Chesapeake Utilities, Eaton, FSI, Hay Group, Hyster-Yale, Intel,
Mercer I, NACCO, and SHRM.
    \431\ See letter from ABA.
---------------------------------------------------------------------------

    We are not providing an additional transition period or staggered
compliance for registrants with non-U.S. employees, as requested by
some commenters. We believe that the final rule provides sufficient
time for all registrants, including multinationals and those with non-
U.S. employees, to identify the median employee and calculate annual
total compensation for that employee and the PEO. Additionally, we note
that the de minimis and foreign privacy law exemptions to the
definition of ``employee'' in the final rule may help reduce the burden
on such registrants in preparing the necessary disclosure.
d. Transition Period for New Registrants
i. Proposed Rule
    The proposed rule would permit new registrants to delay compliance
so that the pay ratio disclosure would not be required in a
registration statement on Form S-1 \432\ or Form S-11 \433\ for an
initial public offering or registration statement on Form 10.\434\ Such
registrants would be required to comply with proposed Item 402(u) with
respect to compensation for the first fiscal year commencing on or
after the date the registrant became subject to the requirements of
Section 13(a) or Section 15(d) of the Exchange Act, and the registrant
could omit this initial pay ratio disclosure from its filings until the
filing of its Form 10-K for such fiscal year or, if later, the filing
of a proxy or information statement for its next annual meeting of
shareholders (or written consents in lieu of a meeting) following the
end of such fiscal year. Similar to the proposed instructions for
updating pay ratio disclosure, these proposed instructions also would
require that this initial pay ratio disclosure be filed, in any event,
as provided in connection with General Instruction G(3) of Form 10-K
not later than 120 days after the end of such fiscal year.
---------------------------------------------------------------------------

    \432\ 17 CFR 239.11.
    \433\ 17 CFR 239.18.
    \434\ 17 CFR 249.210.
---------------------------------------------------------------------------

ii. Comments on the Proposed Rule
    All the commenters that discussed the topic agreed that new
registrants should not be required to provide pay ratio disclosure in
their initial registration statements on Form S-1, Form S-11, or Form
10.\435\ A few commenters also agreed that a new public company should
not have to provide any pay ratio disclosure until it completes its
first full fiscal year as a public company.\436\
---------------------------------------------------------------------------

    \435\ See, e.g., letters from ABA, CalPERS, CII, Corporate
Secretaries, Hyster-Yale, NACCO and PM&P.
    \436\ See, e.g., letters from ABA and Hyster-Yale.
---------------------------------------------------------------------------

iii. Final Rule
    Similar to the transition period for existing registrants, the
final rule provides that a new registrant's first pay ratio disclosure
must follow its first full fiscal year beginning after the registrant
has (i) been subject to the requirements of Sections 13(a) or 15(d) of
the Exchange Act for a period of at least twelve calendar months
beginning on or after January 1, 2017 and (ii) filed at least one
annual report pursuant to Sections 13(a) or 15(d) of the Exchange Act
that does not contain the pay ratio disclosure.\437\
---------------------------------------------------------------------------

    \437\ For example, company with a fiscal year ending on December
31 that completes its initial public offering on March 1, 2017 will
not be required to include any pay ratio information in its
registration statement on Form S-1. The registrant will be first
required to include pay ratio disclosure in its Form 10-K for its
2018 fiscal year or its definitive proxy or information statement
for its 2019 annual meeting of shareholders, but no later than 120
days following the end of its 2018 fiscal year. The registrant's pay
ratio disclosure will be required for its 2018 fiscal year because
it filed its registration statement after January 1, 2017 (March 1,
2017), it will have been subject to the requirements of Sections
13(a) or 15(d) of the Exchange Act for a period of at least twelve
calendar months (March 1, 2017 to March 1, 2018), and it will have
filed at least one annual report pursuant to Sections 13(a) or 15(d)
of the Exchange Act (for fiscal year 2017).
---------------------------------------------------------------------------

    This change aligns the transition for new registrants with the
change we made to the initial transition period for existing
registrants. As discussed above, the final rule provides that a
registrant's first reporting period is its first full fiscal year
beginning on or after January 1, 2017, instead of on or after the
effective date of the rule, as proposed. Also, this change is
consistent with

some commenters' recommendation that new registrants not be required to
provide any pay ratio disclosure until they complete their first full
fiscal year as a public company.\438\
---------------------------------------------------------------------------

    \438\ See, e.g., letters from ABA and Hyster-Yale.
---------------------------------------------------------------------------

    Additionally, as proposed, the final rule does not require the pay
ratio to be disclosed in a registration statement on Form S-1 or Form
S-11 for an initial public offering or an initial registration
statement on Form 10. Also, new registrants are permitted to omit their
pay ratio disclosure from their filings until after the later of (i)
their first full fiscal year beginning on the date they first become
subject to the requirements of Section 13(a) or 15(d) of the Exchange
Act and (ii) January 1, 2017. All commenters that discussed the topic
agreed that new registrants should not be required to provide pay ratio
disclosure in their initial registration statements on Form S-1, Form
S-11, or Form 10.\439\
---------------------------------------------------------------------------

    \439\ See, e.g., letters from ABA, CalPERS, CII, Corporate
Secretaries, Hyster-Yale, NACCO and PM&P.
---------------------------------------------------------------------------

    We noted in the Proposing Release that shareholders might benefit
from pay ratio disclosure in connection with an initial public offering
or Exchange Act registration. Even so, we continue to believe that it
is appropriate to give companies time to develop any needed systems to
compile the disclosure and verify its accuracy. This is particularly so
since we believe the primary purpose of the pay ratio disclosure is to
provide a useful data point for shareholders in making their voting
decisions on executive compensation, including their say-on-pay votes,
which is unlikely to occur for those registrants until at least a year
after the initial public offering has occurred. The transition period
for new registrants is similar to the time frame provided for other
registrants to comply with pay ratio disclosure requirements following
the effective date of the final rule.
    As we stated in the Proposing Release, we are sensitive to the
impact that a rule could have on capital formation. Section 953(b), as
amended by the JOBS Act, distinguished between certain newly public
companies and all other registrants by providing an exemption for
emerging growth companies. We note further that, without a transition
period, the incremental time needed to compile pay ratio disclosure
could cause companies that are not emerging growth companies to delay
an initial public offering, which could have a negative impact on
capital formation. In this regard, we assume that companies that are no
longer eligible for emerging growth company status are likely to be
businesses with more extensive operations or a greater number of
employees, which could increase the initial efforts needed to comply
with the proposed requirements. We continue to believe that providing a
transition period for these newly public companies could mitigate this
potential impact on capital formation and will not significantly affect
shareholders' ability to assess the compensation and accountability of
a registrant's executives.
e. Additional Transition Periods
i. Proposed Rule
    We did not propose a transition period for registrants that cease
to be smaller reporting companies or emerging growth companies or
engage in business combinations and/or acquisitions. We did, however,
request comment on whether there should be such transition periods and
the appropriate length of time for any such transition period.
ii. Comments on the Proposed Rule
    One commenter recommended a transition period for registrants that
cease to be smaller reporting companies.\440\ The commenter recommended
that those registrants not be required to provide their pay ratio
disclosure until the first full fiscal year commencing on or after the
first anniversary of the end of the fiscal year in which the registrant
is no longer a smaller reporting company.
---------------------------------------------------------------------------

    \440\ See letter from ABA.
---------------------------------------------------------------------------

    Several commenters supported generally a transition period for
registrants that engage in a business combination and/or an acquisition
to delay including any new employees acquired in the transaction in the
acquirer's pay ratio.\441\ Other commenters suggested specific
transition periods for such registrants, including: six months after
the end of the fiscal year in which the transaction closes; \442\ six
or more months after the transaction; \443\ one full fiscal year
following the transaction; \444\ the fiscal year beginning 18 months
after closing of the transaction; \445\ and three years after the
transaction.\446\
---------------------------------------------------------------------------

    \441\ See, e.g., letters from Eaton, Hyster-Yale, NAM I, NAM II,
and PM&P.
    \442\ See letter from Brian Foley & Co.
    \443\ See id. (providing an alternative to initial
recommendation of six months after the end of the fiscal year in
which the transaction closes).
    \444\ See, e.g., letters from ABA, Business Roundtable I,
Chesapeake Utilities, Frederic W. Cook & Co., NACCO, and NYC Bar.
    \445\ See letter from Microsoft.
    \446\ See letter from Cummins Inc.
---------------------------------------------------------------------------

iii. Final Rule
    In response to comments, the final rule provides that a registrant
that ceases to be a smaller reporting company or an emerging growth
company will not be required to provide pay ratio disclosure until
after the first full fiscal year after exiting such status and not for
any fiscal year commencing before January 1, 2017. For example, if a
calendar year-end smaller reporting company registrant's public float
exceeds $75 million as of the end of its second fiscal quarter in 2017,
the registrant will cease to be a smaller reporting company as of the
beginning of its fiscal year starting on January 1, 2018.\447\ The
registrant, therefore, must include its pay ratio disclosure in its
Form 10-K for 2018 or a proxy or information statement for its 2019
annual meeting of shareholders (or written consents in lieu of a
meeting) following the end of the 2018 fiscal year, but not later than
120 days after the end of the 2018 fiscal year. We believe that this
approach is appropriate because, as commenters noted, smaller reporting
companies ``will encounter the same challenges in preparing to comply
with the pay ratio disclosure requirement as registrants generally and,
therefore, will need time to determine how they will collect the data
necessary to identify their median employee and prepare the necessary
disclosure,'' but, ``as relatively small entities, these registrants
are not likely to need as much time as `regular' (larger) registrants
to transition to compliance with the pay ratio disclosure
requirement.'' \448\ This new transition period is consistent with the
one comment we received on this issue, and we believe it will provide
sufficient time for these registrants to prepare their disclosure.
---------------------------------------------------------------------------

    \447\ See 17 CFR 229.10(f)(1).
    \448\ See letter from ABA.
---------------------------------------------------------------------------

    Similarly, in 2017, if a calendar year-end emerging growth company
had total annual gross revenues of $1 billion or more, exceeded the $1
billion threshold in non-convertible debt for the previous 3-year
period, has reached the fifth anniversary of the date of the first sale
of its common equity securities pursuant to an effective registration
statement under the Securities Act, had not issued $1 billion in non-
convertible debt during the previous 3-year period, or is deemed to be
a ``large accelerated filer,'' the registrant will cease to be an
emerging growth company at the beginning of its fiscal year starting on
January 1, 2018.\449\ The registrant,

therefore, will be required to include pay ratio disclosure in its Form
10-K for 2018 or a proxy or information statement for its 2019 annual
meeting of shareholders (or written consents in lieu of a meeting)
following the end of the 2018 fiscal year, but not later than 120 days
after the end of the 2018 fiscal year.
---------------------------------------------------------------------------

    \449\ 17 CFR 229.10(a).
---------------------------------------------------------------------------

    We have decided to adopt this provision because it is consistent
with a commenter's similar recommendation for a transition period when
a registrant ceases to be a smaller reporting company. The reasoning
for the approach for both types of registrants is similar in that
emerging growth companies will need time to determine how they will
collect the data necessary to identify their median employee and
prepare the necessary disclosure.
    The final rule also permits a registrant that engages in a business
combination and/or an acquisition to omit the employees of a newly-
acquired entity from their pay ratio calculation for the fiscal year in
which the business combination or acquisition becomes effective. For
example, for a calendar year-end registrant that engages in a business
combination and/or acquisition in 2017, the registrant's first period
for which it will have to include the newly-acquired employees in the
pay ratio disclosure would be fiscal year 2018, with the disclosure
included in its Form 10-K for 2018 or a proxy or information statement
for their next annual meeting of shareholders (or written consents in
lieu of a meeting) following the end of the 2018 fiscal year, but not
later than 120 days after the end of such fiscal year.
    A number of commenters recommended a transition period for such
registrants. Suggestions for the length of the transition period ranged
from six months \450\ to three years.\451\ The transition period being
adopted is generally consistent with commenters' suggestions that the
disclosure not be required until one full fiscal year after the
transaction. We also believe that the final rule's approach will allow
a registrant sufficient time to incorporate the payroll, compensation,
and/or recordkeeping structures of the newly-acquired entity into the
registrant's pay ratio disclosure framework.
---------------------------------------------------------------------------

