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Vol. 78 Tuesday,No. 190 October 1, 2013

Part IV

Securities and Exchange Commission

17 CFR Parts 229 and 249Pay Ratio Disclosure; Proposed Rule

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60560 Federal Register / Vol. 78, No. 190/ Tuesday, October 1, 2013/ Proposed Rules

117 CFR 229.303.217 CFR 229.10 et seq.317 CFR 249.220f.415 U.S.C. 78a et seq.

5Public Law 111203, 124 Stat. 1376 (2010), asamended by Public Law 112106,126 Stat. 306(2012).

6Public Law 111203, sec. 953(b), 124 Stat. 1376,1904 (2010), as amended by Public Law 112106,sec. 102(a)(3), 126 Stat. 306, 309 (2012). Section102(a)(3) of the Jumpstart Our Business StartupsAct (the JOBS Act) amended Section 953(b) of theDodd-Frank Act to provide an exemption forregistrants that are emerging growth companies asthat term is defined in Section 3(a) of the ExchangeAct.

715 U.S.C. 77a et seq.

SECURITIES AND EXCHANGECOMMISSION

17 CFR Parts 229 and 249

[Release Nos. 339452; 3470443; File No.S70713]

RIN 3235AL47

Pay Ratio DisclosureAGENCY: Securities and ExchangeCommission.

ACTION: Proposed rule.

SUMMARY: We are proposingamendments to Item 402 of RegulationSK to implement Section 953(b) of theDodd-Frank Wall Street Reform andConsumer Protection Act. Section953(b) directs the Commission to amendItem 402 of Regulation SK to requiredisclosure of the median of the annualtotal compensation of all employees ofan issuer (excluding the chief executive

officer), the annual total compensationof that issuers chief executive officerand the ratio of the median of theannual total compensation of allemployees to the annual totalcompensation of the chief executiveofficer. The proposed disclosure would

be required in any annual report, proxyor information statement or registrationstatement that requires executivecompensation disclosure pursuant toItem 402 of Regulation SK. Theproposed disclosure requirementswould not apply to emerging growthcompanies, smaller reporting companies

or foreign private issuers.DATES: Comments should be received onor before December 2, 2013.

ADDRESSES: Comments may besubmitted by any of the followingmethods:

Electronic Comments

Use the Commissions Internetcomment form (http://www.sec.gov/rules/proposed.shtml); Send an email to rule-comments@

sec.gov.Please include File Number S70713 on the subject line; or Use the Federal Rulemaking ePortal

(http://www.regulations.gov). Follow theinstructions for submitting comments.

Paper Comments

Send paper comments to ElizabethM. Murphy, Secretary, Securities andExchange Commission, 100 F Street NE.,Washington, DC 205491090.

All submissions should refer to FileNumber S70713. This file numbershould be included on the subject lineif email is used. To help us process andreview your comments more efficiently,please use only one method. The

Commission will post all comments onthe Commissions Internet Web site(http://www.sec.gov/rules/

proposed.shtml). Comments are alsoavailable for Web site viewing andprinting in the Commissions PublicReference Room, 100 F Street NE.,Washington, DC 20549, on official

business days between the hours of

10:00 a.m. and 3:00 p.m. All commentsreceived will be posted without change;we do not edit personal identifyinginformation from submissions. Youshould submit only information thatyou wish to make available publicly.

FOR FURTHER INFORMATION CONTACT:Christina L. Padden, Attorney Fellow inthe Office of Rulemaking, at (202) 5513430, in the Division of CorporationFinance; 100 F Street NE., Washington,DC 20549.

SUPPLEMENTARY INFORMATION: We areproposing amendments to Item 402 1 of

Regulation SK2

and a conformingamendment to Form 8K 3 under theSecurities Exchange Act of 1934 (theExchange Act).4

Table of Contents

I. BackgroundA. Section 953(b) of the Dodd-Frank ActB. Comments Received

II. Discussion of the Proposed AmendmentsA. IntroductionB. Scope of Section 953(b) of the Dodd-

Frank Act1. Filings Subject to the Proposed

Disclosure Requirements2. Registrants Subject to the Proposed

Disclosure RequirementsC. Proposed Requirements for Pay Ratio

Disclosure1. New Paragraph (u) of Item 402 (Pay

Ratio Disclosure)2. Employees Included in the Identification

of the Median3. Identifying the Median4. Determination of Total Compensation5. Disclosure of Methodology,

Assumptions and Estimates6. Clarification of the Meaning of Annual7. Timing of Disclosure8. Status as Filed Not FurnishedD. Transition Matters1. Proposed Compliance Date

2. Proposed Transition for New RegistrantsIII. General Request for CommentIV. Economic AnalysisV. Paperwork Reduction ActVI. Small Business Regulatory Enforcement

Fairness ActVII. Regulatory Flexibility Act CertificationVIII. Statutory Authority and Text of

Amendments

I. Background

A. Section 953(b) of the Dodd-Frank Act

Section 953(b) of the Dodd-FrankWall Street Reform and ConsumerProtection Act (the Dodd-Frank Act) 5directs the Commission to amendsection 229.402 of title 17, Code of

Federal Regulations, to require eachissuer, other than an emerging growthcompany, as that term is defined inSection 3(a) of the Securities ExchangeAct of 1934, to disclose in any filing ofthe issuer described in section 229.10(a)of title 17, Code of Federal Regulations(or any successor thereto) the medianof the annual total compensation of allemployees of the issuer, except the chiefexecutive officer (or any equivalentposition) of the issuer; the annual totalcompensation of the chief executiveofficer (or any equivalent position) ofthe issuer; and the ratio of the median

of the total compensation of allemployees of the issuer to the annualtotal compensation of the chiefexecutive officer of the issuer. Section953(b) also requires that the totalcompensation of an employee of anissuer shall be determined inaccordance with section 229.402(c)(2)(x)of title 17, Code of Federal Regulations,as in effect on the day before the dateof enactment of the Dodd-Frank Act.6

We are proposing amendments toimplement Section 953(b). We refer tothis disclosure of the median of theannual total compensation of all

employees of the issuer, the annual totalcompensation of the chief executiveofficer of the issuer and the ratio of thetwo amounts as pay ratio disclosure.

Section 953(b) of the Dodd-Frank Actdoes not amend the Securities Act of1933 (Securities Act) 7 or theExchange Act. Instead, Section 953(b)directs the Commission to amend Item402 of Regulation SK (Item 402) toadd the pay ratio disclosurerequirements mandated by the Dodd-Frank Act. Although Section 953(b)defines some terms used in the

provision, commenters have raisedquestions about the scope of the

http://www.sec.gov/rules/proposed.shtmlhttp://www.sec.gov/rules/proposed.shtmlhttp://www.sec.gov/rules/proposed.shtmlmailto:[email protected]:[email protected]://www.regulations.gov/http://www.regulations.gov/http://www.sec.gov/rules/proposed.shtmlhttp://www.sec.gov/rules/proposed.shtmlhttp://www.sec.gov/rules/proposed.shtmlmailto:[email protected]:[email protected]://www.regulations.gov/http://www.sec.gov/rules/proposed.shtmlhttp://www.sec.gov/rules/proposed.shtmlhttp://www.sec.gov/rules/proposed.shtmlhttp://www.sec.gov/rules/proposed.shtml

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60561Federal Register / Vol. 78, No. 190/ Tuesday, October 1, 2013/ Proposed Rules

8Comments submitted to the Commission inconnection with Section 953(b) are discussedgenerally in Section I.B. and throughout this releaseas they relate to specific aspects of the proposals.

9Comments related to the executivecompensation provisions of the Dodd-Frank Act,including Section 953(b), are available at http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml.Inconnection with Section 953(b), the Commissionreceived approximately 260 unique comment lettersand approximately 22,600 form letters (posted onthe Web site as Letter Type A) as of September 15,2013. The Commission also received a petition(posted on the Web site as Letter Type B) withapproximately 84,700 signatories. In this release,references to comment letters identify thecommenter by the name of the organization orindividual submitting the letter. Letters bycommenters who submitted multiple letters areidentified by date.

10See, e.g., letters from American Bar Association

(ABA); Center on Executive Compensation datedSeptember 10, 2010 (COEC I); Center onExecutive Compensation dated November 11, 2011(COEC II); Davis Polk & Wardwell LLP (DavisPolk); Business Roundtable et al., (Group ofTrade Associations); Society of CorporateSecretaries and Governance Professionals(SCSGP); Greta E. Cowart, Haynes & Boone LLPet al. (Group of Exec. Comp. Lawyers); ProtectiveLife Corporation; Towers Watson; Brian Foley &Co.; and Pay Governance LLC. We discuss thesecosts in detail in Section IV of this release.

11See, e.g., COEC I and letters from Brian Foley& Co.; Group of Trade Associations; MeridianCompensation Partners, LLC; National Associationof Corporate Directors (NACD); and RetailIndustry Leaders Association (RILA).

