches and associated compliance costs. Mercer advises employers to take the following steps:
• Form an internal team. A cross-departmental team should be responsible for developing an approach toward complying with the proposed rule. The team will likely consist of representatives from Legal, HRIS, HR, Payroll, IT, and Compensation. The leader of the team could be the individual with primary responsibility for preparing the proxy statement executive compensation disclosure.
• Conduct an inventory of the location of compensation information for all employees. While it is too early to attempt to identify the median employee for most companies, it is not premature to identify the location of the data that will be required. This may be a challenging task, particularly for decentralized companies with many different compensation systems in numerous locations.
• Consider potential approaches to identifying the median employee. The proposed rule provides companies with much flexibility. Statistical sampling, “consistently applied compensation measures,” and “reasonable estimates” can ease the compliance burden — but also present companies with the task of determining how best to comply, at the most reasonable cost. After inventorying pay systems, companies should consider alternative approaches to identifying the median employee, including alternative statistical sampling methods.
• Stay informed. Absent legislative action to amend or repeal the rule (which currently appears unlikely), disclosure will probably be required in 2016.
Source: The Proposed Pay Ratio Rule – What Companies Should Do Now, Mercer, http://www.mercer.com; Proposed Rule: Pay Ratio Disclosure, 78 FR 60560, October 1, 2013, http://www.gpo.gov/fdsys/pkg/FR-2013-10-01/pdf/2013-23073.pdf.