    \450\ See letter from Brian Foley & Co. (suggesting that the
final rule allow registrants conducting a merger/acquisition
transaction to delay reporting ``until at least 6 months after the
end of the fiscal year in which the M&A transaction closes, or 6 or
more months after the closing date'').
    \451\ See letter from Cummins Inc.
---------------------------------------------------------------------------

    Finally, under the provision in the final rule for triennial
calculations of median employee compensation discussed above, in the
year of the acquisition or business combination, the registrant need
not evaluate whether the acquisition or business combination would
result in a substantial change to its pay ratio disclosure that would
necessitate the re-identification of the median employee. Rather,
consistent with the one year transition for incorporating the new
employees in the pay ratio disclosure, the first time the registrant
must evaluate whether the business combination or acquisition would
result in a substantial change to its pay ratio disclosure that would
necessitate a re-identification of the median employee is in the fiscal
year following the acquisition or business combination. We believe this
will provide registrants sufficient time to integrate the new business
or acquisition. Nevertheless, those registrants must identify the
acquired business excluded and the approximate number of employees for
the fiscal year in which the business combination or an acquisition
becomes effective to provide transparency about what the pay ratio
disclosure does and does not include.

III. Economic Analysis

A. Background

    We have performed an economic analysis of the main economic effects
that may result from the final rule, relative to the baseline discussed
below. Section 2(b) of the Securities Act and Section 3(f) of the
Exchange Act require us, when engaging in rulemaking that requires us
to consider or determine whether an action is necessary or appropriate
in the public interest, also to consider whether the action will
promote efficiency, competition, and capital formation.\452\ Further,
Section 23(a)(2) of the Exchange Act requires us, when adopting rules
under the Exchange Act, to consider the impact that any new rule will
have on competition and to not adopt any rule that would impose a
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act.\453\
---------------------------------------------------------------------------

    \452\ See 15 U.S.C. 77b(b) and15 U.S.C. 78c(f).
    \453\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    As discussed above, Section 953(b) of the Dodd-Frank Act directs us
to amend Item 402 of Regulation S-K to add a pay ratio disclosure
requirement. Section 953(b) imposes a new requirement on registrants to
disclose the median of the annual total compensation of all employees
and the ratio of that median to the annual total compensation of the
CEO. In doing so, Section 953(b) requires registrants to determine
total compensation in accordance with Item 402(c)(2)(x). Our rules for
compensation disclosure generally focus on compensation matters that
relate to executive officers and directors. While registrants subject
to Item 402 are required to provide extensive information about the
compensation of the PEO and other named executive officers identified
pursuant to Item 402(a), current disclosure rules do not require
registrants to disclose compensation information for other employees in
their filings with us.
    As directed by Congress, we proposed amendments to Item 402 to
require the disclosure of the annual total compensation of a
registrant's PEO, the median annual total compensation of all employees
of that registrant (excluding the PEO), and the ratio of the median
annual total compensation of all employees to the annual total
compensation of the PEO. We considered the statutory language and
exercised our discretion to develop a proposal designed to lower
compliance costs while remaining consistent with the mandate of Section
953(b). In particular, among other things, we proposed a rule that
would permit registrants to use reasonable estimates to identify the
median employee, including by using statistical sampling, and a
consistently applied compensation measure (such as payroll or tax
records). The proposed rule would also allow the use of reasonable
estimates in calculating the annual total compensation or any elements
of total compensation for employees. The proposed flexible approach was
aimed at decreasing compliance costs while taking into consideration a
registrant's particular facts and circumstances. We received thousands
of comment letters in response to the proposal.
    To satisfy the statutory mandate of Section 953(b), we are adopting
amendments to Item 402 substantially as proposed, with modifications
intended to address some of the concerns raised by commenters and
provide further flexibility in the determination of the pay ratio. We
believe the primary benefit that Congress intended with pay ratio
disclosure is to provide shareholders with a company-specific metric
that they can use to inform their voting decisions regarding executive
compensation under Section 951 of the Dodd-Frank Act. Several
commenters stated affirmatively that they would find the new data
points, including pay ratio disclosure, relevant and useful when

making voting decisions.\454\ As discussed above, while neither the
statute nor the related legislative history directly states the
objectives or intended benefits of the provision, we believe, based on
our analysis of the statute and comments received, that Section 953(b)
was intended to provide shareholders with a company-specific metric
that can assist in their evaluation of a registrant's executive
compensation practices.
---------------------------------------------------------------------------

    \454\ See, e.g., letters from AFL-CIO I, AFSCME, Amalgamated,
Bricklayers International, CalSTRS, Calvert, Chevy Chase Trust,
CorpGov.net, Form Letter C, Form Letter D, Form Letter E, Form
Letter F, LIUNA, LAPFF, NY State Comptroller, Pax World Funds,
Public Citizen I, Rep. Ellison et al. I, Rep. Ellison et al. II,
Trillium I, Trillium II, UAW Trust, and US SIF.
---------------------------------------------------------------------------

    We are sensitive to the costs and benefits that stem from the final
rule. Some of the costs and benefits stem directly from the statutory
mandate in Section 953(b), while others are affected by the discretion
we exercise in implementing that mandate. Our economic analysis of the
final rule addresses both the costs and benefits that stem directly
from the mandate of Section 953(b) and those arising from the policy
choices made using our discretion, recognizing that it may be difficult
to separate the discretionary aspects of the rule from those elements
required by statute.
    In the economic analysis that follows, we first examine the current
regulatory and economic landscape to form a baseline for our analysis.
We then analyze the likely economic effects--including benefits and
costs and impact on efficiency, competition, and capital formation--
arising from the new mandatory disclosure requirement prescribed by the
Dodd-Frank Act and from the choices we have made in exercising our
discretion, relative to the baseline discussed below.

B. Baseline

    To assess the economic impact of the final rule, we are using as
our baseline the current state of the market without a requirement for
registrants to disclose pay ratio information. At present, registrants
that are required to comply with Item 402(c) of Regulation S-K provide
disclosure of their PEO's compensation as Section 953(b) requires.
Other registrants, such as emerging growth companies, smaller reporting
companies, foreign private issuers, and MJDS filers, are not required
to comply with Item 402(c).\455\ We do not expect that many
registrants, if any, currently maintain payroll and information systems
that track total compensation as determined pursuant to Item 402 for
all their employees, or make that information publicly available. Some
registrants have reported ratios of CEO compensation to employee
pay.\456\ We note, however, that the voluntarily reported information
is different from the elements covered by Item 402(c)(2)(x), and
therefore is not identical to what would be required under the final
rule.
---------------------------------------------------------------------------

    \455\ These registrants are required to provide disclosure of
executive compensation, but the disclosure requirements for these
registrants do not fall under Item 402(c)(2)(x).
    \456\ For example, Noble Energy Inc. voluntarily disclosed that
``our Chairman and CEO's total annual direct compensation was
approximately 85 times that of the median annual total direct
compensation of all of our other employees'' in their 2014 proxy
filing and disclosed a pay ratio in their 2015 proxy filing. MBIA
Inc. provided voluntary disclosure about average and median salary
and bonus for all employees other than the NEOs, and compared them
to the CEO's salary and bonus in its 2011 and 2012 proxy filings.
NorthWestern Corp. disclosed in its 2011 proxy filing that its CEO
compensation (salary, annual incentive and long-term incentive) was
``18 times the median pay of all our employees'' and disclosed a pay
ratio of 19-24 in its 2012-2015 proxy filings. Whole Foods Market
Inc. disclosed in its filings a ``salary cap'' on executive cash
compensation based on a multiple of the employee ``average annual
wage''. Other examples of registrants that disclosed a pay ratio or
median employee pay in its proxy filings include Advanced
Environmental Recycling Technologies Inc., First Real Estate
Investment Trust of New Jersey, Inter Parfums Inc., Itex
Corporation, and Penn Virginia Corp. See also Simpson Thacher survey
of pay ratio disclosures, available at http://www.compensationstandards.com/member/memos/firms/Simpson/03_15_ratio.pdf. We note that the pay ratio in these voluntary
disclosures may differ from the pay ratio required to be disclosed
in the final rule. In addition, registrants that currently disclose
pay ratio are not necessarily the same registrants subject to the
final rule.
---------------------------------------------------------------------------

    Currently, shareholders cannot calculate registrant-specific median
employee compensation or the ratio of the PEO compensation to median
employee compensation because there are no existing publicly available
sources for this data. In the absence of such data, researchers have
approximated the ratio using other available data, such as average
employee pay.\457\ Statistics on the median earnings of U.S. workers in
various ``industries'' are publicly available from the BLS,\458\
enabling shareholders to approximate the ratio using the industry
median employee compensation and the information about PEO compensation
for those registrants subject to Item 402(c).\459\ The distribution of
the ratios of CEO to industry median employee compensation for a sample
of large reporting companies is reported by NAICS industry sectors in
the figure below for fiscal year 2013.\460\ Using this data, it is
possible, for example, to determine that, for the median manufacturing
firm with available data, CEO pay was approximately 105 times industry
median employee pay. The 25th-75th percentile range for manufacturing
firms was approximately 51-195.
---------------------------------------------------------------------------

    \457\ In a working paper entitled ``The CEO-Employee Pay
Ratio,'' Dr. Steven Crawford finds that during the 1995-2012 period
the ratio of CEO compensation to the average employee pay at U.S.
commercial banks was on average 16.6 (with a median of 8.4). See
``The CEO-Employee Pay Ratio'' available at http://ssrn.com/abstract=2529112.
    \458\ See BLS Occupational Employment Statistics available at
http://www.bls.gov/oes/.
    \459\ See letter from Prof. Angel (``CEO compensation is already
disclosed for public, but not private companies. The only new
information is the pay of the median employee. However, there is
already pretty good information about median compensation in various
industries. For example, a few seconds of Googling leads to http://www.bls.gov/oes/current/oessrci.htm.'').
    \460\ The ratios in the figure are calculated for each
registrant with executive compensation data from the Standard and
Poor's Compustat Executive Compensation database which tracks
compensation for the companies currently or previously in the S&P
1500 index and industry median employee wage information at each 3-
digit NAICS level from the BLS as of May 2014. The data in the
Compustat Executive Compensation database is for fiscal year 2013,
which is the most recent fiscal year with complete coverage at the
time of this analysis. The distribution of the registrant-level
ratios within each NAICS industry sector (2-digit) is represented
using horizontal box plots that show the minimum and maximum, and
25th, 50th (median), and 75th percentiles.