12See, e.g., letters from AFLCIO dated December13, 2010 (AFLCIO I) and AFLCIO dated August11, 2011 (AFLCIO II); Americans for FinancialReform; Batirente et al. (Group of InternationalInvestors); J. Brown; K. Burgoyne; CalvertInvestment Management; Community ActionCommission; CtW Investment Group; DruckerInstitute; Institute for Policy Studies; R. Landgraf;D. Miron; Social Investment Forum; S. Towns;Trillium Asset Management; UAW Retiree MedicalBenefits Trust; and Walden Asset Management. Seealso Letter Type A. We discuss these benefits indetail in Section IV of this release.

13See, e.g., AFLCIO II and letters from ABA;American Benefits Council; COEC II; Protective LifeCorporation; and Davis Polk.

14 Initially, disclosure requirements for executiveand director compensation were set forth inSchedule A to the Securities Act and Section 12(b)of the Exchange Act, which list the type ofinformation to be included in Securities Act and

Exchange Act registration statements. In 1938, theCommission promulgated its first executive anddirector compensation disclosure rules for proxystatements. See Amended Proxy Rules, Release No.341823 (Aug. 11, 1938) [3 FR 1991].

From time to time thereafter, the Commission hasamended its executive and director compensationdisclosure requirements in light of changing trendsin executive compensation and other issues, and,more recently, to comply with the mandates of theDodd Frank Act. See, e.g., Solicitation of ProxiesUnder the Act, Release No. 343347 (Dec. 18, 1942)[7 FR 10655]; Solicitation of Proxies, Release No.344775 (Dec. 11, 1952) [17 FR 11431]; Uniformand Integrated Reporting Requirements:Management Remuneration, Release No. 336003(Dec. 4, 1978) [43 FR 58181]; Disclosure ofExecutive Compensation, Release No. 336486(Sept. 23, 1983) [48 FR 44467]; ExecutiveCompensation Disclosure, Release No. 336962(Oct. 16, 1992) [57 FR 48126]; ExecutiveCompensation Disclosure; Securityholder Lists andMailing Requests, Release No. 337032 (Nov. 22,1993) [58 FR 63010]; Executive Compensation andRelated Person Disclosure, Release No. 338732A(Aug. 29, 2006) [71 FR 53158] (2006 AdoptingRelease); Proxy Disclosure Enhancements, ReleaseNo. 339089A (Dec. 16, 2009) [74 FR 68334]; andShareholder Approval of Executive Compensationand Golden Parachute Compensation, Release No.339178 (Jan. 25, 2011)[76 FR 6010].

15Although the group of covered individuals forwhom disclosure is required has changed over time,the rules generally have sought to requirecompensation disclosure for persons who, in fact,function as key, policy-making members ofmanagement. Uniform and Integrated ReportingRequirements: Management Remuneration, ReleaseNo. 335950 (July 28, 1978) [43 FR 34415], at34416.

16See letter from Davis Polk. See also letter fromR. Morrison.

17See letter from Protective Life (noting thatvery few employers routinely determine certainitems of compensation for individual rank and fileemployees, notably the values of stock and stockoption awards and the aggregate change in theactuarial present value of defined benefit pensionplan accruals. For most employers, determiningthese amounts will require, for the first time,calculations for all (or a large subset) of theiremployees). See also COEC I (No public companycurrently calculates each employees totalcompensation as it calculates total pay on theSummary Compensation Table for the named

Continued

statutory requirements and the need foradditional interpretive guidance.8

B. Comments Received

In connection with rulemakingsimplementing the Dodd-Frank Act, wehave sought comment from the public

before the issuance of a proposingrelease. With respect to Section 953(b)

of the Dodd-Frank Act, as of September15, 2013, we have receivedapproximately 22,860 comment lettersand a petition with approximately84,700 signatories.9 We have consideredthese comments in proposing the rulesdescribed in this release.

Commenters were divided in theirrecommended approaches to Section953(b) and the implementation issues itraises. Comments from industry groups,issuers, law firms and executivecompensation professionals generallyraised concerns about the complexity ofthe Section 953(b) requirements, thesignificant compliance costs that could

be involved and the potential inabilityfor many companies to verify theaccuracy of their disclosure.10 Thesecommenters generally asserted that thistype of disclosure would not be materialto investors or useful to an investmentor voting decision, and they disputedthe potential benefits cited bycommenters who supported theprovision.11 Comments from individualand institutional investors and some

public policy organizations generallyoutlined what they expected to be the

benefits of the mandated informationand urged the Commission toimplement the provision in a way thatwould preserve those benefits.12Notwithstanding these differingviewpoints, several commenterssupported a flexible approach to

implementation that would retain thepotential benefits of the mandateddisclosure, while avoiding theadditional compliance costs that a lessflexible approach could impose.13

We discuss the concerns andrecommendations from the commentersin more detail throughout this release.We agree with commenters that,depending on how Section 953(b) isimplemented, the cost of compliancewith these new disclosure requirementscould be, at least for some registrants,substantial. The rules we are proposingare intended to address commenters

concerns and are designed to lower thecost of compliance while remainingconsistent with Section 953(b).

II. Discussion of the ProposedAmendments

A. Introduction

Section 953(b) imposes a newrequirement on registrants to disclosethe median of the annual totalcompensation of all employees(excluding the chief executive officer),the annual total compensation of thechief executive officer and the ratio ofthe median disclosed to the annual total

compensation of the chief executiveofficer. Section 953(b)(2) specifies that,for purposes of Section 953(b), the totalcompensation of an employee of anissuer shall be determined inaccordance with Item 402(c)(2)(x) ofRegulation SK. The Commissionsrules for compensation disclosure havetraditionally focused on thecompensation of executive officers anddirectors.14 Although registrants subject

to Item 402 are required to provideextensive information about thecompensation of the principal executiveofficer (PEO) and other namedexecutive officers identified pursuant toItem 402(a), current disclosure rulesgenerally do not require registrants todisclose detailed compensationinformation for other employees in their

filings with the Commission.15Commenters have observed that,

because of the complexity of therequirements of Item 402(c)(2)(x),registrants typically compileinformation required by Item 402(c)manually for the named executiveofficers, which they have stated takessignificant time and resources.16 We donot expect that many registrants, if any,currently disclose or track totalcompensation as determined pursuantto Item 402 for their workforce.17

http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtmlhttp://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtmlhttp://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtmlhttp://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtmlhttp://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtmlhttp://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml

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executive officers, because disclosure of executivepay has a different purpose than internalaccounting.); and letter from R. Morrison(Collecting, organizing, and analyzing this kind ofdata for all employees in order to develop a mediancomp figure would be extremely complex, time-consuming, and burdensome, assuming this is evenpossible.).

18 Total compensation as determined pursuantto Item 402 is not an amount that is reported orcalculated in connection with a registrantsfinancial statements.

19See, e.g., FASB ASC 710, CompensationGeneral;ASC 715, Retirement BenefitsCompensation;ASC 960, Defined Benefit PensionPlans;ASC 962, Defined Contribution PensionPlans;ASC 965, Health and Welfare Benefit Plans;and ASC 718, CompensationStock Compensation.

20For example, registrants that are subject to theUnited States Internal Revenue Code [26 U.S.C. 1et seq.] are required to report certain compensationinformation for each employee to the InternalRevenue Service, typically on Form W2. Theelements of compensation that are required to becalculated and reported on Form W2 are not thesame as those covered by Item 402 requirements,and the reported amounts relate to the relevantcalendar year for tax purposes, rather than theregistrants fiscal year.

Additionally, the compensation required to bedisclosed under Item 402 reflects the compensationthat was awarded to, earned by or paid to theexecutive officer during the fiscal year in contrastto compensation reported on Form W2, whichreflects only compensation that was includible inincome for income tax purposes during the calendaryear regardless of when that compensation wasearned. For example, under Item 402, the value ofstock options, deferred salary and bonuses wouldbe included in compensation in the period theywere awarded or earned. In contrast, for purposesof Form W2, income from stock options isgenerally included in income at the time ofexercise, and income relating to deferred salary andbonuses is included only when those amounts areactually paid, which could be in a future year.

21See, e.g., letters from Davis Polk (noting thatcompliance will be highly costly and burdensome,with tremendous uncertainty as to accuracy.Companies are justifiably concerned about the costsand burdens to accomplish the formidable datacollection and calculation tasks for employeesworldwide between the end of the year and the firstrequired filing.); Frederick W. Cook & Co., Inc.(stating, the calculation of median total pay for allemployees other than the CEO is problematic,burdensome and perhaps impossible for manyissuers) and Protective Life Corporation (It isdifficult to overemphasize how burdensome thisrequirement could be for large employers.Calculating annual total compensation is much

more complicated than simply adding up numbersthat companies already have available. . . . Sincemany large companies use outside accounting,actuarial nd compensation and pensionadministration firms to perform these calculations,the costs of disclosure will increase accordingly.).See also letters from ABA; COEC I; Group of Exec.Comp. Lawyers; Group of Trade Associations;Meridian Compensation Partners, LLC; NACD; andR. Morrison.

22See, e.g., letter from Group of TradeAssociations (There is a widespreadmisconception that this information is readilyavailable at the touch of a button.) See also COECII and letters from Group of Exec. Comp. Lawyers;Meridian Compensation Partners, LLC; and R.Morrison.

