As described in our previous alert, SEC Adopts Final CEO Pay Ratio Disclosure Rule, the SEC adopted the final rule requiring CEO pay ratio disclosure in 2015. The CEO pay ratio rule requires public companies to disclose the ratio between the median annual total compensation for all employees of the company (excluding the CEO) and the annual total compensation of the CEO (or equivalent position) for the last completed fiscal year, beginning with the company’s first full fiscal year that begins on or after January 1, 2017.
There have been several regulatory and congressional initiatives to defer or repeal the rule. However, a senior representative of the SEC stated in a speech on September 15, 2017, that the SEC had no plans to delay the compliance date for the rule. It also appears unlikely at this time that Congress will take any action that would defer or repeal the CEO pay ratio rule before its scheduled implementation. Therefore, we recommend that calendar year-end companies work to prepare the CEO pay ratio disclosure in advance of the 2018 proxy season.
Which companies are subject to the CEO pay ratio rule? The CEO pay ratio disclosure rule applies to all companies that are required to provide Summary Compensation Table disclosure under Item 402(c) of Regulation S-K. The final rule therefore does not apply to smaller reporting companies, emerging growth companies, U.S.-Canadian multijurisdictional disclosure system filers, foreign private issuers or registered investment companies.
Newly public companies are not required to provide CEO pay ratio disclosure until the company has been public for at least 12 months beginning on or after January 1, 2017. Emerging growth companies and smaller reporting companies are not required to provide CEO pay ratio disclosure until the first fiscal year commencing on or after the date on which the company ceases to be an emerging growth company or smaller reporting company, as applicable, but not for any fiscal year that begins before January 1, 2017. For example, a company with a calendar year-end that ceases to be an emerging growth company during 2017 would first be required to provide CEO pay ratio disclosure with respect to 2018 compensation in its definitive proxy statement filed in 2019 or, if the company does not file a proxy statement, its annual report on Form 10-K for the year ended December 31, 2018.
Which SEC filings are subject to the CEO pay ratio disclosure rule? The CEO pay ratio disclosure rule applies to any registration statement, proxy or information statement and annual report that requires executive compensation disclosure pursuant to Item 402 of Regulation S-K. However, CEO pay ratio disclosure for a particular year is not required to be disclosed by a company until the filing of its annual report on Form 10-K for its last completed fiscal year (or, if later, its definitive proxy or information statement relating to its next annual meeting). As a result, a company will not be required to include this disclosure in its filings prior to the filing of its Form 10-K annual report in 2018 (or, if later, its definitive proxy or information statement for its subsequent annual meeting).
Next Steps. We recommend that companies continue to prepare to comply with the disclosure requirements of the CEO pay ratio rule, and that companies that have not yet begun this process should consider doing so soon. Among other things, this will require companies to develop the methodology and begin collecting the compensation data that they will use to calculate the CEO pay ratio for the 2018 proxy season. In particular, companies with employees located outside the U.S. or that have a significant number of employees in arrangements other than traditional full-time employment may find the required CEO pay ratio disclosure time-consuming to develop and prepare. Companies should also consider preparing for potential reactions to this disclosure from stockholders, employees and other interested parties as well as the media.