---------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] TR18AU15.003

    We caution that any pay ratio estimate that can be made with
currently available information would be different from the ratio
required under the final rule. The above example uses the BLS median
wage information of U.S. workers within the same 3-digit NAICS
industries, while the final rule mandates registrants to use
registrant-specific information about median employee compensation for
``all employees,'' including employees in workplaces outside the U.S.,
subject to certain exemptions. Also, the example is based on only wages
and does not consider other forms of compensation for employees other
than PEOs because the BLS does not report those components for detailed
industry definitions. In contrast, the final rule requires registrants
to present the ratio using ``total compensation,'' which includes all
forms of compensation in Item 402(c)(2)(x). Thus, while existing public
data may permit shareholders to estimate median pay ratios across
industry sectors, it does not allow for the particularized, registrant-
specific assessment that, in our view, Section 953(b) was intended to
facilitate.
    To assess the economic effects of the final rule, we consider its
impact on shareholders, registrants subject to the pay ratio
disclosure, and all registrants' employees, including executive
officers. We estimate that the final rule applies to approximately
3,571 registrants.\461\
---------------------------------------------------------------------------

    \461\ Based on a review of EDGAR filings in calendar year 2014,
we estimate that there were approximately 7,619 annual reports on
Form 10-K filed in that year with available Xtensible Business
Reporting Language (XBRL) data tags (available at http://www.sec.gov/dera/data/financial-statement-data-sets.html). From this
number we subtracted the annual reports filed by approximately 678
emerging growth companies (EGCs), 2,958 smaller reporting companies
(SRCs), and 412 ABS issuers. These ABS issuers typically omit
executive compensation disclosures in accordance with General
Instruction J to Form 10-K. To the extent that the number of EGCs is
growing each year, we might be underestimating the number of
registered EGCs because we look only at registrants that file an
annual report on Form 10-K. Registrants can fall into multiple
categories among emerging growth companies, smaller reporting
companies, and foreign private issuers. For example, 371 smaller
reporting companies self-identified also as emerging growth
companies. Therefore, we did not include these 371 registrants in
the 2,958 smaller reporting companies that we subtracted from the
7,619 registrants that file annual reports on Form 10-K because they
were already included as emerging growth companies. Foreign private
issuers and MJDS filers that file annual reports on Form 20-F and
Form 40-F, respectively, are not required to provide Item 402
information. They are therefore not included in the 3,571 affected
registrants estimated above.
---------------------------------------------------------------------------

    Important potential determinants of the economic effects of the pay
ratio disclosure requirements on the affected registrants are the
differences in size, nature, and location of the workforce; complexity
of the organization; and the degree of integration of payroll systems
that are likely to exist among these registrants. In particular, the
number of business and/or geographic segments within a particular
registrant can significantly affect the compliance costs associated
with the final rule. The registrants that operate in different
geographic and business segments will likely have a less homogeneous
workforce and are also less likely to maintain a single centralized
payroll system.\462\ The average number of geographic and business
segments and employees per each segment disclosed by some of the
potentially affected

registrants in the calendar year 2014 are reported in the table
below.\463\
---------------------------------------------------------------------------

    \462\ See letter from Chamber II (reporting that 39 companies
that conduct operations in more than 50 countries with an average of
90 different ``employee data systems'' worldwide would have average
estimated labor costs of $311,800 for first year compliance. In
contrast, 37 companies that operate in fewer than 10 countries with
an average of 4.2 employee data systems would have average estimated
labor costs of $67,200 for first year compliance (according to the
25 firms that provided this data)).
    \463\ The corporate segments data used in the table come from
the Standard and Poor's Compustat Segments database for companies
with a business or geographic segment listed under ``segment type''.
Segment information is self-reported by companies. As such, it is
not based on standardized definitions of lines-of-business and
geographic areas. The database provides some geographic segment
information for approximately 63% of the potentially affected
registrants and some business segment information for approximately
68% of the potentially affected registrants.

                           Table 1--Characteristics of Registrants With Segments Data
----------------------------------------------------------------------------------------------------------------
                                                                                Number of
                                      Average           Min           Median            Max         registrants
----------------------------------------------------------------------------------------------------------------
Total Assets ($ millions).......          13,250               1           1,840       3,248,176           2,681
Number of Employees per                   15,453               0           2,978         537,000           1,575
 Registrant.....................
Number of Geographic Segments...            3.11               1               2              31           2,263
Geographic Segment Assets ($              11,892             3.1           1,512       3,248,176           1,037
 millions)......................
Number of Employees per                    8,742               0           1,522       1,100,000           1,210
 Geographic Segment.............
Number of Business Segments.....            2.45               1               1              11           2,444
Business Segment Assets ($                 4,614               1             811         812,044           2,171
 millions)......................
Number of Employees per Business           7,849               0           1,022         420,000           1,429
 Segment........................
----------------------------------------------------------------------------------------------------------------

    Table 1 shows that, in 2014, potentially affected registrants had
an average of three geographic segments and two business segments.
Also, the average number of employees was approximately 8,700 per
geographic segment and 7,800 per business segment. We do not have
complete information on how the registrants maintain their payroll
systems across multiple geographic and business segments, but we
believe that, because it is probable that registrants with multiple
geographic and business segments will have multiple payroll systems and
therefore lack easily accessible employee-level data on compensation,
the number of such segments serves as an indication of the complexity
and costs of trying to comply with the final rule (whether by sampling
at each segment and aggregating the samples across the segments or by
aggregating the payroll observations and sampling from the aggregated
pool). The estimated costs associated with compliance for registrants
with multiple geographic and business segments employing multiple
payroll systems are discussed below.
    One commenter asserted that the pay ratio disclosure may affect PEO
compensation.\464\ If the pay ratio disclosure were to significantly
affect PEO compensation, the rule may have adverse effects on
registrants' ability to attract and retain PEOs focused on such
compensation. We note that there may be other factors affecting the
ability of a registrant to attract and retain executive talent, such as
the general structure and conditions of the labor market for
executives. However, we do not have enough information to assess the
effect of the new rule on PEO compensation or on the level of
competition in the labor market for PEOs.
---------------------------------------------------------------------------

    \464\ See letter from Lou (``In spite of the fact that the pay
ratio does not necessarily lead to CEO pay cuts, some companies may
decrease executive pay if the number is too embarrassing. But this
productivity-unrelated deduction can artificially depress the U.S.
CEO market and IPOs.'').
---------------------------------------------------------------------------

    Relative to the baseline discussed above, the economic analysis
that follows focuses initially on the likely economic effects--
including benefits and costs and impact on efficiency, competition, and
capital formation--arising from the new mandatory disclosure
requirement prescribed by the Dodd-Frank Act, and it then focuses on
those that arise from the choices we have made in exercising our
discretion.\465\
---------------------------------------------------------------------------

    \465\ Although we have divided our discussion of the economic
effects of the rule between mandatory and discretionary features, we
do not mean to imply that Congress unambiguously compelled us to
adopt all of the items discussed under the mandatory requirements
discussion. Specifically, we recognize that we retain exemptive
authority and interpretive authority over many aspects of the rule,
including many of those that we discuss within the mandatory
requirements section. Generally speaking, we have chosen to classify
items as mandatory because, in our view, these particular items
appear to us to be consistent with the Congressional intent
underlying Section 953(b).
---------------------------------------------------------------------------

C. Economic Effects From Mandated Disclosure Requirements

1. Benefits
    The following discussion is mainly intended to address benefits of
the mandated disclosure to shareholders and shareholders of the
registrants that are subject to the disclosure requirements mandated by
Section 953(b).
    Although Congress neither expressly identified in Section 953(b) a
specific market failure intended to be addressed by the new disclosure
requirement nor expressly stated the specific objectives and intended
benefits of Section 953(b), we nonetheless believe that the context in
which the provision appears provides useful evidence of Congress'
purpose in enacting the provision. As discussed above, we believe that
Congress intended Section 953(b) to enhance the executive compensation
information available to shareholders. Particularly, Section 953(b)
provides new data points that shareholders may find relevant and useful
when exercising their voting rights under Section 951. We believe,
therefore, that Section 953(b) should be interpreted consonant with
Subtitle E's general purpose of further facilitating shareholder
engagement in executive compensation decisions. A significant
consideration for us in fashioning a final rule implementing Section
953(b), then, is the extent to which elements of the final rule further
Congress' apparent goal of giving shareholders additional executive
compensation information to use as part of the shareholder engagement
envisioned by Section 951.
    Moreover, as discussed earlier, a number of commenters stated that
they would find the pay ratio disclosure relevant when making voting
decisions.\466\ We acknowledge the views of these commenters and regard
the informational benefit of facilitating shareholder engagement in
executive compensation decisions as potentially a significant new
benefit to shareholders when they exercise their say-on-pay voting
rights. We note that registrants have not historically been required to
provide shareholders with access to information that would allow them
to

assess the level of a PEO's compensation as it compares to employees at
the same registrant and, as a result, shareholders generally have not
been provided such information.
---------------------------------------------------------------------------

    \466\ See, e.g., letters from AFL-CIO I, AFSCME, Amalgamated,
Bricklayers International, CalSTRS, Calvert, Chevy Chase Trust,
CorpGov.net, Form Letter C, Form Letter D, Form Letter E, Form
Letter F, LAPFF, LIUNA, NY State Comptroller, Pax World Funds,
Public Citizen I, Rep. Ellison et al. I, Rep. Ellison et al. II,
Trillium I, Trillium II, UAW Trust, and US SIF.
---------------------------------------------------------------------------

    While we believe that the pay ratio disclosure may provide an
informational benefit to shareholders in their say-on-pay voting, we
are unable to quantify this benefit. This is so for a number of
reasons. First, the primary benefit that results from the pay ratio
disclosure is not directly tied to an immediate economic transaction,
such as the purchase or sale of a security, which makes it difficult
for us to quantify in monetary terms the likely benefit to shareholders
of this information. Second, the pay ratio disclosure is but one data
point among many considerations that shareholders might find relevant
when exercising their say-on-pay votes, which also makes it difficult
for us to quantify the precise benefit that shareholders may
experience. Third, even in situations where the pay ratio may be a
significant or dispositive consideration for shareholders, because the
say-on-pay vote is advisory and not binding, it is difficult for us to
link the disclosure with certainty to a potential change in PEO
compensation and even more speculative for us to link the disclosure to
an economic outcome at a registrant. Further, we note that no commenter
provided us with data that would allow us to quantify the potential
benefits nor did any commenter suggest a source of data or a
methodology that we could look to in quantifying the rule's potential
benefits.
    We also think it is important to observe that, despite our
inability to quantify the benefits, Congress has directed us to
promulgate this disclosure rule. Thus, we believe it reasonable to rely
on Congress's determination that the rule will produce benefits for
shareholders and that its costs (which we discuss further below) are
necessary and appropriate in furthering shareholders' ability to
meaningfully exercise their say-on-pay voting rights. Because Congress
expressly directed us to undertake this rulemaking, we do not believe
it would be appropriate to second-guess its apparent conclusion that
the benefits from this rule justify its adoption. In any event, as
noted above, we concur with Congress's judgment that the pay ratio
disclosure could be beneficial for shareholders.
    Commenters also suggested that pay ratio disclosure can be a
valuable tool in evaluating PEO compensation practices in general.\467\
Among other uses of the pay ratio information, some commenters
suggested that comparing the total compensation of the median employee
and PEO would assist investors in their ability to evaluate the PEO's
compensation in the context of the registrant's overall business,\468\
and could provide insight into the effectiveness of board oversight and
sound board governance.\469\ Other commenters noted that they
incorporate social and governance issues, like pay equity, as part of
their investment decisions.\470\
---------------------------------------------------------------------------

