In all likelihood, a reasonable compensation measure will involve a formulation of cash compensation, such as base salary, Form W-2 (or its foreign equivalent) wages, or actual annual cash compensation, which is consistent across the subject employee pool or group. Phone: (408) 876-4025 As noted in the SEC’s September 2017 guidance, it is permissible to use existing internal records (such as tax and payroll records) that reasonably reflect annual compensation when using a consistently applied compensation measure to identify the “median employee,” even if those records do not include every element of compensation, such as equity awards widely distributed to employees. To date, the new rule doesn’t outline what exactly constitutes a change in compensation arrangements. This will enable you to determine the employee population from which your “median employee” will be identified. Another situation that might prompt a company to have to change their median employee rate is if they make substantial or systematic changes to compensation plans for a single category of employees, such as engineers. Finally, if a COLA is used to identify the “median employee” and he or she is located in a country other than the country of the CEO, a company must use the same adjustment in determining his or her annual total compensation. Another factor in whether a company needs to make a change in the median employee has to do with circumstances around that employee. This approach is current as of September 27, 2017, takes into consideration the guidance of the Securities and Exchange Commission and the Staff of its Division of Corporation Finance issued on September 21, 2017, and is based on our understanding of the final pay ratio rule (the “Pay Ratio Rule”). You will also want to identify an internal or external resource that can assist you in constructing your sample – including establishing a confidence level and degree of reliability for your sample, selecting an appropriate compensation measure (as described below) to apply to the sample, and then gauging the reasonability of the sample. They must go through the process of identifying a new median employee. One additional consideration that should not be overlooked is the employee communication that may be necessary before and after your initial pay ratio disclosure. Once you have selected a compensation measure, then you will need to select the period over which to calculate the total amount of compensation using that measure. The median of the annual total compensation of all employees of the company (except the CEO); The annual total compensation of the CEO; and. A New Reality: Crisis Management Topics Every Board Should Consider. Once you have identified your “median employee,” you will need to determine his or her annual total compensation, as well as that of your CEO, for the last completed fiscal year. During the 2018 proxy season, publicly held companies began disclosing their CEO pay ratio, a Dodd-Frank rule that requires them to calculate the ratio between the compensation level of the median employee and the company’s CEO… Further, a “median employee’s” position within the company may be disclosed, unless doing so would reveal his or her identity. On October 18, 2016, the SEC issued five Compliance and Disclosure … What’s different in this situation is that the company could choose to select a different employee as the median employee from the original identification process that has similar compensation measures as the original median employee. The decision to use statistical sampling will likely be based on your company’s particular facts and circumstances. Factors that may influence a decision to use statistical sampling, either in whole or in part, include whether your company has a single or multiple business lines, segments, or geographic units, the ease or difficulty of obtaining workforce and/or pay data for multiple countries in a timely manner, the number and accessibility of payroll or HRIS systems throughout the company, the stratification of pay levels across the company, and the various forms compensation that your employees receive. Often, CEOs are paid high salaries and receive other perks for the leadership work that they do and the high degree of responsibility that they agree to take on. If these amounts are clustered within a relatively tight band for a significant number of employees, however, they may not adequately reflect your compensation hierarchy. For example, if the ratio of the CEO’s annual total compensation to the “median employee’s” annual total compensation is 100 to 1, it can be expressed as “1 to 100,” 1:100, or “the CEO’s annual total compensation is 100 times that of the median of the annual total compensation of all employees” Companies should consider this factor carefully. Last year, in 2018, companies were required to provide CEO pay ratio disclosures for the first time. However, in many cases, shareholders and others felt that certain CEOs were overpaid and that their salary and other benefits didn’t align well enough with how well they performed at their jobs. Price is the Content Marketing Manager at Diligent Corporation. While many companies are preparing for the new pay ratio disclosure requirements from the SEC, ratios of CEO pay to other NEOs are also something companies should pay close attention to. Out in a prior year disclosures is a time-consuming process will also enable you to this! 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