23The requirements imposed by Section 953(b)originated in the Senate. A provision identical toSection 953(b) was first included in S. 3049, the

Corporate Executive Accountability Act of 2010,which was sponsored by Senator Menendez andintroduced on February 26, 2010. In that bill, theprovision accompanied a say-on-pay provision. Aprovision identical to Section 953(b) next appearedin S. 3217, the Restoring American FinancialStability Act of 2010 sponsored by Senator Doddand introduced on April 15, 2010, which served asthe basis for the Senates amendments to H.R. 4173.The legislative record includes only a few briefreferences to the pay ratio disclosure requirements,each opposing the provision. See 156 Con. Rec.S3121 (daily ed. May 5, 2010) (statement of Sen.Gregg) and 156 Cong. Rec. S4075 (daily ed. May 20,2010) (statement of Sen. Shelby). The April 30,2010 report issued by the Senate Committee onBanking, Housing and Urban Affairs does notmention the pay ratio requirements other than ashort statement by the minority. See Report of the

Senate Committee on Banking, Housing and UrbanAffairs to Accompany S. 3217 (the SenateReport), S. Rep. No. 111176, at 245.

The requirements of Section 953(b) were notdiscussed during the conference committeesdeliberations on the legislation. Similarly, the JointExplanatory Statement of the Committee ofConference does not mention the pay ratiorequirements in its summary of Title IX, Subtitle E.See Conference Report on H.R. 4173, H. Rep. No.111517, at 872.

24See, e.g., letters from Americans for FinancialReform (Existing requirements mandate disclosureof top executive compensation only, encouragingcompanies to focus unduly on peer to peercomparisons when setting CEO pay. . . .Disclosure of CEO-to-worker pay ratios willencourage Boards of Directors to also considervertical pay equity within firms.); Calvert

Investment Management (The disclosure requiredby Section 953(b) will help investors understandhow issuers are distributing compensation dollarsthroughout the firm in ways that may help improveemployee morale and productivity.); CtWInvestment Group (The new disclosure offers aninsight into compensation within the entireorganization, and provides a different way forboards and shareholders to evaluate the relativeworth of a CEO.); and UAW Retiree MedicalBenefits Trust ([W]e view Section 953(b) as anessential tool that will increase corporate boardaccountability to investors . . . a comparisonbetween CEO and employee pay may helpshareholders identify the boards strengths andweaknesses, and may provide insight into [theboards] relationship with the CEO.).

Registrants are required to presentvarious elements of employeecompensation, on an aggregate basis, inthe relevant line items of their financialstatements and related footnotes (suchas accrued payroll and benefits amountsrecorded in current liabilities on the

balance sheet, or salary and bonusamounts included in selling and

administrative expenses or cost of goodssold on the income statement).18 Theseamounts are calculated and presented inaccordance with the comprehensive setof accounting principles that theregistrant uses to prepare its primaryfinancial statements. For example,under United States generally acceptedaccounting principles (U.S. GAAP),there are several accounting standardsthat relate to compensation,19 and thesestandards are distinct from theCommissions executive compensationdisclosure rules. In addition, theCommissions executive compensation

disclosure rules differ from taxaccounting and reporting standards.20Therefore, Section 953(b) requiresregistrants to disclose specificinformation about non-executiveemployee compensation that is not

currently required for disclosure,accounting or tax purposes.

Many commenters raised concernsabout the significant compliance coststhat could result from requiring the useof total compensation as defined inItem 402(c)(2)(x) to calculate employeepay and requiring registrants to identifythe median instead of the average.21

According to these commenters, theprimary driver of the significantcompliance costs is that manyregistrants, whether large multinationalsor companies of modest revenue sizeand market capitalization, maintainmultiple and complex payroll, benefitsand pension systems (including systemsmaintained by third partyadministrators) that are not structured toeasily accumulate and analyze all thetypes of data that would be required tocalculate the annual total compensationfor all employees in accordance withItem 402(c)(2)(x). Thus, in order to

compile such disclosure, registrantswould either need to integrate thesedata systems or consolidate the datamanually, which, in both cases, would

be, according to these commenters,highly costly and time consuming.22

The proposed rules to implementSection 953(b) are designed to complywith the statutory mandate and toaddress commenters concerns regardingthe potential costs of complying withthe disclosure requirement. Where wehave exercised discretion inimplementing the statutoryrequirements, we are proposingalternatives that we believe will reduce

costs and burdens, while preservingwhat we believe to be the potential

benefits, as articulated by commenters,of the disclosure requirement mandated

by the Dodd-Frank Act. We note,however, that neither the statute nor therelated legislative history directly statesthe objectives or intended benefits of theprovision.23 Commenters supportingSection 953(b) have emphasized thatpotential benefits could arise fromadding pay ratio-type information to thetotal mix of executive compensationinformation.24 We have considered thestatutory mandate of Section 953(b) inthe context of other executivecompensation disclosure under Item402, and, where practicable, we havesought to make the mandated disclosureof Section 953(b) work with the existingexecutive compensation disclosureregime.


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25The potential costs arising from therequirements of Section 953(b), as well as thepotential costs relating to the proposed rules, arediscussed in detail below in Section IV of thisrelease.

2617 CFR 249.310.27Registrants would follow the instructions in

each form to determine whether Item 402information is required, including any instructionsthat allow for the omission of Item 402 informationin certain circumstances, such as GeneralInstructions I(2)(c) and J(1)(m) to Form 10Kcontaining special provisions for the omission of

Item 402 information by wholly-owned subsidiariesand asset-backed issuers.

As described below in Section II.C.7., theproposed requirements do not require a registrantto update its pay ratio disclosure for the mostrecently completed fiscal year until it files itsannual report on Form 10K, or, if later, its proxyor information statement for its next annual meetingof shareholders (or written consents in lieu of such

a meeting).In addition, we are proposing a transition period

for compliance by new registrants that are subjectto Section 953(b), so that the pay ratio requirementis not required in a registration statement on FormS1 [17 CFR 239.11] or Form S11 [17 CFR 239.18]for an initial public offering or registrationstatement on Form 10 [17 CFR 249.210]. SeeSection II.D.2. of this release.

28See, e.g., COEC I and letters from AmericanBenefits Council; Compensia, Inc.; Davis Polk;SCSGP; and Towers Watson.

29See, e.g., letters from ABA and RILA.30See, e.g., AFLCIO I, House Letter and Senate

Letter; and letters from CtW Investment Group andUAW Retiree Medical Benefits Trust.

In light of the significant potentialcosts articulated by commenters,25 we

believe that it is appropriate for theproposed rules to allow registrantsflexibility in developing the disclosurerequired by the statute. The proposalseeks to implement Section 953(b)without imposing additionalprescriptive requirements that are not

mandated by the Dodd-Frank Act andreflects our consideration of the relativecosts and benefits of this approach asopposed to a more prescriptive one. Forexample, registrants would be able tochoose from several options in order toprovide the disclosure. Registrants maychoose to identify the median usingtheir full employee population or byusing statistical sampling or anotherreasonable method. In doing so, theproposed requirements would allowregistrants to choose a statistical methodto identify the median that isappropriate to the size and structure of

their own businesses and the way inwhich they compensate employees,rather than prescribing a particularmethodology or specific computationparameters. Registrants may calculatethe annual total compensation for eachemployee included in the calculation(whether the entire population or astatistical sample) and the PEO usingItem 402(c)(2)(x) and to identify themedian using this method. As analternative, registrants may identify themedian employee based on anyconsistently applied compensationmeasure and then calculate the annual

total compensation for that medianemployee in accordance with Item402(c)(2)(x). The proposed requirementsalso would permit registrants to usereasonable estimates in calculating theannual total compensation foremployees other than the PEO,including when disclosing the annualtotal compensation of the medianemployee identified using a consistentlyapplied compensation measure. We

believe that this flexible approach isconsistent with Section 953(b) andcould ease commenters concerns aboutthe potential burdens of complying withthe disclosure requirement. We do not

believe that a one-size-fits-all approachwould be prudent, given the wide rangeof registrants and the disparate burdenson registrants based on factors such astheir type of business and thecomplexity of their payroll systems. Weseek comment on whether the proposedrules address sufficiently the practical

difficulties of data collection andwhether there are other alternativeapproaches consistent with Section953(b) that could provide the potential

benefits of pay ratio information at alower cost. We also seek comment onwhether the flexible approach proposedin this release appropriately implementsSection 953(b).

The details of the proposal are setforth in the sections below. First, weinterpret the scope of Section 953(b)with respect to the filings and theregistrants that are subject to theproposed requirements. Next, we setforth the proposed new pay ratiodisclosure requirement in Item 402, to

be designated paragraph (u), andprovide details on a variety of technicaland interpretive issues, including: The employees that are to be

included in the identification of themedian; identifying the median;

determining total compensation; disclosure of the methodology,

assumptions and estimates used; the meaning of annual in the

context of annual total compensation; various timing matters that arise in

connection with the proposedrequirements; and the status of the disclosure as

filed rather than furnished.