    \467\ See, e.g., letters from Alexander, Bricklayers
International, CalSTRS, Calvert, Chicago Teachers Fund, First
Affirmative, Grossman, Grosvenor Capital, ICCR, IL Bricklayers and
Craftworkers Union, Cummings Foundation, LaBruyere, Linton, Marco
Consulting, NEI Investments (Dec. 2, 2013) (``NEI Investments I''),
NEI Investments (Feb. 28, 2014) (``NEI Investments II''), Novara
Tesija, NY Bricklayers and Craftworkers Union, NY State Comptroller,
Oxfam, Pax World Funds, Public Citizen I, RPMI, Taylor, Tortora, US
SIF, and Walden.
    \468\ See, e.g., letter from UAW Retiree Medical Benefits Trust
(Apr. 15, 2011) (``UAW Trust pre-proposal'') (``Disclosure of
internal pay equity, whether the ratio between median employee wages
and those of the CEO or the ratio between compensation awarded to
the CEO and to other top executives, will ultimately help investors
evaluate executive pay practices by better contextualizing the
information provided to the shareholders through the proxy statement
and other corporate filings.'').
    \469\ See, e.g., letters from Allied Value, LLC (``Allied
Value''); Kranen; Lynne L. Dallas, Professor of Law, University of
San Diego (Dec. 1, 2013) (``Prof. Dallas''); UAW Trust pre-proposal
(noting ``we view Section 953(b) as an essential tool that will
increase corporate board accountability to investors''); and WA
State Investment Board.
    \470\ See, e.g., letters from AFR, CT State Treasurer, Cummings
Foundation, and Form Letter B (``I support Dodd-Frank rule 953(b),
which strikes me as being all about the intersection of pay equity
and investor value.'').
---------------------------------------------------------------------------

    As noted above, we recognize that there are significant limitations
to using the pay ratio information for comparative purposes in light of
the various factors that could affect employee compensation at a
particular registrant and the flexibility we are providing. We believe
that the informational benefit to shareholders from the final rule is
in providing information about a particular registrant's executive
compensation.
    In addition to its utility in assessing PEO compensation practices,
commenters identified a number of ancillary benefits that may arise
from the required pay ratio disclosure. Some commenters suggested that
the new disclosure could offset an upward bias in executive
compensation resulting from the practice of benchmarking executive pay
solely against the compensation of other executives to the extent that
current benchmarking practices are inefficient.\471\ Other commenters
suggested that a comparison of PEO compensation to employee
compensation could be used by shareholders to approximate employee
morale and/or productivity \472\ or analyzed as a measure of a
particular registrant's approach to managing human capital.\473\ One
commenter cited his own research showing that large pay disparities
within a corporation contribute to an unethical culture within the
corporation.\474\ Finally, some commenters asserted that the
registrant-specific information about the median employee compensation
may be used to address a broader public policy concern relating to
income inequality and income mobility, which they suggest is
exacerbated by increasingly high levels of PEO compensation relative to
other workers.\475\
---------------------------------------------------------------------------

    \471\ See, e.g., letters from AFR, Cummings Foundation, LIUNA,
PGGM, and RPMI.
    \472\ See, e.g., letters from AFL-CIO I, AFR, AFSCME, Alexander,
Allied Value, B[acirc]tirente et al., CalSTRS, Calvert, Cummings
Foundation, CUPE, Demos I, Domini, Professors Charles M. Elson and
Craig K. Ferrere (Dec. 2, 2013) (``Profs. Elson and Ferrere''),
Estep, Form Letter A, FS FTQ, Daniel Greenwood (Oct. 26, 2013)
(``Greenwood''), Grossman, IPS, LaBruyere, Linton, McMorgan Co.,
Mudd, NY State Comptroller, Overcott, Pax World Funds, Public
Citizen I, Rosati, SEIU, Socially Responsive Financial Advisors,
Somers, Taylor, Teamsters, Tortora, Trillium I, Trillium II, Trustee
Campbell, US SIF, and Walden.
    \473\ See, e.g., letters from Bricklayers International, Demos
(May 30, 2014) (``Demos II''), FS FTQ, MVC Associates, Quintave,
OCP, Rep. Ellison et al. I, and UAW Trust.
    \474\ See letter from Prof. Dallas.
    \475\ See letters from Rep. Ellison et al. I; Rep. Ellison et
al. II; and Dr. Sue Ravenscroft, Professor of Accounting, Iowa State
University (Jun. 18, 2014) (``Prof. Ravenscroft II'').
---------------------------------------------------------------------------

    With respect to employee morale and productivity, commenters did
not specify what effect a pay ratio disclosure would have on these
conditions relative to other environment-specific and registrant-
specific factors. In particular, the pay ratio disclosure may be
significantly dependent on how a registrant structures its business.
For example, one registrant might outsource the labor-related
(manufacturing) aspects of its business to a third party to focus on
product innovation, while another registrant competing in the same
industry might choose to retain the labor aspect of its business. To
the extent that product innovation requires higher pay than
manufacturing, the outsourcing company will have a lower pay ratio for
the same PEO pay. Therefore, the potential value of this disclosure for
assessing issues related to employee morale, productivity, and
investment in human capital may be

diminished by the variation in business structures.
    Some commenters suggested that the pay ratio disclosure would
promote capital formation.\476\ The main rationale given for this
effect is that the new disclosure would help shareholders understand
the assets of the firms they invest in or that it will let shareholders
choose registrants that invest in their workforce.\477\ On the other
hand, some commenters asserted that the rule would discourage capital
formation because it would discourage firms from accessing the U.S.
capital markets.\478\ We note that the final rule does not apply to
emerging growth companies, which conduct the bulk of initial public
offerings.\479\ While the pay ratio disclosure could be costly, it is
not clear whether it would significantly affect a registrant's ongoing
capital raising activity.
---------------------------------------------------------------------------

    \476\ See, e.g., letters from Alexander, Capital Strategies,
Change to Win (Nov. 25, 2013) (``Change to Win''), CUPE, Greenwood,
Grossman, LaBruyere, Mudd, Overcott, Prof. Ravenscroft I, Taylor,
and Tortora.
    \477\ See, e.g., letters from Alexander, Greenwood, Grossman,
LaBruyere, Mudd, Overcott, Taylor, and Tortora.
    \478\ See, e.g., letters from Prof. Angel, COEC I, Lou, and
NIRI.
    \479\ M. Dambra, L. Field and M. Gustafson, The JOBS Act and IPO
Volume: Evidence that Disclosure Costs Affect the IPO Decision, J.
of Financial Economics. (2014) (documenting that 88% of the U.S.
IPOs filed in the 4/1/12-3/31/14 period are eligible for the EGC
revenue threshold).
---------------------------------------------------------------------------

    Overall, while certain shareholders may use the pay ratio for their
investment decisions, it is unclear whether the final rule would impact
the capital formation of U.S. capital markets in a significant way. As
discussed above, shareholders may be able to approximate the industry
level pay ratio using industry employee compensation data from BLS and
the information about PEO compensation for registrants subject to Item
402(c). In this regard, adding the pay ratio statistic to the mix of
reported financial and operational data may not change the investment
decision of investors who access this data. On the other hand, the pay
ratio disclosure is company-specific, which adds information not
otherwise available to investors.
    In contrast to commenters supporting the required disclosure, some
commenters stated that the disclosure mandated by Section 953(b) would
not have any benefit, or would not have benefits sufficient to justify
the compliance costs, which many of those commenters anticipate would
be substantial.\480\ Some of the commenters questioned the materiality
of pay ratio information to an investment decision \481\ This view was
also asserted by the minority in the Senate report accompanying the
legislation.\482\
---------------------------------------------------------------------------

    \480\ See, e.g., letters from AAFA I, American Benefits Council,
ASA, Brian Foley & Co. Chamber I, Chamber II, NIRI, Tesoro Corp.,
WorldatWork I, and WorldatWork II.
    \481\ See, e.g., American Benefits Council, ExxonMobil, Prof.
Muth, and RILA. Another commenter noted that pay ratio disclosure
that includes all employees and is based on a large, global, full-
and part-time pool of employees will not be meaningful without
substantial explanation. See letter from WorldatWork II.
    \482\ See S. Rep. No. 111-176 (2010) (``Although provisions like
this appeal to popular notions that chief executive officer salaries
are too high, they do not provide material information to investors
who are trying to make a reasoned assessment of how executive
compensation levels are set. Existing SEC disclosures already do
this.'').
---------------------------------------------------------------------------

    While we acknowledge these concerns about the usefulness or
materiality of the mandated disclosure, we note that other commenters
asserted that certain shareholders incorporate social and governance
issues, like pay equity, as part of their decision making.\483\ These
shareholders may realize non-economic benefits associated with their
decision making based on this type of information. These commenters,
however, did not quantify the extent to which shareholders would value
pay ratio information or would incorporate the disclosure required by
Section 953(b) into their investment or voting decision, if at all.
Academic research suggests that the stock market does not fully
incorporate employee satisfaction into stock prices.\484\ As mentioned
above, because company-specific pay ratio information is not currently
reported, it is not possible to assess the usefulness to shareholders
of this information as required by Section 953(b) relative to the
usefulness of publicly available statistics of median compensation, or
the usefulness of any other company-specific metric of employee
compensation or satisfaction.
---------------------------------------------------------------------------

    \483\ See, e.g., letters from AFR and Form Letter B.
    \484\ Existing research has studied whether there is a
correlation between information about employee satisfaction and
long-term equity returns in an effort to understand how the market
values a public company's intangible assets. This research uses
different information than what is provided in the pay ratio
disclosure. This research was based on the equity prices of
companies that were identified on Fortune Magazine's list of the
``100 Best Companies to Work For in America.'' See A. Edmans, Does
the stock market fully value intangibles? Employee satisfaction and
equity prices, J. of Financial Economics 101, 621-640 (2011)
(finding evidence implying that the market fails to incorporate
intangible assets, like employee satisfaction, fully into stock
valuations until the intangible subsequently manifests in tangibles,
such as earnings, that are valued by the market, and finding
evidence suggesting that the non-incorporation of intangibles into
stock prices is not simply due to the lack of salient information
about them).
---------------------------------------------------------------------------

    Some commenters were particularly concerned that the comparisons of
pay ratios across registrants may be inappropriate to the extent that
registrants employ workers in different countries that have unique
compensation practices,\485\ use different methodologies to calculate
the median employee,\486\ employ workers with different skill
levels,\487\ and have different corporate structures.\488\ As noted
above, we believe that the purpose of the pay ratio disclosure is to
provide shareholders of a registrant with new data points that they may
find relevant and useful when exercising their voting rights under
Section 951. As we noted in the Proposing Release, we believe that a
variety of factors can potentially limit the comparability of the pay
ratio across registrants. We also acknowledge that the final rule we
are adopting allows for significant flexibility in determining the pay
ratio to address concerns raised by a number of commenters about the
potential costs of the pay ratio disclosure. One result of allowing for
this flexibility, however, is that the comparability of the pay ratio
from registrant to registrant may be further diminished. We recognize
this consequence but believe it is justified in light of the cost
savings that such flexibility will provide and because we do not regard
precise comparability as the primary objective of the final rule.
---------------------------------------------------------------------------

    \485\ See, e.g., letters from Avery Dennison, BCIMC, and COEC I.
    \486\ See letter from BCIMC.
    \487\ See letter from COEC I.
    \488\ See letters from Prof. Angel, COEC I, and Tesoro Corp.
---------------------------------------------------------------------------

