R&C: Could you outline the general principles of the SEC’s CEO pay disclosure requirements, and why they are so important?

Bivans: The general principle behind the SEC’s CEO pay disclosure requirements is to identify all elements of a CEO’s compensation and place them in context to assist shareholders with making informed voting decisions on the ‘say-on-pay’ advisory votes. Over the years, the SEC has significantly increased the scope of information required to be reported, including the valuation of share-based compensation awarded to the CEO, the identification and valuation of ‘perks’ and deferred compensation, narrative discussion of the policies and elements of compensation, the use of benchmarking to peer companies, the relation between CEO compensation to the performance of the company and now the relation of the CEO’s compensation to that of a median employee. The disclosure of the CEO’s aggregate compensation is not new. The new CEO pay ratio rules will now require companies to identify a median employee and calculate the median employee compensation cost in the same manner as used for the CEO compensation.

Nelson: Subject to some limited exceptions, all the employees of the company and its consolidated subsidiaries are to be taken into account in determining the median employee, although the rule provides flexibility in determining precisely how the median employee is identified. Once identified, the total compensation of the median employee – and the CEO – is generally determined under the usual SEC executive compensation disclosure rules. This disclosure rule is important for several reasons. First, companies will be required to devote substantial time and expense in order to understand the rule, identify and collect the relevant data and determine how best to disclose the information. This process will be all the more difficult because the rule is new and companies will have to develop new procedures and systems in order to comply with it. Second, companies must prepare for the potential reaction to the pay ratio disclosure from investors and their advisers, the press, the company’s own employees and others. Because the rule is new, companies can only speculate on how these various groups will react to the disclosure, complicating any attempt to prepare for that reaction.

Jan-Mar 2016 Issue

Baker & McKenzie LLP

Cleary Gottlieb Steen & Hamilton LLP

Pay Governance LLC

Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates