<\/p>\n
Starting in 2018, certain public companies must disclose the ratio of their CEO\u2019s annual compensation to that of its \u201cmedian employee.\u201d The rule allows for significant flexibility in calculating these ratios, leading to widely divergent ratios within the same industry. Therefore, public companies and their investors should tread carefully before they rely on these metrics.<\/p>\n
Complying with the rule<\/p>\n
The pay-ratio disclosure rule applies to all U.S. public companies required to provide Summary Compensation Table disclosures. With limited exceptions, covered companies must disclose pay ratios in annual reports, on Form 10-K, in proxy and information statements, and in registration statements \u2014 if these filings require executive compensation disclosures.<\/p>\n
The rule doesn\u2019t apply to the following companies:<\/p>\n
Smaller reporting companies (SRCs). The Securities and Exchange Commission (SEC) voted unanimously in June 2018 to increase the public float threshold for SRCs to $250 million.<\/p>\n
Emerging growth companies (EGCs). This term generally refers to new public companies with gross revenues under $1 billion in the most recent fiscal year. (The SEC allows a transition period for newly public companies.)<\/p>\n
The rule also exempts registered investment companies, foreign private issuers and Canadian companies filing in the United States pursuant to the Multijurisdictional Disclosure System.<\/p>\n
Calculating pay ratios<\/p>\n
The SEC allows significant leeway in calculating pay ratios to ease the burden of complying with the rule. Companies may choose a process that fits their structure and compensation programs. But they must disclose the methodology used to determine the median employee pay and the estimates used in calculating the pay ratio.<\/p>\n
For example, a company could use a statistically representative sample of its workforce rather than the entire population. Or they could compare only base salary or W-2 wages, excluding from their computations bonuses, overtime, stock options and other forms of compensation.<\/p>\n
Companies also aren\u2019t required to calculate the exact compensation when identifying the median. Rather, the SEC lets them use \u201creasonable estimates.\u201d In addition, the rule allows companies to exclude up to 5% of their non-U.S. workers and to adjust foreign pay to account for differences in the cost of living between regions.<\/p>\n
As a result, the initial round of pay-ratio disclosures published in early 2018 vary widely. For example, a recent study found that ratios disclosed by companies in the financial services industry ranged from 1:1 to 1:429.<\/p>\n
Comparing apples to oranges<\/p>\n
Before relying on pay-ratio disclosures to evaluate compensation practices or cost efficiency, it\u2019s important to compare a company\u2019s process for calculating pay ratios to others used in the same industry. Contact us for more information about pay-ratio disclosures and how a company\u2019s compensation practices measure up.<\/p>\n
\u00a9 2018<\/p>\n","protected":false},"excerpt":{"rendered":"
Starting in 2018, certain public companies must disclose the ratio of their CEO\u2019s annual compensation to that of its \u201cmedian employee.\u201d The rule allows for significant flexibility in calculating these ratios, leading to widely divergent ratios within the same industry. Therefore, public companies and their investors should tread carefully before they rely on these … Continue reading “Use pay-ratio disclosures with caution”<\/span><\/a><\/p>\n","protected":false},"author":3,"featured_media":775,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3,256,11],"tags":[],"class_list":["post-776","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting","category-public-companys","category-sec-compliance"],"_links":{"self":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/776","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/comments?post=776"}],"version-history":[{"count":2,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/776\/revisions"}],"predecessor-version":[{"id":778,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/776\/revisions\/778"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/media\/775"}],"wp:attachment":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/media?parent=776"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/categories?post=776"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/tags?post=776"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}