2. Costs
a. General
    The following discussion is mainly intended to address costs to
registrants that are subject to the pay ratio disclosure. The analysis
of costs focuses on direct compliance costs on registrants.
    As discussed above, the final rule permits registrants to choose
from several options to identify the median employee. First,
registrants can choose to use Item 402(c)(2)(x) to calculate the annual
total compensation for each employee and then identify the median
employee. Second, registrants can choose a statistical method that is
appropriate to the size and structure of their own businesses and the
way in which they compensate employees to identify the median employee,
and then use Item 402(c)(2)(x) to calculate the median employee's
compensation. Third, registrants can use a consistently applied
compensation measure, whether with respect to the entire employee
population or in conjunction with

statistical sampling, to identify the median employee, and then
calculate and disclose that median employee's total compensation in
accordance with Item 402(c)(2)(x).
    In addition to providing flexibility in identifying the median
employee's compensation, the final rule allows flexibility in several
other respects. Registrants may:
     Use reasonable estimates when applying Item 402(c)(2)(x)
to calculate the annual total compensation for employees other than the
PEO, including when disclosing the annual total compensation of the
median employee identified using a consistently applied compensation
measure;
     identify the median employee every three years to the
extent that there is no significant change in the registrant's employee
population or employee compensation arrangements;
     consistently choose any date within the last three months
of a registrant's fiscal year to identify the median employee.
    Moreover, the final rule allows flexibility for registrants with
non-U.S. employees by providing (1) a foreign data privacy law
exemption reducing the burden on registrants that operate in certain
foreign jurisdictions, and (2) a de minimis exemption that may reduce
the number of payroll systems that need to be used to identify the
median employee and will allow registrants some flexibility in
addressing payroll matters that may result from having employees in
multiple jurisdictions. Finally, the final rule also provides that
registrants, when determining the compensation of the median employee
for purposes of identifying the median employee and making the pay
ratio disclosure, may elect to adjust the compensation of their
employees in jurisdictions other than the jurisdiction in which the PEO
resides to reflect the cost of living in the PEO's country of
residence, but they must also provide disclosure of the registrant's
pay ratio calculated without the cost-of-living adjustment. Overall, we
believe that the flexible approach allowed by the final rule is
consistent with Section 953(b) and, in certain circumstances discussed
below, may reduce costs compared to other methods of implementing the
statute.
b. Compliance Cost Estimates in Comment Letters
    In the pre-proposing period, we received estimates of the costs of
compliance for certain registrants from some commenters.\489\ These
estimates varied significantly and were based on the commenters'
initial reading and interpretation of the statute and not on the
proposed rule, which would allow for flexibility not accounted for in
the pre-proposal letters. For example, prior to the proposal, one
commenter estimated the cost of compliance with Section 953(b) would be
$250,000 to $500,000 annually, and revised its cost estimate downward
to $15,000 annually after the proposed rule was released ``primarily
due to the ability afforded by the proposed rule for registrants to use
a consistently applied compensation measure, such as payroll records or
W-2 reportable wages and the equivalents for non-U.S. employees, to
identify the median employee.'' \490\
---------------------------------------------------------------------------

    \489\ For example, one pre-proposal comment letter from an
industry group reported that a member company estimated that it
would require approximately $7.6 million and 26 weeks to prepare the
pay ratio disclosure and that a separate member company estimated
that it would cost approximately $2 million annually to determine
the actuarial value of employee pension benefits. See American
Benefits Council et al., (Jan. 19, 2012) (``American Benefits
Council et al. pre-proposal letter'').
    \490\ See letter from Intel.
---------------------------------------------------------------------------

    In the Proposing Release, we did not estimate the costs of the
calculation and disclosure of a registrant's pay ratio because we did
not have enough data for such estimation. In response to the Proposing
Release, a number of commenters evaluated our estimates of the
compliance costs represented by the estimated Paperwork Reduction Act
(``PRA'') burdens imposed by the proposed rule. Most commenters
generally indicated that those PRA burdens underestimated the
compliance costs associated with the disclosure requirement, and some
provided more specific cost estimates. For example, one commenter noted
that our PRA estimate of an average of 340 hours of internal company
time in year one to comply with the proposed rule significantly
understates the time that many companies would need to comply
(especially those with non-U.S. employees).\491\ Below, we discuss the
specific comments that we consider to be the most useful to estimate
the compliance costs of the pay ratio disclosure. We note that, in
providing specific comments, commenters did not typically distinguish
between costs derived from the statutory mandate and costs derived from
the exercise of our discretion. Furthermore, they typically did not
distinguish between internal costs in burden hours versus external
professional costs in dollar amounts for PRA purposes.
---------------------------------------------------------------------------

    \491\ See letter from NIRI.
---------------------------------------------------------------------------

    Two commenters provided survey studies with several relevant
estimates of the compliance costs associated with the proposed rule, as
well as characteristics of the types of registrants that would be
affected. As discussed in greater detail below, the aggregate initial
external compliance cost estimates provided by these commenters range
between $187 million \492\ and approximately $711 million.\493\ These
estimates are based on responses to the surveys discussed below and may
not be representative of all registrants affected by the final rule.
---------------------------------------------------------------------------

    \492\ See letter from COEC I. We note that this estimate
represents only the cost of outside professionals and does not take
into account internal company hours as an additional cost of
compliance with the rule. This commenter estimated that compliance
would require at least 801,000 hours of in-house personnel time (at
least 255,000 additional company hours above the 546,000 company
hours we estimated) in addition to a cost of $187 million.
    \493\ See letter from Chamber II. This commenter estimated an
annual internal compliance burden of 3.6 million hours in addition
to an annual cost of $710.9 million.
---------------------------------------------------------------------------

i. Center on Executive Compensation Survey
    One commenter provided the results of a joint survey it conducted
among its members.\494\ The results are based on the responses from 128
public companies out of 1,270 surveyed.\495\ Most of the respondents
are large registrants, with average revenue of approximately $28
billion; 59% of the registrants had revenues greater than $10 billion.
Nearly 80% of respondents had 10,000 or more employees, most of them
employed full-time. In addition, nine out of ten respondents had
foreign operations with employees located outside the United States. On
average, respondents operated in 34 countries, and about two-fifths of
their employees worked in foreign countries. The average number of
separate employee data systems that respondents had worldwide was 46.
---------------------------------------------------------------------------

    \494\ This survey was jointly conducted by the COEC, Human
Resource Policy Association, and Corporate Secretaries. See letters
from COEC I and Corporate Secretaries. See also letter from Business
Roundtable I (referencing the results from the COEC I survey).
    \495\ See letter from COEC I. We note that the letter from
Corporate Secretaries refers to results from the same survey, but
for the 127 respondents who are also members of Corporate
Secretaries.
---------------------------------------------------------------------------

    In its letter, the commenter questioned our estimate, for PRA
purposes, of $400 per hour for outside professional costs and the
estimated PRA hour burden. More than half of the survey respondents
indicated that the average hourly fee for their company's

external securities compliance counsel is above $700. The respondents
also indicated that, on average, 72% of the estimated initial
compliance costs are expected to be incurred in subsequent years. Based
on these survey results, the commenter asserted that compliance with
the rule would require at least 255,000 additional company hours and an
additional $114.1 million in costs across all affected registrants for
outside professional services above the our PRA burden estimates in the
Proposing Release ($72.77 million). Using these updated estimates, the
commenter arrived at a total initial compliance cost estimate of at
least $186.9 million.\496\ We note that, although labeled ``total
compliance costs'' by the commenter, that estimate of compliance costs
includes only the cost of outside professionals, and thus is only part
of the expected total compliance costs. The estimate does not take into
account internal company hours as an additional cost of compliance with
the rule. Additionally, the commenter assumed that all affected
registrants will bear the same compliance costs, which may bias its
total cost estimate because compliance costs are likely to vary between
registrants with and without foreign operations, or between small and
large registrants.
---------------------------------------------------------------------------

    \496\ The commenter reports the additional cost of outside
professional services of $114 million in excess of the cost of
outside professional services estimated by us in the Proposing
Release. The total cost estimate reported as $186.9 million can be
obtained by adding $114 million and $72.77 million, with the
difference likely due to rounding. See letter from COEC I.
---------------------------------------------------------------------------

    The survey provided several estimates of how compliance costs might
change if there were certain changes in the rule. For instance, the
commenter's letter argued that the final rule should apply only to a
registrant's consolidated subsidiaries, noting that its survey
indicated that, if the final rule were to include employees of all
minority-owned subsidiaries and joint ventures, a registrant's
compliance costs would increase by an average of 91%, with a mid-range
of 20%. The letter from the other commenter that jointly conducted the
survey also presented information about the inclusion of all minority-
owned subsidiaries and joint ventures, but its letter presented the
survey data in a different format. It presented the average and median
anticipated increases categorized based on the company's annual
revenue.\497\ According to this comment letter, for registrants with
annual revenue of over $30 billion, the median increase in cost would
be approximately 35% if employees in minority-owned subsidiaries and
joint ventures were included. For registrants with annual revenue
between $5 billion and $30 billion, that median increase would be
approximately 20%, while for registrants with annual revenue below $5
billion, the median increase in compliance cost would be 10%. These
numbers, however, appear to reflect an increase in the compliance cost
if the coverage of subsidiaries and joint ventures were to be increased
from the suggested coverage under the Proposing Release to complete
(100%) coverage of subsidiaries and joint ventures. Thus, they do not
directly correspond to the changes we made in this release, including
the change that we made to include only employees of a registrant's
consolidated subsidiaries, as suggested by the commenter.
---------------------------------------------------------------------------

    \497\ See letter from Corporate Secretaries.
---------------------------------------------------------------------------

    If a registrant were permitted to calculate the pay ratio based on
full-time, permanent employees only, then according to the survey
responses, the compliance cost would decrease by a mid-range of 10% or
an average of approximately 11%.\498\ Another commenter suggested that
the median decrease in compliance costs would be approximately 10% or
an average of 12% if a registrant were permitted to calculate the pay
ratio based on full-time, permanent employees only.\499\ Requiring only
U.S. employees to be used when estimating the pay ratio would decrease
costs on average by 40%, while the mid-range decrease would be
approximately 50%.\500\ In contrast, if the rule did not contain the
flexibility allowed under the proposal and instead total compensation
as calculated in the Summary Compensation Table was required to be used
to identify the median employee, 99% of the respondents said that their
cost would increase and 49.1% said that the cost would increase by over
100%. Another commenter, relying on information from the same survey,
suggested that the average cost increase would be 4,689% and the median
cost increase would be approximately 175% if total compensation as
calculated in the Summary Compensation Table was required to be used to
identify median employee pay.\501\
---------------------------------------------------------------------------

    \498\ See letter from COEC I. While the survey data attached to
the comment letter showed that the average anticipated cost
reduction would be 11%, the text of the comment letter discussing
the survey also stated that for the subset of respondents that
anticipated that limiting the rule to full-time employees would
lower costs, ``the average savings would be approximately 20
percent.''
    \499\ See letter from Corporate Secretaries.
    \500\ See letter from COEC I (mentioning in the text of the
comment letter that the expected decrease is ``47% on average for
firms with non-U.S. employees''). See also letter from Corporate
Secretaries.
    \501\ See letter from Corporate Secretaries.
---------------------------------------------------------------------------

ii. Chamber of Commerce Survey
    A different commenter also provided estimates of compliance costs
of the proposed rule based on survey results.\502\ This commenter's
survey is a version of the COEC survey that included only 118
respondents, approximately ``3.1% of all covered businesses.'' The
commenter did not elaborate on how its version of the survey is
different from the COEC survey, other than including fewer
respondents.\503\ The commenter's letter provides no information on the
survey's respondent size characteristics to provide context with
respect to the respondents' potential organizational complexity and
associated challenges in complying with the proposed rule. Based on the
survey, the commenter concludes that the average labor cost per company
of complying with the proposed rule would be approximately $185,600 for
the initial year. That commenter also estimated, but did not monetize,
an annual compliance time of 3.6 million hours.\504\ The survey results
also show a wide divergence in cost estimates across survey
respondents, with 42 respondents estimating the value of the time
necessary to comply with the proposal to be at least $100,000, while 13
respondents estimated this value to be less than $10,000. On average,
respondents estimated 952 hours needed to comply with the proposed
rule. Respondents that conduct operations in foreign countries will
have higher compliance costs according to the survey results. Thirty-
nine respondents that conduct operations in more than 50 countries
indicated an average labor cost of $311,800 to comply with the proposed
rule. These respondents also reported an average of 90 different
employee data systems worldwide. On the other hand, for 37 respondents
that operate in fewer than 10 countries, the average compliance cost
was estimated to be $67,200. Based on the survey results, the commenter
asserted that the total external compliance costs for the private
sector could be approximately $711 million and that total cost could
increase to $1.1 billion (in addition to the internal compliance time)
if every

affected registrant has an average cost of $311,800.
---------------------------------------------------------------------------