Finally, we address transition matters,including the proposed compliance datefor registrants that would be subject tothe rules, and proposed transitionprovisions for new registrants.

B. Scope of Section 953(b) of the Dodd-Frank Act

1. Filings Subject to the ProposedDisclosure Requirements

In accordance with Section 953(b) ofthe Dodd-Frank Act, we are proposingto require registrants to include payratio disclosure in any filing describedin Item 10(a) of Regulation SK thatrequires executive compensationdisclosure under Item 402 of RegulationSK. Therefore, the proposed pay ratiodisclosure would be required in annualreports on Form 10K,26 registration

statements under the Securities Act andExchange Act, and proxy andinformation statements, to the sameextent that the requirements of theseforms require compliance with Item402.27 We are not proposing changes to

the requirements of these forms relatingto Item 402. Section 953(b) does notdirect the Commission to amend any ofits forms to add the pay ratio disclosurerequirements to filings that do notalready require disclosure of Item 402information, and we are not proposingto do so.

Although some commenters suggested

that Section 953(b)(1) requires pay ratiodisclosure in every Commission filing,28other commenters suggested that thestatute, by referring to filings describedin Item 10(a) of Regulation SK, isintended to apply only to those filingsfor which the applicable form requiresItem 402 disclosure.29 We agree with thelatter reading of Section 953(b). We

believe that reading Section 953(b) torequire pay ratio disclosure in filingsthat do not contain other executivecompensation information would notpresent this information in a meaningfulcontext. Because some commenters have

asserted that the pay ratio disclosurewould provide another metric toevaluate executive compensationdisclosure,30 we believe that theproposed pay ratio disclosure should beplaced in context with other executivecompensation disclosure, such as thesummary compensation table required

by Item 402(c) and the compensationdiscussion and analysis required byItem 402(b), rather than provided on astand-alone basis. Therefore, we believeit is appropriate to read Section 953(b)as requiring pay ratio disclosure in onlythose filings that are required to includeother Item 402 information.

Request for Comment

1. Should we require the pay ratiodisclosure only in filings in which Item402 disclosure is required, as proposed?Should we require the pay ratiodisclosure in Commission forms that do


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3115 U.S.C. 78c(a).32See proposed Instruction 6 to Item 402(u).3317 CFR 229.10(f)(1).

34See Item 402(l). Smaller reporting companiesare permitted to choose compliance with either thescaled disclosure requirements or the largercompany disclosure requirements on an a la cartebasis. As discussed in the scaled disclosureadopting release, the staff evaluates compliance bysmaller reporting companies with only theRegulation SK requirements applicable to smallerreporting companies, even if the company choosesto comply with the larger company requirements.See Smaller Reporting Company Regulatory Reliefand Simplification, Release No. 338876 (Dec. 19,2007) [73 FR 934], at 941.

35Specifically, under Item 402(n)(2)(viii), smallerreporting companies are not required to include theaggregate change in the actuarial present value ofpension benefits that is required for companiessubject to Item 402(c)(2)(viii).

36The term MJDS filers refers to registrants thatfile reports and registration statements with the

Commission in accordance with the requirements ofthe U.S.- Canadian Multijurisdictional DisclosureSystem (the MJDS). The definition for foreignprivate issuer is contained in Exchange Act Rule3b4(c) [17 CFR 240.3b4(c)]. A foreign privateissuer is any foreign issuer other than a foreigngovernment, except for an issuer that, as of the lastbusiness day of its most recent fiscal year, has morethan 50% of its outstanding voting securities heldof record by United States residents and any of thefollowing: A majority of its officers and directorsare citizens or residents of the United States, morethan 50% of its assets are located in the UnitedStates, or its business is principally administered inthe United States.

not currently require Item 402disclosure? If so, which forms, andwhy? Would disclosure be meaningfulto investors where no other executivecompensation disclosures are required?

2. Do registrants need any additionalguidance about which filings wouldrequire the proposed pay ratiodisclosure? Are there circumstances

where the requirements of a particularform call for Item 402 information incertain circumstances, but theapplicability of the proposed pay ratiodisclosure requirements may not beclear? If so, please provide details aboutwhat should be clarified and whatguidance is recommended.

2. Registrants Subject to the ProposedDisclosure Requirements

The proposed pay ratio disclosurerequirements would apply to only thoseregistrants that are required to providesummary compensation table disclosure

pursuant to Item 402(c). We recognizethat the reference to each issuer inSection 953(b) could be read to apply toall issuers that are not emerging growthcompanies, including smaller reportingcompanies and foreign private issuers.As a result of the specific reference inSection 953(b) to the definition of totalcompensation contained in Item402(c)(2)(x), and the absence ofdirection to apply this requirement tocompanies not previously subject toItem 402(c) requirements, we propose tolimit the pay ratio disclosurerequirement to registrants that aresubject to Item 402(c) requirements, asdescribed in more detail below.

a. Emerging Growth Companies Are NotCovered

Under JOBS Act Section 102(a)(3),registrants that qualify as emerginggrowth companies, as that term isdefined in Section 3(a) of the ExchangeAct,31 are not subject to Section 953(b).To give effect to the statutoryexemption, we are proposing aninstruction to Item 402(u) that providesthat a registrant that is an emerginggrowth company is not required tocomply with Item 402(u).32

b. Smaller Reporting Companies AreNot Covered

Section 953(b) requires totalcompensation to be calculated inaccordance with Item 402(c)(2)(x).Smaller reporting companies (as definedin Item 10(f)(1) of Regulation SK) 33 arepermitted to follow the scaleddisclosure requirements set forth in

Items 402(m)(r) instead of complyingwith the disclosure requirements setforth in Items 402(a)(k) and (s),34 andtherefore are not required to calculatecompensation in accordance with Item402(c)(2)(x). The requirement set forthin Item 402(n) for disclosure ofsummary compensation tableinformation, which includes disclosure

of total compensation, does notrequire smaller reporting companies toinclude all of the same types ofcompensation required to be includedin total compensation for otherregistrants under Item 402(c)(2).35 We

believe that by requiring the use of Item402(c)(2)(x) to calculate totalcompensation (without mention of Item402(n)(2)(x)), Congress intended toexclude smaller reporting companiesfrom the scope of Section 953(b). Inaddition, requiring smaller reportingcompanies to provide the pay ratiodisclosure consistent with the

requirement for other registrants wouldrequire smaller reporting companies tocollect data and calculate compensationfor the PEO in a manner they otherwisewould not be required to calculatecompensation. Thus, we do not believethis is the intent of the provision.

Therefore, as proposed, the pay ratiodisclosure requirements would notapply to smaller reporting companies.To make this clear, we are proposing atechnical amendment to paragraph (l) ofItem 402, to add proposed paragraph (u)to the list of items that are not requiredfor smaller reporting companies.

c. Foreign Private Issuers and MJDSFilers Are Not Covered

Foreign private issuers that fileannual reports and registrationstatements on Form 20F and MJDSfilers that file annual reports andregistration statements on Form 40Fwould not be required to provide theproposed pay ratio disclosure, becausethose forms do not require Item 402disclosure.36 We do not read Section

953(b) as requiring the Commission toexpand the scope of Item 402 to applyto companies that are not currentlysubject to the executive compensationdisclosure requirements set forth in Item402. Accordingly, we are not proposingto amend Form 20F or Form 40F, andthe proposed pay ratio disclosurerequirements would not be applicable to

foreign private issuers or MJDS filers. Inaddition, we are not proposing anychanges to existing Item 402(a)(1),which provides for the treatment offoreign private issuers. Accordingly,foreign private issuers that file annualreports on Form 10K will continue to

be able to satisfy Item 402 requirementsby following the requirements of Items6.B and 6.E.2 of Form 20F and wouldnot be required to make the pay ratiodisclosure mandated by Section 953(b).In addition, requiring foreign privateissuers and MJDS filers to provide thepay ratio disclosure consistent with the

requirement for other registrants wouldrequire these registrants to collect dataand calculate compensation for the PEOin a manner they otherwise would not

be required to calculate compensation.Thus, we do not believe this is theintent of the provision.

Request for Comment

3. Should the pay ratio disclosurerequirements, as proposed, apply onlyto those registrants that are required toprovide summary compensation tabledisclosure pursuant to Item 402(c)? Ifnot, to which registrants should payratio disclosure requirements apply?

4. Should we revise the proposal sothat smaller reporting companies would

be subject to the proposed pay ratiodisclosure requirements? If so, why? Ifso, also discuss how smaller reportingcompanies should calculate totalcompensation for employees and thePEO. For example, should they berequired to calculate total compensationin accordance with Item 402(c)(2)(x)instead of the scaled disclosurerequirements? In the alternative, shouldsmaller reporting companies be requiredto provide a modified version of the payratio disclosure? If so, why, and what

should that modified version entail?


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37The term chief executive officer in theexecutive compensation rules was replaced by theterm principal executive officer as part of the2006 amendments to Item 402 of Regulation SK in

order to maintain consistency with thenomenclature used in Item 5.02 of Form 8K. See2006 Adopting Release, supra note 14, at n. 326.

