Pay Ratio Disclosure Rule: The SEC’s Latest Guidance Should Ease Compliance Costs for Companies
Client Memorandum

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On September 21, 2017, the SEC issued guidance to assist companies in their efforts to comply with the pay ratio disclosure requirement mandated by the Dodd-Frank Act. Overall, the guidance should come as a relief to many companies. It came in three parts:

1.  The Commission’s interpretative guidance that clarifies:

  • A basis for excluding independent contractors, by allowing companies to use a widely recognized test that they otherwise use under other laws and regulations to determine whether their workers are “employees;”
  • The ability to use appropriate existing internal records, such as tax or payroll records, in identifying the median employee and in determinations about the inclusion of non-U.S. employees; and
  • The significant flexibility in methodologies available to identify a company's median employee and in calculating his or her annual compensation.

2.  Staff guidance that includes detailed examples illustrating how reasonable estimates and statistical methodologies may be used; and

3.  Updated Compliance and Disclosure Interpretations (C&DIs), which, among other things, withdraws the prior C&DI on independent contractors. 

The issuance of this guidance underscores the need for calendar-year companies to continue their preparations to comply with the pay ratio rule during the 2018 proxy season.