On June 4, 2015, the SEC staff issued an economic analysis related to its proposed pay ratio rule. This economic analysis, conducted by the SEC’s Division of Economic and Risk Analysis, looks at the potential effects on the pay ratio calculation when different percentages of employees are excluded from the calculation. The SEC’s staff believes that the analysis will help in evaluating the potential effects on the accuracy of the pay ratio calculation of excluding different percentages of certain categories of employees.
This economic analysis relates to the SEC’s pay ratio rule that was proposed initially in September 2013. The proposed rule would add a new paragraph to Item 402 of Regulation S-K that would require disclosure of the following:
- the median of the annual total compensation of all employees of a company, except for the principal executive officer,
- the annual total compensation of the principal executive officer of a company, and
- the ratio of the median of the annual total compensation of all employees to the annual total compensation of a company’s principal executive officer.
Some commenters to the proposed rule suggested that certain employees should be excluded from the pay ratio, such as part-time, foreign, seasonal and temporary employees. The SEC’s economic analysis is meant to evaluate the potential effects on the pay ratio if different percentages of these employees are excluded from the pay ratio calculation. The SEC will accept comments on the proposed rules until July 6, 2015.
The SEC determined in its analysis that excluding some employees from the determination of median employee compensation may affect the pay ratio calculation. For example, according to the study, the exclusion of 15% of a company’s employees may potentially decrease or increase the pay ratio estimate by up to 9.9% or 11%. The full text of the analysis, including a description of the different variables that may affect the pay ratio calculation can be found here.