38See letters from Compensia, Inc. (Forexample, if the annual total compensation of acompanys chief executive officer was $3,750,000and the median of the annual total compensationof all employees was $75,000, then as currentlyformulated, the required disclosure would be 0.02to 1, rather than the commonly understoodcalculation of 50 to 1.); Frederick W. Cook & Co.,Inc.; and Group of Exec. Comp. Lawyers (Forexample, if CEO pay were 2 million and the medianannual compensation of all employees were$25,000, the statute literally requires a disclosurethat the median annual compensation of allemployees is 1/80 of the CEOs pay.).

39Average salary for all occupations, U.S. Bureauof Labor Statistics, May 2012 National OccupationalEmployment and Wage Estimates United States,available athttp://www.bls.gov/oes/current/oes_nat.htm#00-0000.

40Derived from 2012 Average CEO at S&P 500Index Companies, AFLCIO, Trends in CEO Pay,available athttp://www.aflcio.org/Corporate-Watch/CEO-Pay-and-the-99/Trends-in-CEO-Pay.

41The commenters asserting that Section 953(b)disclosure would be useful to investors did notraise the order of the ratio components as a factorthat would diminish the meaningfulness of theinformation. These commenters are listed at notes155 through 165, infra.

42By directing the Commission to amend Item402, we believe that Section 953(b) is intended tocover employees on an enterprise-wide basis,including both the registrant and its subsidiaries,which is the same approach as that taken for otherItem 402 information. See Item 402(a)(2) andInstruction 2 to Item 402(a)(3). Because this issue

Continued

Should it be based on the compensationamounts required under the scaleddisclosure requirements applicable tosmaller reporting companies, such as aratio where the PEO compensation andother employee compensation arecalculated in accordance with Item402(n)(2)(x)? Please provide informationas to particular concerns that smaller

reporting companies may have. Pleasediscuss whether the disclosure would

be useful to investors in smallerreporting companies.

5. Should we amend either Form 20F or Form 40F to include disclosurethat is similar to the proposed pay ratiodisclosure requirements? If so, why?Assuming we would not otherwisesubject foreign private issuers to theexecutive compensation disclosurerules, what modifications would beneeded to address the differentreporting requirements that foreignprivate issuers and MJDS filers have for

executive compensation disclosure inorder to require pay ratio disclosure? Inparticular, how should these registrantscalculate total compensation (for thePEO and for employees) for purposes ofsuch a requirement? Please provideinformation as to particular concernsthat foreign private issuers or MJDSfilers may have if they were required tocomply with such a requirement. Pleasediscuss whether the disclosure would

be useful to investors, particularly in theabsence of the executive compensationdisclosure that would accompanydisclosure of the ratio for registrants

subject to Item 402 disclosure.C. Proposed Requirements for Pay RatioDisclosure

1. New Paragraph (u) of Item 402 (PayRatio Disclosure)

We are proposing new paragraph (u)of Item 402 that would requiredisclosure of:

(A) The median of the annual totalcompensation of all employees of theregistrant, except the principalexecutive officer of the registrant;

(B) the annual total compensation ofthe principal executive officer of the

registrant; and(C) the ratio of the amount in (A) to

the amount in (B), presented as a ratioin which the amount in (A) equals oneor, alternatively, expressed narrativelyin terms of the multiple that the amountin (B) bears to the amount in (A).

For consistency with existing Item402 requirements, the proposedrequirements would use the definedterm PEO (principal executiveofficer), instead of the term chiefexecutive officer used in Section

953(b).37 PEO is defined in Item402(a)(3) as an individual serving asthe registrants principal executiveofficer or acting in a similar capacityduring the last completed fiscal year.We believe that this consistency wouldsimplify compliance for registrants andwould clarify how the pay ratiodisclosure relates to the PEOs total

compensation figure disclosed in thesummary compensation table. We also

believe that this change in terminologyis consistent with Section 953(b).

Section 953(b) specifies thatregistrants must disclose the ratio of themedian of the annual totalcompensation of all employees to thePEOs annual total compensation. Wenote that three commenters raisedconcerns about the presentation of thepay ratio in the order set forth inSection 953(b).38 These commentersnoted that the customary manner ofpresenting similar types of ratios would

include the PEOs annual totalcompensation in the numerator and themedian of the annual totalcompensation of all employees in thedenominator and would typically beexpressed in terms of the multiple thatthe PEO amount bears to the medianamount (such as PEO pay is X timesthe median employee pay). Thesecommenters recommended that weallow registrants to present the ratio inthis more customary manner.

Although Section 953(b) calls for aratio showing the median of the annualtotal compensation of all employees tothe PEOs annual total compensation, it

does not specify how the ratio should beexpressed. In order to promoteconsistent presentation and address thepotential for confusion, the proposedpay ratio disclosure requirementsspecify that the ratio must be expressedas a ratio in which the median of theannual total compensation of allemployees is equal to one, or,alternatively, expressed narratively interms of the multiple that the PEO total

compensation amount bears to themedian of the annual totalcompensation amount. For example, ifthe median of the annual totalcompensation of all employees of aregistrant is $45,790,39 and the annualtotal compensation of a registrants PEOis $12,260,000,40 then the pay ratiodisclosed would be 1 to 268 (which

could also be expressed narratively asthe PEOs annual total compensation is268 times that of the median of theannual total compensation of allemployees).

We believe that the proposedrequirements for the expression of theratio would help to address theconcerns of commenters and areconsistent with the statute. It does notappear that the order of the ratiospecified in Section 953(b) wouldimpact investor understanding or theusefulness, as expressed by somecommenters,41 to investors of the

proposed pay ratio disclosure.Request for Comment

6. Are there any other presentationissues that companies need guidance onor that should be clarified in the payratio disclosure requirements? If so,please provide details about such issuesand any recommended guidance thatshould be provided.

2. Employees Included in theIdentification of the Median

a. All Employees

Section 953(b) expressly requires

disclosure of the median of the annualtotal compensation of all employees.Consistent with that mandate, theproposed requirements state thatemployee or employee of theregistrant includes any full-time, part-time, seasonal or temporary workeremployed by the registrant or any of itssubsidiaries 42 (including officers other

http://www.bls.gov/oes/current/oes_nat.htm#00-0000http://www.bls.gov/oes/current/oes_nat.htm#00-0000http://www.bls.gov/oes/current/oes_nat.htm#00-0000http://www.aflcio.org/Corporate-Watch/CEO-Pay-and-the-99/Trends-in-CEO-Payhttp://www.aflcio.org/Corporate-Watch/CEO-Pay-and-the-99/Trends-in-CEO-Payhttp://www.bls.gov/oes/current/oes_nat.htm#00-0000http://www.bls.gov/oes/current/oes_nat.htm#00-0000http://www.aflcio.org/Corporate-Watch/CEO-Pay-and-the-99/Trends-in-CEO-Payhttp://www.aflcio.org/Corporate-Watch/CEO-Pay-and-the-99/Trends-in-CEO-Pay

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was not addressed by commenters, we specificallyrequest comment below on this approach.

In the context of Item 402 disclosure, a subsidiaryof a registrant is an affiliate controlled by theregistrant directly or indirectly through one or moreintermediaries, as set forth in the definition ofsubsidiary under both Securities Act Rule 405and Exchange Act Rule 12b2. Therefore, forpurposes of the proposed pay ratio disclosure, anemployee would be covered by the disclosurerequirements if he or she is employed by theregistrant or a subsidiary of the registrant as definedin Rule 405 and Rule 12b2.

43Rule 405 under the Securities Act states thatthe term employee does not include a director,trustee or officer. The parenthetical (includingofficers other than the PEO) in Item 402(u)(3) ofthe proposed rules is intended to clarify thatofficers, as that term is defined under Rule 405, arenot excluded from the definition of employee forpurposes of the proposed pay ratio disclosurerequirements.

44For example, if a registrant pays a fee toanother company (such as a management companyor an employee leasing agency) that suppliesworkers to the registrant, and those workers receivecompensation from that other company, thoseworkers would not be counted as employees of theregistrant for purposes of the proposed rules.

45See AFLCIO I and letters from Americans forFinancial Reform; CtW Investment Group; Group ofInternational Investors; Senator Menendez; SocialInvestment Forum; Trillium Asset Management;UAW Medical Benefits Trust; and Walden AssetManagement.

46See COEC I and letters from ABA; AmericanBenefits Council; Brian Foley & Co.; Group of Exec.Comp. Lawyers; NACD; Protective Life Corporation;RILA; SCSGP; and Towers Watson.

47See COEC I and letters from ABA; AmericanBenefits Council; Brian Foley & Co.; Group of Exec.Comp. Lawyers; NACD; Protective Life Corporation;RILA; SCSGP; and Towers Watson.

48See, e.g., letter from Group of Exec. Comp.Lawyers.

49 Id.50See letter from Senator Menendez, the sponsor

of Section 953(b) (Specifically, I want to clarifythat when I wrote all employees of the issuer, Ireally did mean all employees of the issuer. Iintended that to mean both full-time and part-timeemployees, not just full-time employees. I alsointended that to mean all foreign employees of thecompany, not just U.S. employees.).

