SEC Issues Pay Ratio Guidance Focused on Reinforcing Flexibility, Good Faith Estimates

September 22, 2017

The SEC issued both Commission and Staff Guidance on the pay ratio rule this week reemphasizing compliance flexibility, including how independent contractors should be evaluated; with congressional pay ratio repeal efforts dead for now and the SEC's Director of Corporation Finance recently stating that the Commission would not delay the rules, the Guidance will be useful as companies prepare for their first disclosures in 2018.  The Guidance, which carries significant authority, reemphasizes that companies will not face compliance actions if pay ratio estimates are made in good faith, despite a level of imprecision.  Specifically, the Guidance provides "if a [company] uses reasonable estimates, assumptions or methodologies, the pay ratio and related disclosure that results from such use would not provide the basis for Commission enforcement action unless the disclosure was made or reaffirmed without a reasonable basis or was provided other than in good faith" (emphasis added).  The "good faith" language is significant and was urged by our Center On Executive Compensation in its comment letters.  In response to lack of clarity regarding whether certain individuals that are typically considered independent contractors must be included in the pay ratio calculation, the Guidance states that companies may apply "a widely recognized test under another area of law that the [company] otherwise uses to determine whether its workers are employees" in order to determine whether a worker must be included in the pay ratio.  This means it appears that companies can apply a traditional employment or tax law test to an individual to determine whether he or she is required to be included in the pay ratio.  The additional staff guidance provides examples of the use of flexibility and how statistical sampling may be used to determine the median employee. 

The Association's Center On Executive Compensation will host a conference call for Center Subscribers on the newly-issued guidance next Wednesday, September 27, 2017.  Register for the conference call.