SHRM Seeks Revisions to CEO-Pay-Ratio Proposal

By Stephen Miller, CEBS Jan 7, 2014

Update: On Aug. 5, 2015, the Securities and Exchange Commission issued a final rule requiring publicly traded companies based in the U.S. to disclose how median employee pay compares with CEO compensation, known as the CEO pay ratio. See the SHRM Online articles SEC Pay-Ratio Rule Spotlights CEO Compensation and Determining CEO Pay Ratio Isn’t So Simple.

​The Society for Human Resource Management (SHRM) submitted comments in December 2013 responding to a proposal by the Securities and Exchange Commission (SEC) that would require public companies to disclose how their chief executives’ compensation compares with that of employees overall. The CEO-pay-ratio proposal would implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

"HR professionals will be instrumental in the administration of any system that analyzes and summarizes an employer's compensation data, such as the pay ratio disclosures required by the proposed rule," wrote Michael P. Aitken, SHRM's vice president for government affairs, in a comment letter submitted to the SEC. He noted several issues in the proposed rule that, if revised, "would further reduce compliance challenges for employers without diminishing the value of the disclosure provided to the commission," as highlighted below.

Employees outside the U.S. The SEC should use only the compensation of workers who are employed within the United States or of those who are paid through a U.S. payroll system to calculate median employee pay. "As a threshold matter, challenges exist in aggregating compensation data over a variety of incompatible payroll systems," Aitken stated. "These challenges may be exacerbated by currency fluctuations."

Moreover, "Compensation practices vary widely in jurisdictions outside of the U.S., and a number of employers across a wide range of industries incorporate unique methods of compensation that are not comparable with U.S. compensation concepts," Aitken said. By eliminating the requirement that employees outside of the U.S. be counted in determining the median employee, therefore, "a number of the most significant compliance burdens would be substantially reduced."

Part-time, seasonal and temporary employees. The proposed rule would prohibit employers from annualizing or adjusting the compensation of non-full-time employees. However, Aitken recommended that the rule allow “employers to annualize the compensation of non-full-time employees." He explained, "If an accommodation for annualizing non-full-time employee compensation is not included in the final rule, the result will be skewed pay ratio data for employers who require an increased number of employees at certain points during the year, or those employers who have emphasized certain benefits through part-time employment positions."

For example, requiring a business with a large retail operation to compare its CEO’s compensation with a median employee pay figure that is determined by including a large number of workers hired for the holiday season "will grossly distort the pay ratio," Aitken pointed out.

Calculation methods. Although the proposed rule's allowance of sampling and reasonable estimates in determining median employee pay should somewhat reduce compliance burdens, "the calculation of the pay ratio will still create significant administrative burdens for employers," Aitken observed. Accordingly, SHRM recommends that the SEC establish a safe-harbor method that provides for estimating median employee compensation, such as through the use of a formula or an algorithm.

"Creation of such a safe harbor would provide employers with a streamlined process for making these determinations that are not excessively burdensome to administer," Aitken wrote. "At the same time, such a safe-harbor methodology would not result in significant distortions of the pay ratio as currently calculated. A safe harbor would also minimize the liability concerns for chief executive officers and chief financial officers in certifying information in public filings."

Date of compliance. Under the rule, the initial compliance period would be the employer's first fiscal year commencing on or after the effective date of the final rule. "Depending on when the final rule becomes effective, the initial compliance period will likely be sufficiently abbreviated such that it may cause employers to incur significant compliance expenses," Aitken stated. "The effect of a short initial compliance period would be magnified for employers with fiscal years that begin shortly after the effective date of the final rule.

SHRM recommends that the initial compliance date be at least two years from the effective date of the final rule. Such a delay would allow employers to gather necessary information, and to review various approaches for compliance."

In addition, complying with the final rule would require companies to develop sophisticated systems and provide extensive training to employees on these systems. "Allowing a two-year delay would significantly decrease the ultimate cost of compliance for employers, reduce the potential for miscalculation, and avoid placing any excessive burden on the employers in order to comply with the final rule," Aitken said.

Furnishing disclosures. Because the rule would mandate that the pay-ratio disclosures be filed in an annual or quarterly report, a company's CEO and chief financial officer would have to certify the accuracy of the disclosures under the Sarbanes-Oxley Act. "Verifying such information to the degree necessary to certify its accuracy will be challenging," Aiken argued. By allowing these disclosures to be "furnished," rather than officially "filed," the SEC would avoid imposing undue liability for CEO and CFO certifications of "information that is inadvertently incomplete or erroneous."

Aitken noted that the SEC has allowed other disclosures to be furnished in situations where the filing of such disclosures would impose undue liability.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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