51See AFLCIO I and letters from Americans forFinancial Reform; CtW Investment Group; Group ofInternational Investors; Institute for Policy Studies;and UAW Medical Benefits Trust. But see letter

from Social Investment Forum ([W]e acknowledgethat a comparison of a U.S. CEOs pay to the medianfor U.S. employees is the most useful comparisonas a factor for the compensation committee inestablishing executive pay packages.) and letterfrom Walden Asset Management ([F]or thepurposes of analyzing trends in executive pay forU.S. executives, statistics comparing compensationof NEOs to the median U.S. employee [are] mostuseful.).

52See AFLCIO I and letters from Americans forFinancial Reform; Walden Asset Management; andSocial Investment Forum (We recommend that theSEC require two statistics, one on pay disparitywith only U.S. workers and another for non-U.S.workers so that investors can better study paydisparity trends and inherent risks.).

53See COEC II and letters from Davis Polk; Groupof Exec. Comp. Lawyers; and SCSGP.

54The EU Directive 95/46/EC, 1995 O.J. L 281(European Union Directive on the Protection ofIndividuals with Regard to the Processing ofPersonal Data and on the Free Movement of SuchData) sets forth the regulatory framework governingthe transfer of personal data from an EU MemberState to a non-EU country.

55See letter from Group of Exec. Comp. Lawyers.56 Id.

than the PEO).43 Therefore, under theproposed requirements, all employeescovers all such individuals. In contrast,workers who are not employed by theregistrant or its subsidiaries, such asindependent contractors or leasedworkers or other temporary workerswho are employed by a third party,would not be covered.44

We note that commenters were splitin their support for a rule that wouldinclude all employees of the issuer,45rather than only covering full-time U.S.workers.46 Many commenters raisedconcerns that the inclusion of workerslocated outside the United States, aswell as employees that are notpermanent, full-time employees, wouldrender the comparison to the PEO lessmeaningful, while at the same timeimposing significant costs on registrantsthat have global operations.47 Accordingto these commenters, the internationalvariation in compensation arrangements

and benefits, in addition to cost-of-living differences and currencyfluctuations, could distort thecomparability of employeecompensation to that of a PEO based inthe United States.48 In addition, thesecommenters noted that the types of

compensation that are recorded inpayroll and benefits systems outside theUnited States may vary from thoserecorded as compensation in the UnitedStates due to local accounting standardsand tax regulations. Because of thesevariations, they further suggest thatrequiring registrants to recompute oradjust the output of payroll systems to

include non-payroll items that would bereportable as compensation under Item402 has the potential to imposesignificant compliance costs.49

In contrast, one commenter assertedthat the provision was intended to coverall employees of the issuer, includingfull-time, part-time, U.S. and non-U.S.employees.50 Some commentersasserted that the exclusion of non-U.S.and non-full-time employees woulddiminish the meaningfulness of the payratio disclosure to investors.51 Some ofthese commenters suggested allowingcompanies to present separate pay ratios

covering U.S. and non-U.S. employees,which they believed could mitigateconcerns that the comparison of thePEO to workers located outside of theUnited States could distort thedisclosure.52

We acknowledge the concerns ofcommenters that the inclusion of non-U.S. employees raises compliance costsfor multinational companies, introducescross-border compliance issues, andcould raise concerns about the impact ofnon-U.S. pay structures on thecomparability of the data to companieswithout off-shore operations. We alsorecognize that differences in relativecompliance costs may have an adverseimpact on competition. We haveweighed these considerations and are

proposing that the requirement cover allemployees without carve-outs forspecific categories of employees.Although we believe that the inclusionof non-U.S. employees in thecalculation of the median is consistentwith the statute, we have consideredways to address the costs of compliancethat commenters attribute to the

provisions coverage of a registrantsglobal workforce.

In particular, we are cognizant thatdata privacy laws in variousjurisdictions could have an impact ongathering and verifying the data neededto identify the median of the annualtotal compensation of all employees.Commenters have asserted that, in somecases, data privacy laws could prohibita registrants collection and transfer ofpersonally identifiable compensationdata that would be needed to identifythe median.53 We also understand thatin many cases, the collection or transfer

of the underlying data is madeburdensome by local data privacy laws,but is not prohibited.

For example, we acknowledge thatmultinational companies based in theUnited States may need to ensurecompliance with data privacyregulations in transmitting personallyidentifiable human resources data(personal data) of European Union(EU) persons onto global humanresource information system networksin the United States, sending personaldata in hard copy from the EuropeanUnion to the United States, as well as

personal data onward transfers tothird-party payroll, pension and benefitsprocessors outside of the EuropeanUnion.54 In some EU Member States,employee consent is required, while inothers, consent may not be sufficient.55Commenters also have asserted thatother jurisdictions, such as Peru,Argentina, Canada and Japan also havedata privacy laws that could beimplicated by the gathering of data forpurposes of the proposed pay ratiodisclosure.56

Although we are not proposing anyadditional accommodation to addressthis concern, we believe that theflexibility afforded to all registrantsunder the proposed rules could permitregistrants to manage any potential costs


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57See AFLCIO I and letters from Americans forFinancial Reform; Walden Asset Management; andSocial Investment Forum. 58Proposed Item 402(u)(3).

arising from applicable data privacylaws. For example, consistent with theproposed requirements, registrants inthis situation would be permitted toestimate the compensation of affectedemployees. We request comment belowon whether the proposed flexibilityafforded to registrants in selecting amethod to identify the median, such as

the use of statistical sampling or otherreasonable estimation techniques andthe use of consistently appliedcompensation measures to identify themedian employee, could enableregistrants to better manage anypotential costs and burdens arising fromlocal data privacy regulations or if thereare other alternatives that would beconsistent with Section 953(b).Commenters did not provide us withinformation about applicable dataprivacy laws sufficient to analyze howthe flexibility allowed to all registrantsunder the proposed requirements could

impact the potential costs arising fromsuch laws, and we request informationabout the specific impact these matterswould have on collecting or transferringdata needed to comply with theproposed requirements.

Request for Comment

7. Are there alternative ways to fulfillthe statutory mandate of covering allemployees that could reduce thecompliance costs and cross-borderissues raised by commenters? Forexample, would it be consistent withthe statute to permit registrants toexclude non-U.S. employees from thecalculation of the median? Would it beconsistent with the statute to permitregistrants to exclude non-full-timeemployees from the calculation of themedian? If not, could these alternatives

be implemented in a way that would beconsistent with the statute?

8. Should registrants be allowed todisclose two separate pay ratioscovering U.S. employees and non-U.S.employees in lieu of the pay ratiocovering all U.S. and non-U.S.employees? Why or why not? Shouldwe require registrants to provide twoseparate pay ratios, as requested by

some commenters? 57 What should theseparate ratios cover (e.g., should there

be one for U.S. employees and one fornon-U.S. employees, or should there beone for U.S. employees and onecovering all employees)? If separateratios are required, should this be inaddition to, or in lieu of, the pay ratiocovering all U.S. and non-U.S.employees? Would such a requirement

increase costs for registrants? Would itincrease the usefulness to investors ofthe disclosure?

9. Please identify the applicable dataprivacy laws or regulations that couldimpact the collection or transfer of thedata needed to comply with theproposed pay ratio requirement. Pleasealso identify whether there are

exclusions, exemptions or safe harborsthat could be used to collect or transfersuch data. Please quantify, to the extentpracticable, the impact of such laws onregistrants subject to Section 953(b),such as an estimate of the number ofregistrants affected or the averagepercentage of employees affected. Howwould the proposed flexibility affordedto all registrants (i.e., selecting a methodto identify the median, the use ofstatistical sampling or other reasonableestimation techniques and the use ofconsistently applied compensationmeasures to identify the median

employee) impact any potential costsand burdens arising from local dataprivacy laws? In particular, would aregistrant be able to make a reasonableestimation of the total compensation foraffected employees? Would a registrant

be able to select a consistentcompensation measure that is notsubject to local data privacy laws? If not,are there alternative ways to meet thestatutory mandate of Section 953(b) thatwould reduce the costs and burdensarising from local data privacy laws?

10. Are there applicable local dataprivacy laws that would prohibit thecollection or transfer of data necessary

to calculate the annual totalcompensation of an employee or groupof employees or the identification of amedian employee using a consistentcompensation measure? In thatsituation, would a registrant be able toreasonably estimate compensation? Ifnot, are there alternatives to theproposed rule that would address sucha situation while still being consistentwith Section 953(b)? Should any suchalternatives be permitted? If analternative should be permitted, whatlimitations or conditions should beimposed on using the alternative? For

example, should registrants be requiredto disclose the approximate number ofemployees affected and identify the lawthat prohibits the collection or transferof data? Please discuss whether anysuch alternatives would significantlyimpact the pay ratio disclosure.

