This article originally appeared in the Nasdaq Governance Clearinghouse.
Should public companies still plan on implementing the CEO Pay Ratio rule given that President-elect Trump has promised to repeal or reform Dodd-Frank? Nasdaq sat down with Don Kalfen of Meridian Compensation Partners to find out. Don leads Meridian’s Technical Team and has more than 20 years of consulting experience in executive and director compensation and related issues.
The Pay Ratio disclosure rules—drafted by the SEC and mandated under Dodd-Frank—become effective in 2017 and, for calendar year companies, apply to their first annual report, annual proxy or information statement filed in 2018. Don’s interview with Nasdaq resulted in a robust nuts and bolts guide to the CEO Pay Ratio rule, including an overview of the rule, who must follow it, and how to calculate the required pay ratios, as well as his views on its (lack of) merit.
During our conversation, we asked Don to share his thoughts on whether the incoming Trump administration will repeal the CEO pay ratio rule:
President-elect Trump’s specific view on the CEO pay ratio are not known. However, Mr. Trump’s view on Dodd-Frank are clear: The President-elect will seek the repeal or sweeping reformation of Dodd-Frank. This could result in the repeal of the CEO pay ratio along with the other Dodd-Frank disclosure mandates. Further, over the past several years, Congressional Republicans have routinely introduced bills to repeal the CEO pay ratio. Despite these hopeful signs, at this point it would be premature to write off the Pay Ratio rule. It may be well into the summer of 2017 before the fate of Dodd-Frank and its various disclosure mandates start to become clear. Until then, we are advising companies to operate under the assumption that the Pay Ratio will go into effect in 2017, with initial public disclosure in 2018.
Don also shared his advice and planning steps for companies to begin preparing for the rule in advance of the 2018 proxy season:
Until the fourth quarter of 2017, for a calendar year company it is too early to determine a CEO pay ratio that complies with the Dodd-Frank requirements and the SEC rule on the pay ratio disclosure. A calendar year company is required to determine the covered employee population from which to derive the pay ratio as of a company-selected date occurring in its fourth quarter. Only after this determination has been made may a company calculate a compliant CEO pay ratio.
However, we suggest companies undertake the following planning steps during the current calendar year, and into the start of 2017 to get ahead of the curve:
Identify covered entities (and covered jurisdictions) and means of data collection. A company should identify each covered entity (i.e., every consolidated entity for financial statement purposes), the jurisdiction(s) of the entity and the means of collecting applicable employee pay data from each entity. This, importantly, includes how the company will collect data (e.g., via the company’s country specific HRIS system, by hand input on paper documents, etc.), and determine currency conversions.
Determine employee exclusions. Once covered entities are identified and how pay data will be collected, a company should determine if any employees from covered entities may be excluded from the covered employee population (e.g., 5% exclusion of non-U.S. employees, countries where data privacy laws raise issues, independent contractors, etc.). In this regard, a company should consider retention of legal counsel to determine the extent to which non-U.S. employees may be excluded by reason of data privacy laws.
Determine covered employee population. Next a company should determine whether the median employee should be identified from the entire covered employee population or a subset of the employee population based on statistical sampling techniques. A company may need to retain a statistician to determine the appropriate sampling techniques.
Agree upon pay definition for determining median employee. A company should then determine how pay will be defined for purposes of identifying the median employee and to what extent pay may be annualized for certain categories of covered employees. Note, the pay definition for this purpose could be W-2 reported pay, base salary, or other consistently applied measure.
Conduct a simplified calculation based on U.S. employees only. A company should determine sample CEO pay ratio based solely on its U.S. employee population or a subset of this population. This will help a company further refine its processes for developing its CEO pay ratio disclosure and help to surface issues for resolution. Finally, this may provide some indication as to what will be the disclosed CEO pay ratio, and create a more informed expectation on how a company may need to develop disclosures regarding the pay ratio.
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With over sixty associates in ten offices in the U.S. and Canada, Meridian Compensation Partners provides executive compensation consulting and corporate governance services to over 500 major publicly traded and privately held corporations. Their core services include board level advisory services, compensation program design, research and competitive market intelligence on executive pay, and corporate governance matters.