Five developments to follow in 2014 - Pay-ratio disclosure

January 24, 2014

In accordance with the U.S. Dodd-Frank Act, the Securities and Exchange Commission introduced proposed rules in September 2013 to provide for new “pay ratio disclosure” obligations. According to the proposal, every public company would be required to disclose the ratio of the compensation of its principal executive officer (PEO) to the median compensation of its employees in any filings that mandate executive compensation disclosure, such as annual reports, registration statements, and proxy and information statements. Companies would be able to disclose the information either as a ratio or expressed narratively by referring to the multiple that the PEO total compensation amount bears to the median of the annual total compensation amount.

The proposed rule covers “all employees of the registrant”, which means any full-time, part-time, seasonal or temporary worker employed by the registrant or any of its subsidiaries. It does not, however, specify any required calculation methodologies for identifying the median employee in terms of total compensation. Thus, companies would be allowed to select a methodology appropriate to their size and structure as well as their employee compensation practices. In this respect, the SEC proposal indicates that companies could use statistical sampling or other reasonable methods to identify the median compensation. In any case, companies would have to disclose the methodology used to identify the median employee, as well as any material assumptions, adjustments or estimates used to identify the median employee or to determine total compensation.

The final pay ratio rule is expected to be adopted in 2014. If this is indeed the case, companies will provide the pay ratio disclosure for the 2015 fiscal year in disclosure documents filed in 2016.

Canadian companies that are foreign private issuers or MJDS filers in the U.S. are exempted from the pay ratio rule. Still, the developments surrounding the adoption and implementation of the pay ratio rule should be closely monitored in Canada. Experience shows that initiatives seeking to reign-in compensation have influenced Canadian regulators and institutional investors, and pay ratio disclosure has already been the subject of shareholder proposals tabled in Canada in previous years.

This is the second in a series of five posts intended to consider securities regulatory developments to watch in 2014. Watch for the remaining posts over the course of the next week.

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