11. Should the rule cover employeesof a registrants subsidiaries as definedin Rule 405 and Rule 12b2, asproposed? Are there any situationswhere an entity meets the subsidiarydefinition but its employees should not

be included for purposes of the

proposed requirement? For example,should the rule be limited tosubsidiaries that consolidate theirfinancial statements with those of theregistrant? Should the rule not apply tosubsidiaries of certain types ofregistrants, such as the portfoliocompanies of business developmentcompanies? Please provide details of

any recommended limitations.12. Alternatively, should the

requirements be limited to employeesthat are employed directly by theregistrant (i.e., excluding employees ofits subsidiaries)? Would such alimitation be consistent with Section953(b)? How would such a limitationaffect the potential benefits of thedisclosure? Would such a limitationhave other impacts, such asincentivizing registrants to alter theircorporate structure, and, if so, are therealternative ways that the rule couldaddress those impacts?

13. Should Section 953(b) be read toapply to leased workers or othertemporary workers employed by a thirdparty? Does the proposed approach tosuch workers raise costs or othercompliance issues for registrants, orimpact potential benefits to investors,that we have not identified? Doregistrants need guidance orinstructions for determining how totreat employees of partially-ownedsubsidiaries or joint ventures? If so,what should such guidance orinstructions entail?

14. Is it likely that registrants wouldalter their corporate structure oremployment arrangements to reduce thenumber of employees covered by theproposed requirements? How should wetailor the proposed requirements toaddress such an impact?

15. Does the proposed inclusion of allemployees raise competition concerns?If so, are there some industries or typesof registrants that would be moreaffected than others? How should wetailor the proposed requirements toaddress such concerns?

b. Calculation Date for DeterminingWho Is An Employee

The proposed requirement definesemployee as an individual employedas of the last day of the registrants lastcompleted fiscal year.58 This calculationdate for determining who is anemployee would be consistent with theone used for the determination of thethree most highly compensatedexecutive officers under Item


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59See letters from RILA (For consistency withthe requirements of Item 402, we believe the bestoption is to determine the median total annualsalary of the issuers employees as of the close of

the most recently completed fiscal year.) andTowers Watson ([I]t will be necessary to fix theemployee group as of a particular dateThe lastday of the prior year would seem an obviouschoice.).

60See letters from ABA and RILA. One of thesecommenters suggested that the use of the wordannual in Section 953(b) could be interpreted aslimiting the scope of the provision to only thoseemployees that have been employed for the fullfiscal year. See letter from ABA.

61We note that a requirement to track whichemployees have been continuously employed forthe entire annual period could increase costs forregistrants, although, as discussed below, we arepermitting registrants to annualize thecompensation of certain employees.

62See AFLCIO I (The disclosure ofcompensation data under Section 953(b) will nothave unintended consequences on public companyemployment decisions.).

63See, e.g., letters from Davis Polk; Frederick W.Cook & Co.; Social Investment Forum; RILA,Walden Asset Management; and Trillium AssetManagement.

64RILA noted employees on leave under theFamily and Medical Leave Act of 1993 [29 U.S.C.2601 et seq.] and employees called for activemilitary duty as common examples.

65By use of the term employee, this proposedinstruction would apply to individuals who wereemployed on the last day of the fiscal year (thecalculation date).

402(a)(3)(iii). Two commentersexpressly supported this approach.59

Additionally, two commenterssuggested that only employees that have

been employed for the entire annualperiod (and as of the last day of thefiscal year) should be covered.60 Thecomposition of a companys workforcetypically changes throughout the fiscal

year, and in some industries andbusinesses, it can change constantly.Although Section 953(b) requires themedian calculation to cover allemployees, it does not prescribe aparticular calculation date for thedetermination of who should be treatedas an employee for that purpose. We

believe that a bright line calculationdate for determining who is anemployee would ease compliance forregistrants by eliminating the need tomonitor changing workforcecomposition during the year, while stillproviding a recent snapshot of the entire

workforce.61

We agree with thecommenters who suggest that the mostappropriate calculation date is one thatis consistent with the calculation datefor determining the named executiveofficers under current Item 402requirements.

In proposing this approach, we haveassumed that the potential benefits ofthe disclosure mandated by Section953(b) would not be significantlydiminished by covering onlyindividuals employed on a specific dateat year-end, rather than covering everyindividual who was employed at anytime during the year. Although we

believe that this approach could helpcontain compliance costs for registrants,we acknowledge that it could have othercosts. For example, this approach wouldnot capture seasonal or temporaryemployees that are not employed atyear-end. This would enable a registrantwith a significant amount of suchworkers to calculate a median that doesnot fully reflect the workforce that isrequired to run its business. It could

also cause the proposed requirements tobe costlier for, and thereby have an anti-competitive impact on, registrantswhose temporary or seasonal workersare employed at year-end as opposed toother times during the year. Finally, itis possible, although commenters haveasserted that it is remote, that registrantscould try to structure their employment

arrangements to reduce the number ofworkers employed on the calculationdate.62

Request for Comment

16. Is the proposed calculation dateworkable for registrants? If not, whatdate should be used (e.g., the last day ofthe registrants second (or third) fiscalquarter) and why?

17. In the alternative, shouldregistrants be permitted the flexibility tochoose a calculation date for thispurpose? Why or why not? If so, shouldwe require the registrant to disclose why

a particular date was chosen? Shouldsuch flexibility be limited to certaincircumstances? If so, what principlesshould apply in identifying thosecircumstances?

18. Is it appropriate to limit the scopeof covered employees to those who wereemployed on the last day of theregistrants fiscal year, as proposed?Why or why not? Is consistency withother Item 402 disclosure important inthis context? Would this approach easecompliance costs for registrants? Whatimpact would this calculation date haveon registrants that employ seasonalworkers and would the exclusion ofseasonal workers not employed on thecalculation date likely have an impacton the median or the ratio? Pleaseprovide data, such as an estimate of thenumber of registrants that employseasonal workers and the averagepercentage of seasonal employees thatwould likely be excluded. Is it likelythat registrants might structure theiremployment arrangements to reduce thenumber of workers employed on thecalculation date? Are there other coststhat would be incurred using thisapproach that we should consider?Would the proposed calculation date

have a meaningful impact on thepotential usefulness of the disclosure forinvestors? Are there other ways to dealwith defining the scope of coveredemployees that are more effective atreducing costs and providingmeaningful disclosure?

19. Should registrants be required toinclude any individual who was

employed at any time during the year,or for some minimum amount of time(and if so, what amount of time) duringthe year?

20. Should the rule only apply toemployees employed for the full fiscalyear? Why or why not?

c. Adjustments for Certain Employees

Some commenters raised questionsabout how to treat employees who werenot employed during the entire fiscalyear and recommended that companies

be permitted to annualize thecompensation for these employees inorder to more accurately reflect theemployment relationship.63 We agreethat in instances where the employmentrelationship is permanent, and nottemporary or seasonal, registrantsshould be permitted to annualize thetotal compensation for an employeewho did not work for the entire year,such as a new hire or an employee whotook an unpaid leave of absence duringthe period.64

Accordingly, the proposedrequirements include an instruction thatstates that total compensation may beannualized for all permanent employees(other than those in temporary orseasonal positions) who were employedfor less than the full fiscal year.65 Weare not proposing to require registrantsto perform this type of adjustment,however, because we do not believe thatthe costs of requiring companies tomake an extra calculation would bejustified.

The proposed instruction is limited to

permanent employees. In addition, asproposed, the instruction would notpermit a registrant to annualize someeligible employees and not others. Asdiscussed below, this instruction alsowould not permit adjustments thatwould cause the ratio to not reflect theactual composition of the workforce,such as annualizing the compensationof seasonal or temporary workers.Depending on the facts andcircumstances, it could be appropriatefor a registrant to annualize thecompensation for a permanent part-timeworker who has only worked a portion

of the year (such as an employee whois permanently employed for three daysa week and who took an unpaid leave


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66See AFLCIO I and letters from; CalvertInvestment Management; CtW Investment Group;Group of International Investors; Americans forFinancial Reform; Drucker Institute; Institute forPolicy Studies; Social Investment Forum; TrilliumAsset Management; and UAW Retiree MedicalBenefits Trust.

67See letters from Social Investment Forum andTrillium Asset Management.

68See Section IV of this release.

69See proposed Item 402(u)(3).70See letters from American Benefits Council;

Americans for Financial Reform; Davis Polk;Frederick W. Cook & Co., Inc.; RILA; SocialInvestment Forum; Trillium Asset Management;and Walden Asset Management.

71See letters from Americans for FinancialReform; Frederick W. Cook & Co., Inc.; and RILA.

72See generallyletter from CtW InvestmentGroup.

73See letter from Senator Menendez (I wrote thisprovision so that investors and the general publicknow whether public companies pay practices arefair to their average employees, especiallycompared to their highly compensated CEOs.).

See also Representative Keith Ellison, et al.(House Letter) and Senator Robert Menendez etal. (Senate Letter) (noting that Section 953(b)

Continued

of absence under the Family andMedical Leave Act). In such a case, theadjustment should reflect compensationfor the employees part-time scheduleover the entire year, but should notadjust the part-time schedule to a full-time equivalent schedule.