    \502\ See letter from Chamber II.
    \503\ The letter from Chamber II does not specify how many
companies were surveyed but the letter indicates that the Chamber
represents over ``3 million businesses and organizations of every
size, sector and region.''
    \504\ See letter from Chamber II.
---------------------------------------------------------------------------

iii. Other Specific Comments
    In addition to the two surveys, several other commenters provided
the following cost estimates based on the proposed rule. In these
estimates, the commenters did not distinguish between the costs arising
from the mandated disclosure and the costs arising from the exercise of
our discretion. The estimates for the proposal were as follows:
     $500,000 to $1 million to automate a large global
registrant's processes; \505\
---------------------------------------------------------------------------

    \505\ See letter from KBR.
---------------------------------------------------------------------------

     between $1 million and $1.5 million for at least 10 to 15
internal staff members and two or three external advisors, with 100 to
150 hours of internal work and 20 to 40 hours in external consulting
time; \506\
---------------------------------------------------------------------------

    \506\ See letter from Avery Dennison.
---------------------------------------------------------------------------

     annual compliance cost of $15,000 for an issuer with
global operations; \507\
---------------------------------------------------------------------------

    \507\ See letter from Intel.
---------------------------------------------------------------------------

     a ``likely to be conservative'' estimate of $100,000 per
company, based on what mid-sized retail corporations informed the
commenter.\508\
---------------------------------------------------------------------------

    \508\ See letter from NRF. We note that this commenter did not
indicate the number of employees of such mid-sized retail
corporations.
---------------------------------------------------------------------------

     approximately $250,000 for 1,000 internal hours initially
and $100,000 per year for 500 hours annually thereafter (but, according
to the commenter, the workload would perhaps drop by 90% if the final
rule includes only employees employed by the U.S. parent organization
and all U.S.-based subsidiaries in addition to other changes
recommended by the commenter); \509\
---------------------------------------------------------------------------

    \509\ See letter from FEI.
---------------------------------------------------------------------------

     ``thousands of dollars to hire a dedicated resource and
overhaul our payroll and human resource information system in order to
prepare our first pay ratio disclosures under this rule;'' \510\
---------------------------------------------------------------------------

    \510\ See letter from FuelCell Energy.
---------------------------------------------------------------------------

     between $50,000 and $100,000 to test the commenter's
current payroll system for a quote on identifying the median employee,
with an ``actual cost'' that ``is indeterminable'' but that the
commenter believes could cost over $500,000; \511\
---------------------------------------------------------------------------

    \511\ See letter from NACCO.
---------------------------------------------------------------------------

     $500,000 to $1 million for 50 internal employees and
outside advisors; \512\
---------------------------------------------------------------------------

    \512\ See letter from General Mills.
---------------------------------------------------------------------------

     3,000 work hours in the initial year and 850 work hours
annually thereafter (but, according to the commenter, these costs would
be reduced by 90% if the final rule excluded non-U.S. employees); \513\
---------------------------------------------------------------------------

    \513\ See letter from ExxonMobil.
---------------------------------------------------------------------------

     over $1.6 million not including modifications of payroll
or accounting systems; \514\
---------------------------------------------------------------------------

    \514\ See letter from Eaton.
---------------------------------------------------------------------------

     actual cost is indeterminable, but believed to exceed
$500,000 due to substantial non-U.S. employee base; \515\
---------------------------------------------------------------------------

    \515\ See letter from Hyster-Yale.
---------------------------------------------------------------------------

     cost for many registrants would likely to be in the
millions of dollars; \516\ and
---------------------------------------------------------------------------

    \516\ See letter from ASA.
---------------------------------------------------------------------------

     annual cost to collect required data would exceed $2
million.\517\
---------------------------------------------------------------------------

    \517\ See letter from Dover Corp.
---------------------------------------------------------------------------

    The overall cost range provided by individual commenters for
initial compliance by a large registrant was between $15,000 per year
to $2 million.\518\ We note that all of these comments concerned the
proposed rule, rather than the final rule. As discussed below, the
final rule allows for further flexibility, which we believe will reduce
the cost of compliance.
---------------------------------------------------------------------------

    \518\ See letters from Dover Corp. and Intel.
---------------------------------------------------------------------------

    These estimates provide a significant number of data points on the
anticipated compliance costs that we use in our quantification of the
estimated compliance costs of the final rule below. However, we caution
that these estimates do not necessarily represent an accurate
indication of the expected costs because they use different
methodologies and assumptions in arriving at these numbers, some of
which might change with the different requirements under the final
rule. Moreover, only a few commenters discussed the complexity of their
payroll systems; \519\ the degree to which the estimated costs reflect
internal personnel costs \520\ or the costs of outside service
providers \521\ and outside professionals; \522\ and the precise
assumptions used in deriving the estimates, all of which may be
relevant for assessing the estimates provided.\523\ Also, although most
of these estimates do not precisely distinguish between initial and
ongoing costs, we expect that, for many registrants, the overall
compliance burden will diminish after systems are in place to gather
and verify the underlying data.\524\ Some commenters noted that the
costs are impossible to determine before they start the process.\525\
The provided cost estimates were also given prior to additional cost-
reducing measures adopted in the final rule in response to comments,
including comments about costs. These measures include: The ability to
calculate the median employee once every three years, the exemption
from the definition of ``employee'' of a de minimis percentage of non-
U.S. employees, the requirement to consider only registrant's own
employees and those of their consolidated subsidiaries when identifying
the median employee, and the exemption for employees in foreign
jurisdictions in which it is not possible for a registrant to obtain or
process information necessary to comply with the rule without violating
the data privacy laws or regulations of that jurisdiction. We expect
that these changes will further reduce the costs of compliance.
---------------------------------------------------------------------------

    \519\ See letter from Hyster-Yale (commenting that ``of the
4,967 people who received Form W-2s (or similar documents) for 2012,
2,375 (48%) resided outside the U.S. and were paid on twenty
different payroll systems (none of which are integrated with our
U.S. system or any other system)''). This commenter, however, did
not comment on the expected cost of integrating these payroll
systems.
    \520\ See letter from Avery Dennison (estimating that they will
use 10-15 internal staff members with 100-150 hours of internal
work), FEI (estimating 1,000 hours of internal time to develop the
database and methodology to derive the data and 500 hours to
maintain this database in the following years), and ExxonMobil
(estimating 3,000 work hours by internal personnel in the first year
and 850 work hours per year thereafter).
    \521\ See letter from ExxonMobil (stating ``are not able to
provide a specific estimate, but expect that a significant work
effort would also be required on the part of each of our 60 third-
party vendors'').
    \522\ See letters from Avery Dennison (estimating that they will
use two or three external advisors (e.g., legal counsel, human
resources consultants) and 20-40 hours of external consulting time,)
and Hyster-Yale (stating that it will need to hire an outside
consulting firm to assist with the process).
    \523\ See letter from General Mills (providing a list of steps
it will take). However, the commenter did not provide detailed cost
estimates for these steps.
    \524\ A few commenters addressed this point, and the estimates
they provided were very different. See, e.g., letters from
ExxonMobil (expecting a 72% drop), FEI (estimating a 60% drop in
compliance costs from the first year to the next year), and General
Mills (indicating that most of the costs for the first year would
also apply to subsequent years of compliance). But see letter from
Business Roundtable I (asserting that 42% of respondents to a survey
it conducted indicated that they would have to update their
methodology every year).
    \525\ See, e.g., letter from NACCO (stating that consulting
companies were unable to provide quotes about the cost to assist
with statistical sampling until they are able to test their various
payroll systems). This commenter also stated that the actual cost is
indeterminable but could exceed $500,000, as it will depend on (i)
the availability and accuracy of employee data, (ii) the scope of
the final rule and (iii) whether registrants choose to disclose the
minimum required disclosure or if they decide to provide various
alternative disclosures that would provide shareholders with more
context.
---------------------------------------------------------------------------

    In contrast to these estimates, a significant number of the
commenters, generally the same commenters that perceived the benefits
of the rule, asserted that the rule would not impose high costs and
burdens. The majority of these commenters indicated that the

permitted flexibility in complying with the proposed rule would reduce
costs,\526\ and that the registrants already have the data necessary to
make their pay ratio calculations.\527\ While we agree that the
permitted flexibility should lower costs for many registrants, we
recognize that registrants who operate in various geographic and
business segments may need to reconcile their systems to compile and
provide the required information at a potentially significant
cost.\528\
---------------------------------------------------------------------------

    \526\ See e.g., letters from AFR, Bricklayers International,
CalPERS, Calvert, Capital Strategies, Chicago Teachers Fund,
Cummings Foundation, First Affirmative, ICCR, IL Bricklayers and
Craftworkers Union, LIUNA, Marco Consulting, Novara Tesija, NY
Bricklayers and Craftworkers Union, Oxfam, Pax World Funds, Prof.
Ravenscroft I, Public Citizen I, Rep. Ellison et al. I (referring
specifically to sampling), Sen. Menendez et al. I, Sen. Menendez et
al. II, and US SIF.
    \527\ See, e.g., letters from AFR, Allied Value, CalPERS, LAPFF,
LIUNA, Pax World Funds, and Theodore.
    \528\ See, e.g., letters from American Benefits Council, Aon
Hewitt, Avery Dennison, BCIMC, Business Roundtable I, Business
Roundtable (Jul. 21, 2015) (``Business Roundtable II''), Chamber I,
COEC I, Corporate Secretaries, Cummins Inc., Eaton, ExxonMobil, FEI,
Freeport-McMoRan, FuelCell Energy, IBC, KBR, MVC Associates, NACCO,
NAM I, NAM II, NIRI, Semtech, SHRM, and Tesoro.
---------------------------------------------------------------------------

c. Quantification of Compliance Costs
    While our overarching consideration of the costs of the rule takes
into account the information provided by a broad range of commenters,
the most useful frameworks for considering costs were provided by
commenters that provided data on company-wide potential costs. Other
commenters provided certain valuable insights into how our rule would
be implemented, but were either not as transparent in their analytical
frameworks or not easily generalizable in terms of aggregating the
costs across multiple registrants.
    Some commenters indicated that the most important driver for the
compliance costs of the required disclosure is the presence of foreign
operations and the complexity of dealing with, or the need to create
compatible employee data and payroll systems that track the
compensation of employees of such foreign operations.\529\ Underscoring
the importance of foreign operations for the costs of compliance with
the rule, one commenter's survey results indicate that the compliance
costs for registrants would decrease by a median of 50% or on average
by 40% if only U.S. employees were included in the calculation of the
median compensation.\530\ In addition, most of the survey participants
appear to have had at least some international operations. The
participants in the commenter's survey on average operate in 34
countries (including the United States) \531\ and have about 38% of all
employees and 44% of their full-time employees outside of the United
States. The survey reflected predominantly larger registrants and
therefore may not reflect the characteristics of a large number of
registrants subject to Section 953(b) requirements. Another commenter
suggested that the cost of implementing the final rule would be 20-30
times higher if foreign employees are included in the calculation of
the median compensation.\532\ Based on these comments and survey
results, we acknowledge that there may be significant differences in
the potential costs of the rule between registrants with foreign
operations and registrants without foreign operations.
---------------------------------------------------------------------------

    \529\ See id.
    \530\ See letter from COEC I. The survey was conducted jointly
by COEC, Human Resource Policy Association, and Corporate
Secretaries. See supra note 494.
    \531\ See id. The Chamber II survey participants were similarly
international in operation. Over 68% of the participants in the
Chamber II survey operate in more than 10 countries.
    \532\ See letter from American Benefits Council.
---------------------------------------------------------------------------

