Wednesday, December 25, 2013

Corporate Secretaries Urge SEC to be More Flexible in Implementing Dodd-Frank Pay Ratio Provision

The Society of Corporate Secretaries and Governance Professionals urged the SEC to make more flexible the proposed regulations implementing the pay ratio provisions of the Dodd-Frank Act. While the Society fully recognizes that the SEC must adopt regulations implementing Section 953(b) of the Dodd-Frank Act, the group believes that the regulations will add significant costs and impose burdens on public companies to provide disclosure that will not provide investors with material information to making investment decisions.

All that said, the Society, accepting the fact that there will be regulations implementing Section 953(b), has a number of suggested changes in the proposal. The Society believes that the information called for by amended Item 402 should be furnished to, rather than filed with, the Commission. Also, the employees covered by the rule should be limited in two respects. First, part-time and seasonal employees should be excluded from the calculation of median total compensation of all employees. Second, only employees of consolidated subsidiaries, rather than subsidiaries generally, should be included in determining such compensation. Importantly, the Society noted that data privacy laws will impact the gathering of data on non-US employees, and the final rule should take this into account.

In addition, the Society urged the SEC to give a company discretion to choose a date, other than the end of its most recent fiscal year, for determining the median employee for the purpose of the pay ratio regulations. At a minimum, a company should not be required to use the end of the most recent fiscal year. Further, a company should be able to choose more than one compensation measure for the purposes of determining the median employee where it has non-US employees for whom US W-2 data does not exist.

The Society also urges the Commission to permit companies to use compensation data from the year prior to the most recently completed fiscal year, both for determination of the median employee and in the calculation of the pay ratio.

The issue of furnishing versus filing the information looms large with the Society. The Commission rejected the idea of furnishing the information based on what the Society believes is an unnecessarily literal reading of Section 953(b) of the Dodd-Frank Act, which directs the Commission to amend Item 402 of Regulation S-K to require disclosure of the pay ratio in any filing of the issuer described in Item 10(a) of Regulation S-K. The Commission concludes that the use of the word ‘filing’ in Section 953(b) is consistent with the disclosure being filed and not furnished and thus proposes that the pay ratio disclosure would be considered filed for purposes of the Securities Act and Exchange Act and, accordingly, would be subject to potential liabilities under such Acts.

The Society urges the SEC not to give such disproportionate weight to the use of the word filing in Section 953(b). Filing described in Item 10(a) of Regulation S-K include, without limitation, registration statements under the Securities Act and Exchange Act, annual and other reports under Sections 13 and 15(d) of the Exchange Act, and proxy and information statements under Section 14 of the Exchange Act. Some of these filings include disclosures that are considered furnished and not filed. Therefore, reasoned the Society, the legislative mandate to disclose the pay ratio in any filing described in Item 10(a) of Regulation S-K does not mean that such disclosure must necessarily be “filed.” Section 953(b) of the Dodd-Frank Act only prescribes the type of documents in which pay ratio disclosure should appear and does not dictate whether such disclosure should be furnished or filed.

The Society disagrees with the Commission’s apparent belief that the flexibility afforded by the proposed rules supports treating pay ratio disclosure as filed because the flexibility and use of estimates could reduce some of the difficulties of compiling the required information. Indeed, the Society believes that  the opposite is true, that the flexibility and use of estimates makes filed status inappropriate due to the imprecision of the amounts involved.

Another area where the Society believes that the Commission has adopted an unnecessarily literal approach is its view that “all employees” includes part-time and seasonal employees. The statutory provision should not be read so literally that it includes any employee, regardless of the nature of his or her employment.


Employees. Section 953(b) is silent on the definition of “employees,” and there is no legislative history to support that it was intended to have such an expansive application. Including part-time and seasonal employees will generate higher costs and other compliance burdens and will lead to longer and more complex proxy statements. The Society also argued that including part-time and seasonal employees in the ratio would distort the ratio for companies in industries that rely heavily on seasonal employees during high periods of demand, particularly if the companies are not permitted to annualize the salary data. The same is true for other industries that rely heavily on part-time employees. 

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