In proposing this approach, we haveassumed that this annualizing

adjustment would not significantlydiminish the potential usefulness of thedisclosure mandated by Section 953(b).For example, we would not expect thatannualizing the salary of a permanentnew hire would impact the potentialability of an investor to use the pay ratiodisclosure as an indicator of employeemorale or to gain an understanding of aregistrants investment in humancapital, which some commenters haveidentified as potential benefits of thedisclosure under Section 953(b).66 Wealso note that some of the commentersthat support Section 953(b) disclosure

were also supportive of allowingannualizing adjustments for employeesemployed for less than the full year.67

By permitting but not requiringregistrants to annualize compensationfor these employees, the comparabilityof disclosure across companies could bereduced. As discussed elsewhere in thisrelease,68 we do not believe that precisecomparability or conformity ofdisclosure from registrant to registrant isnecessarily achievable due to the varietyof factors that could cause the ratio todiffer, and, accordingly, we do not

believe that the costs associated withattempting to promote precisecomparability in this respect would bejustified.

Although we are proposing to permitthe annualizing adjustments describedabove, we believe that some of theassumptions or adjustments suggested

by commenters for calculating theannual total compensation of employeesmight present a distorted picture of theactual composition of a registrantsworkforce or compensation practices.We believe that certain adjustments orassumptions, such as full-timeequivalent adjustments for part-timeworkers, annualizing adjustments for

temporary or seasonal employees, andcost-of-living adjustments for non-U.S.workers, would cause the median to not

be reasonably representative of the

registrants actual employment andcompensation arrangements for itsworkforce during the period and could,therefore, diminish the potentialusefulness of the disclosure. Therefore,the proposed disclosure requirementswould not permit such adjustments.

For example, under the proposedrules, a retailer that hires a seasonal

worker at minimum wage for threemonths during the holiday seasonwould need to calculate annual totalcompensation for that employee as threemonths at $7.25/hour ($3,480) andcould not annualize the wages as ifthe seasonal worker was paid for a full12 months of work ($13,920). In thisexample, if the seasonal worker was notstill employed by the registrant on thelast day of the registrants fiscal year,the registrant would exclude thatworker from the calculation of themedian.69

We understand that some commentersbelieve that these types of adjustmentscould allow for a more meaningfulcomparison between the compensationof the PEO and that of the registrantsemployees, especially where thoseemployees are not full-time, U.S.employees.70 We are concerned,however, that adjusting for thesevariables could distort an understandingof the registrants compensationpractices. For example, if a registrantwith a workforce primarily located injurisdictions with a lower cost of livingthan the United States adjusted theannual total compensation of thoseemployees using purchasing power

parity statistics, the median of theannual total compensation of all itsemployees would likely increase.Likewise, if a registrant with aworkforce that is primarily part-time orseasonal adjusted the annual totalcompensation of those employees usingfull-time equivalent adjustments, themedian of the annual totalcompensation of all its employeeswould likely increase. In thesescenarios, the registrants pay ratiowould show less of a disparity incompensation levels, while its laborcosts would appear to be higher than

they actually were. We believe that,rather than making the disclosure moremeaningful, such a result coulddiminish the potential usefulness of thedisclosure because the ratio would showa less accurate reflection of actualworkforce compensation and couldpermit a registrant to alter the reported

ratio to achieve a particular objectivewith the ratio disclosure.

Request for Comment

21. Is it appropriate to allowregistrants to annualize thecompensation for non-seasonal, non-temporary employees that have onlyworked part of the year, as proposed?

Why or why not? Would allowingannualizing the compensation for theseemployees likely impact the median orthe pay ratio?

22. In the alternative, shouldregistrants be required to annualize thecompensation for these employees?Why or why not?

23. Should we require all registrantsthat rely on the proposed instruction toannualize compensation for theseemployees to disclose that they havedone so (or only when the adjustmentis material, as would be required underthe proposed instruction for disclosure

of material assumptions, adjustmentsand estimates)? Why or why not? If so,what should the disclosure entail? Forexample, should the registrant only berequired to state that it has relied on theinstruction, or should it also be requiredto discuss the number or percentage ofemployees for which compensation wasannualized?

24. Should we allow full-timeequivalent adjustments for part-timeemployees and temporary or seasonalemployees, as recommended by somecommenters? 71 Should we allow cost-of-living adjustments for non-U.S.employees as recommended by some

commenters? 72 If so in either case,please explain why. In particular, pleaseaddress the potential concern that thesekinds of adjustments could cause theratio to be a less accurate reflection ofactual workforce compensation. Is therean alternative way to mitigate thisconcern?

3. Identifying the Median

Commenters have suggested that apotential purpose of the pay ratiodisclosure is to allow investors toevaluate the annual total compensationof the PEO within the context of the

registrants internal compensationpractices.73 We note that Congress


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80See AFLCIO II (The SEC can minimize issuer

compliance costs by permitting the use of randomstatistical sampling to calculate the median. . . .Because the median is a statistical term that isfrequently used to describe a set of observationsrandomly drawn from a larger population, it isreasonable for the SEC to permit issuers to sampletheir employee populations to calculate themedian.) and letter from Davis Polk (Werecommend that the Commission permit companiesto identify a single employee, via a samplingtechnique or other statistically reasonable method,among its employee base as the representative formedian compensation.).

81See COEC II (noting that sampling wouldintroduce additional complexity by requiring thedevelopment of a methodology to determine theappropriate stratification of the sample population,develop and assess the appropriate confidenceintervals to enhance the reliability of the data

collected and ensure that comparable forms ofcompensation are included across the varying paypractices that are common in different regions ofthe world.).

82See letter from M. Ohlrogge.83The commenter assumed that any

compensation distribution is lognormal and that thevariance of compensation distribution within acompany is given as a constant number. We believe,however, that this may not be a practicalassumption because, as described in detail inSection IV of this release, each registrant wouldhave a company-specific compensation variance,which is impossible to be generally assumed. Inaddition, registrants that have multiple business orgeographical segments may not necessarily havelognormal distribution of wages.

84Our analysis, further discussed in Section IV ofthis release, uses mean and median wage estimatesfrom the Bureau of Labor Statistics (BLS) at the 4-digit NAICS industry level (290 industries) andassumes a lognormal wage distribution, a 95%confidence interval with 0.5% margin of error. Theanalysis focuses on the registrants that have a singlebusiness or geographical unit. The analysis alsoassumes that when the sampling is implemented,the sampling method would be a true randomsampling, i.e., it would not be biased by region,occupation, rank, or other factor. In our analysis,

the appropriate sample size for the registrants witha single business or geographical unit variesbetween 81 and 1,065 across industries, with theaverage estimated sample size close to 560.

85We believe that reasonable estimates of themedian for registrants with multiple business linesor geographical units could be arrived at throughmore than one statistical sampling approach. Allapproaches, however, require drawing observationsfrom each business or geographical unit with areasonable assumption on each units compensationdistribution and inferring the registrants overallmedian based on the observations drawn. Certaincases may not easily generate confidence intervalsaround the estimates or prescribe the appropriateminimum sample size. See Section IV of this releasefor further discussion.

86See, e.g., COEC I and II and letters fromAmerican Benefits Council; Brian Foley & Co.;Group of Exec. Comp. Lawyers; Group of TradeAssociations; Protective Life Corporation; SCSGP;and Towers Watson.

87See AFLCIO II and letters from ABA;American Benefits Council; Americans forFinancial Reform; CtW Investment Group;Protective Life Corporation; RILA; and SCSGP.

88Registrants would be permitted to use aconsistently-applied compensation measure toidentify the median employee regardless of whetherthey use statistical sampling.

89See COEC II (asserting that cash compensationis not an appropriate substitute since non-cashremuneration makes up a substantial part ofcompensation in certain parts of the world, andcash compensation would still need to be gatheredmanually for many registrants due to variances inpayroll systems and tax regimes).

registrants flexibility without imposingprescriptive requirements that may not

be workable for all types of registrants.In addition, we highlight below twoalternatives recommended bycommenters that would be permittedunder the proposal.

Use of Statistical Sampling. Twocommenters suggested that companies

should be permitted to identify themedian through a sampling technique orother statistically reasonable method.80Two other commenters also providedviews on statistical sampling. Onecommenter, based on a survey of 95registrants, disagreed that statisticalsampling methodology would reducethe compliance burden for companies

because of the wide variability in paypractices and recordkeeping andasserted that requiring statisticalsampling would introduce furthercomplexity.81 Another commentersupported the use of statistical sampling

and described a random samplingtechnique that could yield an accurateand unbiased estimate of a registrantsactual median compensation using arelatively small sample size.82 Thiscommenter asserted that morecomplicated procedures, such asstratified sampling, would beunnecessary, regardless of companysize, how many countries it operates inor how many subsidiaries it has.83

As we discuss in more detail in theeconomic analysis section of thisrelease, the variance of underlying

compensation distributions (that is, howwidely employee compensation isspread out or distributed around themean) can materially affect the samplesize needed for reasonable statisticalsampling.84 Variation in the types ofemployees at a registrant across

business units and geographical regionscan also add complexity to the sampling

procedure. While we generally agreethat a relatively small s

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2013-23073