    Commenters have pointed out other potential cost drivers, such as
including part-time, seasonal, and temporary employees in the
calculation of the median. However, the effect of these other factors
seems to be less significant. For example, one commenter's survey
results suggest that the compliance costs for registrants would
decrease by a median of 10% and on average by 11% if only full-time
permanent employees are included in the determination of the median
compensation, compared to an expected median reduction of 50% or
average reduction of 40% if no foreign employees are included in the
determination.\533\
---------------------------------------------------------------------------

    \533\ See letters from COEC I.
---------------------------------------------------------------------------

    Some of the compliance costs outlined above may be ameliorated by
the de minimis exemption in the final rule that allows for some
flexibility in identifying the median employee for registrants that
have employees in multiple countries. The final rule also provides a
foreign data privacy law exemption that should help to reduce the
burden on registrants that operate in certain foreign jurisdictions.
For some registrants with small foreign operations, the de minimis
exemption and the foreign data privacy law exemption might greatly
reduce the importance of foreign operations as a driver of compliance
costs.
    Several commenters subject to the proposed rule provided compliance
costs estimates specific to their particular situation. Other
commenters provided cost estimates for what appear to be anonymous but
real companies.\534\ For all estimates received, we have used data
available from Standard and Poor's Compustat,\535\ to obtain or confirm
information about the number of employees at the registrant. Because,
as noted above, certain registrants were not specifically identified,
we could not confirm or obtain their number of employees or use them to
construct a reliable cost-per-employee estimate, which is a key factor
in our analysis below. Accordingly, we decided to focus our analysis on
those estimates where the registrant was identified, although we have
noted below what the impact on our estimates would be if we were to
include the estimates from the unidentified registrants whose
employment data we cannot verify.
---------------------------------------------------------------------------

    \534\ One commenter mentioned that ``Company B,'' a U.S.
multinational manufacturer with approximately 130,000 employees in
about 275 locations worldwide, including 30,000 employees in the
United States and 100,000 overseas expects that the cost to build
the global human resources information system needed to comply with
the proposed rule would exceed $18 million. See letters from NAM I
and NAM II. Another commenter mentioned that one survey respondent
with over 50,000 employees across 69 countries described the costs
of data gathering as over $10 million. See letter from Corporate
Secretaries. The commenter only notes that the survey respondent has
over a certain number of employees.
    \535\ The Standard and Poor's Compustat Database is a
comprehensive database of company financials routinely used by us,
academics, and practitioners in empirical assessments involving
public companies.
---------------------------------------------------------------------------

    To estimate the potential compliance costs of the final rule, we
analyze the detailed information on compliance costs provided in
comment letters from 10 registrants \536\ and provide an assessment,
below, of how their estimates might relate more broadly to other
affected registrants. The reported expected costs vary in nature, but
the common element among the commenters is the cost associated with
modifying current payroll or accounting systems to compile the
information necessary for the identification of the median employee and
the calculation of the employee's compensation. In quantifying these
and other reported potential costs, when registrants presented a range
of cost estimates, we use the mid-range value (i.e., if a registrant
indicated that its costs would range from $0.5 million to $1 million,
we use $0.75 million in the analysis).\537\

When registrants indicated that they expect to incur at least a certain
dollar amount of costs, we use that value in our estimation, and, as
such, this represents a lower bound because we have no way of
estimating the top of their range (i.e., if a registrant indicated that
its costs would be at least $0.5 million, we use $0.5 million in the
analysis).
---------------------------------------------------------------------------

    \536\ See letters from Avery Dennison, Dover Corp., Eaton,
ExxonMobil, General Mills, Intel, NACCO, FEI, Hyster-Yale, and KBR.
    \537\ Since commenters provided no information on how likely it
is that the costs would be close to the lower or upper bound of the
range, we believe that using the midpoint of the range would provide
a reasonable cost estimate.
---------------------------------------------------------------------------

    One commenter provided costs in terms of the number of hours rather
than in dollar value terms.\538\ In this case, we converted the hours
into a dollar amount using the hourly rates reported in one commenter's
survey,\539\ according to which the median respondent expected to incur
the cost of $700 per hour to comply with the proposed rule. This rate
is higher than our estimate of $400 per hour for professional costs in
the PRA section of the Proposing Release, and we believe it may
overestimate the costs of compliance with the final rule. We continue
to believe that $400 per hour is the appropriate rate to use for PRA
purposes as this reflects the average cost for outside professional
services for all registrants, including smaller and mid-sized
registrants. Nevertheless, we have used the $700 per hour rate here to
be conservative in our estimates and because the commenter in question
is a large registrant with globally diversified operations. The
estimate of $700 per hour for outside compliance counsel may be
justified for a certain type of registrant with certain size and
characteristics but may not be representative of all registrants. We
also note that we have monetized the commenter's entire hourly estimate
using the $700 per hour rate. This likely overstates the actual dollar
value of these costs, as we expect that some of the compliance burden
of the final rule will be carried internally by the registrant (e.g.,
using the registrant's existing workforce) and at rates significantly
lower than $700 per hour.
---------------------------------------------------------------------------

    \538\ See letter from ExxonMobil.
    \539\ See letter from COEC I.
---------------------------------------------------------------------------

    The 10 registrants that quantified expected registrant-wide
compliance costs tend to be large registrants (in terms of both assets
and revenues) and have globally diverse operations, and as such, may
not be representative of the costs incurred by smaller registrants or
registrants that do not have foreign operations. Thus, we restrict the
use of the information provided by them to estimate the expected
compliance costs for only registrants subject to the requirements that
we identify as having foreign operations. Since we believe that the
compliance costs will be generally proportionate to the size of the
registrant's work force, we calculate the cost per employee using the
number of employees reported for fiscal year 2013.\540\
---------------------------------------------------------------------------

    \540\ This assumption implies that all compliance costs are
variable. It is possible that some compliance costs have a fixed
component (i.e., payroll system configuration costs and training),
and thus compliance costs per employee may be higher for small and
mid-size firms with globally diversified operations than for
globally diversified large firms, which may result in adverse
effects on competition to the extent that the former are not SRCs
and are not covered by the de minimis or foreign data privacy
exemptions. Data on the number of employees and revenues is taken
from Standard and Poor's Compustat.
---------------------------------------------------------------------------

    For the 10 registrants with compliance cost estimates, we estimate
the ratio of ``Compliance cost estimates'' to ``Number of employees.''
We then take the median ratio and use it to estimate the expected
initial compliance costs for registrants with U.S.-based operations and
registrants with foreign operations. We use the median instead of the
average to diminish the influence of outliers. The individual estimates
and the average and median are presented in the table below. We
estimate that the average cost-per-employee for these registrants would
be $50.70 and the median cost-per-employee would be $38.04. The average
cost per registrant is approximately $971,500, while the median is
$750,000.\541\ We note that the 10 registrants in this analysis are
larger than the average and median registrant subject to the final
rule. To adjust for differences in registrant size, we make the
assumption that the compliance costs of the rule will be proportionate
to the size of the registrant's work force, which enables us to use the
cost-per-employee ratio to estimate the potential compliance costs of
affected registrants.
---------------------------------------------------------------------------

    \541\ Our estimate of the cost per registrant aggregates the
cost of outside professional services and monetized internal burden
hours. One commenter referred to an average cost of $311,800 per
registrant to comply with the pay ratio provision. The commenter
also estimated that the median registrant would require 1,825
internal burden hours to comply with the rule. These estimates are
based on companies with operations in more than 50 countries that
averaged 90 different employee data systems. See letter from Chamber
II.

               Table 2--Total Initial Compliance Costs per Employee Based on Commenters' Estimates
----------------------------------------------------------------------------------------------------------------
                                                       Total
                                                    compliance      Revenue ($       Number of    Estimated cost
            Commenter                   CIK       cost estimates     millions)       employees     per employee
                                                     (dollars)                      (thousands)      (dollars)
----------------------------------------------------------------------------------------------------------------
Avery Dennison..................<PHONE_NUMBER>       1,250,000         6,140.0              26           48.08
Dover Corporation...............<PHONE_NUMBER>       2,000,000         8,729.8              37           54.05
Eaton Corporation...............<PHONE_NUMBER>       1,600,000        22,046.0             102           15.69
ExxonMobil Corp.................<PHONE_NUMBER>       2,100,000       390,247.0              75           28.00
General Mills...................<PHONE_NUMBER>         750,000        17,909.6              43           17.44
Intel...........................<PHONE_NUMBER>          15,000        52,708.0           107.6            0.14
NACCO...........................<PHONE_NUMBER>         500,000           932.7             4.1          121.95
FEI Company.....................<PHONE_NUMBER>         250,000           927.5            2.61           95.79
Hyster-Yale Materials Handling..<PHONE_NUMBER>         500,000         2,666.3             5.1           98.04
KBR.............................<PHONE_NUMBER>         750,000         7,214.0              27           27.78
                                 -------------------------------------------------------------------------------
Average.........................  ..............  ..............  ..............  ..............           50.70
Median \542\....................  ..............  ..............  ..............  ..............           38.04
----------------------------------------------------------------------------------------------------------------

    We estimate the aggregate costs for the 3,571 registrants to whom
the rule will apply, including both registrants with U.S.-based
operations and registrants with foreign operations, using data from
Standard and Poor's Compustat. We

classify registrants as having foreign operations if they report having
at least one geographical segment outside the United States. If they
report only U.S.-based segments, then we classify them as having U.S.-
based operations only. We note several challenges in calculating these
estimates. First, 13 of both the registrants with foreign operations
and the registrants with U.S.-based operations only do not report the
total number of employees. For these registrants, we impute the total
number of employees by using the median number of employees for the
registrants with foreign operations and the registrants with U.S.-based
operations, respectively. Second, about 37% of affected registrants do
not report geographic segment data, so we cannot classify them as
registrants with U.S.-based operations or registrants with foreign
operations.\543\ We compare the total assets and total revenues of
these to the group of registrants with U.S.-based operations or
registrants with foreign operations. These registrants tend to more
closely resemble the registrants with U.S.-based operations, so we
classify them as such. We recognize that this may underestimate the
compliance cost for registrants with non-U.S. operations that choose
not to report geographic segments.
---------------------------------------------------------------------------

    \542\ If we were to include the data for the anonymous
registrants in the NAM I/NAM II letters and the Corporate
Secretaries letter, the median would be $51.07. We note that the
data for the anonymous registrant in the Corporate Secretaries
letter did not specify a single number of employees, indicating
instead that registrant had over 50,000 employees, thus making it
difficult to compute a cost per employee ratio without additional
assumptions. We assume that the number of employees of that
anonymous registrant was 50,000 and its compliance cost was $10
million.
    \543\ Compustat, like most other databases, has incomplete
coverage of small companies, and reporting companies that do not
trade on national exchanges.
---------------------------------------------------------------------------

    We estimate the initial compliance costs for the registrants with
foreign operations by first aggregating the number of employees across
all such registrants and then multiplying that number by the median
estimated cost per employee, calculated as $38.04 in Table 2 above.
    To estimate the expected costs for registrants with U.S.-based
operations only, we rely on one commenter's survey results that
indicate that the median decrease in registrants' compliance costs
would be 50% if only U.S. employees are included in the determination
of the median employee compensation.\544\ Thus, we assume that the
expected compliance costs for registrants with U.S.-based operations
only will be 50% lower than the expected compliance costs for
registrants with foreign operations. Accordingly, we estimate the
compliance costs for registrants with only U.S.-based operations by
multiplying the total number of employees across such registrants by
the (median estimated costs per employee * (1-0.5)), which is $19.02
per employee.\545\
---------------------------------------------------------------------------

    \544\ See letters from COEC I.
    \545\ $38.04*(1-0.5) = $19.02
---------------------------------------------------------------------------

    Lastly, to estimate the total compliance costs for registrants that
do not report geographic segment data, which we reclassify as
registrants with U.S.-based operations only, we first determine whether
we have information on their number of employees.\546\ For the 973
registrants that we reclassify as registrants with U.S.-based
operations and for which we have information as to their number of
employees, we aggregate the total number of employees for those
registrants and multiply it by $19.02. For the other 335 registrants
that we reclassify as registrants with U.S.-based operations, we do not
have information on the number of employees. As mentioned above, these
registrants are similar to registrants with U.S.-based operations with
respect to total assets and total revenues. Thus, to estimate the
compliance cost for those registrants, we estimate the median cost per
registrant with U.S.-based operations only and multiply it by the
number of such registrants (335). To estimate the median cost per
registrant with U.S.-based operations only, we first multiplied $19.02
per employee by the number of employees of each of the 793 registrants
with U.S.-based operations only. We then found the median of those 793
amounts, which was $27,008.40. Multiplying this number by the total
number of registrants with missing employee data (335), we reached a
total cost estimate of $9,047,814. Consistent with other estimates in
our analysis, we used median costs rather than average costs to reduce
the significance of outliers. We believe that our approach to the
estimate is more appropriate because, by using median numbers, we
reduce the significance of outliers, but we acknowledge that had we
instead estimated based on average numbers, a significantly higher cost
estimate for this group would result. Our cost estimates are presented
in Table 3 below.
---------------------------------------------------------------------------

    \546\ For about a third of registrants with missing segment
data, Compustat reports no employee data.

