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back to index backGLOBALtalk November,  2015


U.S.: Do SEC Pay Ratio Disclosure Regulations Matter for Foreign Companies?

Employer Action Code: Monitor

On August 5, the Securities and Exchange Commission (SEC) voted 3 – 2 to issue final regulations that will require most companies publicly listed in the U.S. to disclose the ratio between the pay of their chief executive officer and the median for all other employees in their global workforces. The disclosure will be required beginning with the company's first full fiscal year commencing on or after January 1, 2017.

Foreign multinationals that constitute "foreign private issuers" under the Securities and Exchange Act but are listed in the U.S. are exempt from the pay ratio disclosure requirements. Thus, while the issue of compliance is expected to occupy the minds of HR, compensation committees and the boardrooms in the U.S. for the next few years, it would appear that the new rules will have a negligible impact on most foreign multinationals. That said, companies unaffected by the new rules may still want to monitor implementation of the regulations for the impact they may have on executive compensation, compliance and other rule-setting bodies. It is worth noting that subsequent to the controversy regarding the extraterritorial reach of the U.S. Foreign Account Tax Compliance Act and related compliance costs, some countries such as the U.K. passed similar legislation.

Key Details

The disclosure is important because of the onus it places upon employers to accurately determine the median pay for their global workforce and the multiple administrative challenges it presents. The U.S. Chamber of Commerce estimated in 2014 that compliance costs could be as high as US$700 million annually. The SEC estimates that the cost will be closer to US$70 million.

It is also important because of the potential impact the disclosure could have on employee attitudes and engagement, as it will be easier for employees to compare their own pay not just with the CEO's but with the pay of other employees, including the median employee at their company and other organizations.

The final regulations are generally in line with the rules initially proposed in 2013, with a few notable modifications. Companies will still be required to inventory their global workforces including part-time, temporary and seasonal workers in calculating the median, but some aspects have been simplified, such as:

- Once companies determine their median employee, they can continue to use that person as the median employee for two more years, as long as their circumstances remain the same.

- Companies that have business combinations can exclude newly acquired employees for that fiscal year's disclosure, although the company must then identify the acquired business and disclose the approximate number of employees omitted.

- Two exclusions for non-U.S. workers are provided. Companies may exclude workers in a jurisdiction with data privacy laws that prevent the assembly of employee pay data, but only if the company obtains a legal opinion from counsel on its inability to obtain or process the information necessary for compliance with the rule without violating the jurisdiction's laws or regulations governing data privacy. Companies can also exclude foreign employees from a jurisdiction where the number of employees in that location is equal to less than 5% of the firm's total workforce.

- Companies can apply a cost-of-living adjustment when identifying the median employee and in calculating the median employee's compensation, although the unadjusted ratio would also need to be disclosed to provide context.

The disclosure requirement applies to all publicly traded companies that must provide executive compensation disclosure under Item 402(c)(2)(x) of Regulation S-K. As noted, it does not apply to:

- Smaller reporting companies
- Foreign private issuers
- Multi-jurisdictional disclosure system filers
- Emerging growth companies
- Registered investment companies

Employer Implications

As noted above, the regulations could have an impact on rule makers in non-U.S. jurisdictions or simply challenge foreign multinationals to provide similar disclosure as a matter of public and employee relations. At a minimum, we would suggest that multinationals headquartered outside of the U.S. acquaint themselves with the new regulations and follow their development. Companies that wish to learn more can register for our complimentary webcast on September 17 at 1:00 p.m. ET and learn about the latest developments at our blog Executive Pay Matters. You may also follow us on Twitter @execpaymatters.

Source: Towers Watson - GAI





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