RC: What are the key issues and arguments in the debate over CEO pay disclosure?

Bivans: The key issue is whether the CEO pay ratio disclosure provides useful information to investors in light of the significant costs and burdens of obtaining the data and calculating the total compensation of the ‘median employee’ using the methodology of Rule 402(c) of Regulation S-K, which is currently a manual exercise done only for the CEO, CFO and the three most highly compensated executive officers of the registrant. While some commentators have argued that an internal pay equity disclosure is necessary in light of ever escalating levels of CEO compensation caused by peer group comparisons, the SEC has recognised that variations in business profiles, geographies and employee base can lead to misleading comparisons. As a result, the SEC has attempted to provide a level of flexibility in implementing the regulation to ease the costs and burdens, even if the ratio may only be useful for year-over-year comparisons, if even that. The key issues can be summarised in four main categories: employees that must be included in the identification of the median; identifying the ‘median employee’; determining ‘total compensation’; and whether the disclosure may be ‘furnished’ rather than ‘filed’. Most industry commentators have urged the SEC to define ‘all employees’ to mean all full-time employees in the US to mitigate the cost and burden of collecting the compensation information as well as enhancing the comparability of the information. The SEC declined to do so. Many industry commentators have urged the SEC to adopt a safe harbour for identifying the ‘median employee’ by a formula or algorithm. While the SEC has permitted registrants to use statistical sampling and other reasonable estimates for identifying the median employee, it declined to specify a safe harbour.

Apr-Jun 2014 Issue

Baker & McKenzie LLP

Board Advisory, LLC

Cleary Gottlieb Steen & Hamilton LLP

Skadden, Arps, Slate, Meagher & Flom LLP