                    Table 3--Total Initial Compliance Cost Estimates for Affected Registrants
----------------------------------------------------------------------------------------------------------------
              Type of registrant                      Estimates                       Calculation
----------------------------------------------------------------------------------------------------------------
Registrants with foreign operations:
    Registrants affected......................                 1,470
    Total number of employees.................            27,595,305
    Cost/employee ratio.......................                $38.04
    Total cost................................        $1,049,725,402  27,595,305*$38.04
    Average cost per registrant...............              $714,099  $1,049,725,402/1,470
Registrants with U.S.-based operations only:
    Registrants affected......................                   793
    Total number of employees.................             6,522,626
    Cost/employee ratio.......................                $19.02  $38.04*(1-0.5)
    Total cost................................          $124,060,347  6,522,626*$19.02
    Average cost per registrant...............              $156,444  $124,060,347/793
    Median cost per registrant................            $27,008.40  This number represents the median of
                                                                       (number of employees * $19.02) across the
                                                                       793 U.S.-based registrants
Registrants with missing data, reclassified as
 registrants with U.S.-based operations only:
    Registrants affected......................                 1,308
    Registrants with available employee data..                   973
    Total number of employees for the 973                  6,932,754
     registrants.
    Cost/employee ratio.......................                $19.02  $38.04*(1-0.5)
    Total cost for the 973 registrants........          $131,860,981  6,932,754*$19.02
    Registrants with no employee data.........                   335  1,308-973
    Total cost for the 335 registrants........            $9,047,814  335 * $27,008.4

    Total cost................................          $140,908,795  131,860,981 + 9,047,814
        Total.................................   $1,314,694,544\547\  $1,049,725,402 + $124,060,347 +
                                                                       $140,908,795
----------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------

    \547\ If we had included the cost estimates of the anonymous
registrants provided by two commenters in calculating the median
cost per employee ratio, as referenced above, the median cost per
employee would be $51.07, and the total compliance cost for all
3,571 registrants would have been $1,765 million. See letters from
NAM I, NAM II (providing the same estimate as in the NAM I letter),
and Corporate Secretaries.
---------------------------------------------------------------------------

    Based on our calculations, the average initial cost of compliance
for a registrant with foreign operations is expected to be
approximately $714,099 and for a registrant with U.S.-based operations
only is expected to be approximately $156,444. The total initial cost
of compliance for all 3,571 registrants affected by the Section 953(b)
requirements is expected to be approximately $1,315 million, which
includes both internal company costs as well as the costs of outside
professionals.\548\ Thus, we estimate the initial cost of compliance
for the average registrant to be approximately $368,159.\549\
---------------------------------------------------------------------------

    \548\ If average cost per registrant with U.S.-based operations
($156,444) were used in lieu of median for the 335 registrants with
missing employee data ($27,008.40), the total cost would instead be
estimated as $1,049,725,402 + $124,060,347 + $131,860,981 +
(335*$156,444) = $1,358 million.
    \549\ $1,314,694,544/3,571 = $368,159.
---------------------------------------------------------------------------

    It is important to note that this estimate does not reflect the de
minimis and foreign data privacy exemptions, or the change to include
only employees of consolidated subsidiaries, which would lead to some
cost reductions for some registrants and which we are not able to fully
quantify. Our cost estimate is higher than the survey estimate of $187
million for the cost of outside professionals provided by one
commenter, although we note that the commenter also estimated, but did
not monetize, an internal company burden of 800,870 hours.\550\
Similarly, our estimated cost is higher than the other commenter's
survey estimate of over $710 million, although that commenter also
estimated, but did not monetize, an annual compliance time of 3.6
million hours.\551\
---------------------------------------------------------------------------

    \550\ See letter from COEC I.
    \551\ See letter from Chamber II.
---------------------------------------------------------------------------

    Next, we estimate the ongoing compliance costs. Unlike in the case
of the initial compliance costs, we received very few specific
estimates of the ongoing compliance costs from commenters. One
commenter suggested that ongoing annual costs would be approximately
28% of the initial compliance costs.\552\ Another commenter reported
expected ongoing compliance costs of 40%.\553\ One commenter's survey
results suggest that the ongoing costs are expected to be about 80%
(mid-range) or 72% (average) of the initial compliance costs.\554\ We
note that some compliance costs of the final rule, such as burden hours
and professional costs associated with making the disclosure, may
remain consistent from year to year. Other compliance costs, however,
will largely be upfront fixed costs, such as those associated with the
modification of payroll or accounting systems to allow a registrant to
compile the information and costs associated with developing the
methodology needed to identify the median employee and calculate his or
her pay.\555\ Given these upfront fixed costs, it is likely that that
part of the initial compliance costs would decline after the first
year.
---------------------------------------------------------------------------

    \552\ See letter from ExxonMobil. The commenter stated that it
expects 3,000 work hours for initial compliance costs and 850 work
hours for ongoing compliance costs. This suggests the ongoing
compliance cost is approximately 28.3% (850/3000) of the initial
compliance costs.
    \553\ See letter from FEI. According to this commenter, the
initial compliance costs would be approximately $250,000, while the
ongoing compliance costs would be approximately $100,000, suggesting
that the latter is 40% of the former ($100,000/$250,000).
    \554\ See letter from COEC I.
    \555\ But see letter from Business Roundtable I (asserting that
42% of respondents to a survey indicated that they would have to
update their methodology every year). We note that ongoing costs of
compliance may represent a higher percentage of the initial costs of
compliance for these respondents.
---------------------------------------------------------------------------

    The specific estimates provided by commenters (28% to 72%) \556\
yield a range of ongoing compliance cost estimates of between $368
million and $947 million per year, with the median of the estimates
provided by these commenters (40%) yielding an ongoing compliance cost
of approximately $526 million per year.\557\ We note, however, that the
Proposing Release did not provide registrants with the flexibility to
identify the median employee every three years. We assume these three
estimates are based on the commenters' reading of the Proposing
Release, and hence include the requirement that the median employee be
identified every year.
---------------------------------------------------------------------------

    \556\ Other commenters made more general assertions about
ongoing compliance costs, but because they did not provide specific
cost estimates, we did not include them in this calculation. See,
e.g., letters from General Mills (asserting that ``most of the costs
would also apply to subsequent years of compliance'') and Business
Roundtable I.
    \557\ $1,315 million * 0.28 = $368 million; $1,315 million *
0.72 = $947 million; $1,315 million * 0.4 = $526 million.
---------------------------------------------------------------------------

d. Indirect Costs
    Registrants covered by the final rule also could be affected by
indirect costs.\558\ They could be at a competitive disadvantage to
registrants (including private companies, foreign private issuers,
smaller reporting companies and emerging growth companies) that are
outside the scope of the final rule. Some commenters suggested that the
proposed rule would cause competitive disadvantages for public
companies,\559\ U.S. companies, especially those with overseas
employees,\560\ issuers with subsidiaries,\561\ and issuers with low-
wage workers.\562\ In addition, we understand from commenters that some
registrants covered by the final rule would likely incur higher costs
of compliance based on size, business type, and level of integration of
payroll and benefits systems--such as large, multinational registrants
that do not maintain integrated employee compensation information on a
global basis.\563\ Therefore, the competitive impact of compliance with
the disclosure requirements prescribed by Section 953(b) could
disproportionately fall on U.S. registrants with large workforces and
global operations, although the de minimis exemption and the foreign
data privacy law exemption in the final rule would likely reduce some
of these compliance costs and the competitive effects of the final
rule. While we expect that the incremental

impact of the fixed components of compliance costs will have a lower
impact on larger registrants than on smaller registrants, as discussed
in the previous section, the overall compliance costs will likely
lessen after systems are in place to gather and verify the underlying
data, reducing the competitive effects of the final rule over the
years.\564\
---------------------------------------------------------------------------

    \558\ We cannot precisely quantify the indirect costs because
they depend on the registrant's business structure and competitive
environment.
    \559\ See, e.g., letters from ABA, Prof. Angel, Former Assistant
Secretary Campbell, Chamber I, COEC I, Corporate Secretaries, NAM I,
NAM II.
    \560\ See, e.g., letters from ABA, Chamber I, COEC I, and
Corporate Secretaries.
    \561\ See letter from COEC I.
    \562\ See, e.g., letters from IBC and Prof. Ray.
    \563\ See supra note 528.
    \564\ But see letters from Business Roundtable I (noting that
42% of respondents to a survey ``indicated that they expect having
to update their pay ratio methodology every year because of changes
to their business organization or structure'') and COEC I (arguing
that the burden hours and professional costs may decrease after the
first year but not by the estimated 50% in the Proposing Release).
---------------------------------------------------------------------------

    Registrants subject to the final rule could also face a competitive
disadvantage if their competitors are able to infer proprietary or
sensitive information from the disclosure of the median of the annual
total compensation of all employees.\565\ For example, it could be
possible in some instances for a competitor to infer sensitive
information about a registrant's cost structure based on information
about median levels of employee compensation, especially for small
registrants operating in a single industry. While the final rule does
not apply to smaller reporting companies and emerging growth companies,
we still estimate that at least 131 affected registrants operated in a
single business segment and had book value of assets less than $100
million in 2014.\566\ As we noted above, a registrant subject to
Section 953(b) could potentially be at a competitive disadvantage when
hiring or retaining a PEO if there is pressure to limit PEO wages based
on the pay ratio disclosure while non-covered registrants are not
subject to the same pressure. However, there may be other factors
affecting the ability of a registrant to attract and retain executive
talent.
---------------------------------------------------------------------------

    \565\ See letter from Prof. Ray. But see letter from Capital
Strategies (stating, on the contrary, that competitors will not be
able to decipher any proprietary or sensitive information from the
pay ratio disclosure).
    \566\ This estimate is based on data from the Standard and
Poor's Compustat Segments database as of the end of December 2014.
---------------------------------------------------------------------------

    One of the commenters indicated that 55% of the respondents in a
survey of members it conducted anticipated indirect costs (i.e.,
adverse impact on sales, brand damage, increased public relations costs
etc.)\567\ Although we acknowledge the possibility of these indirect
costs, we cannot quantify them and lack sufficient data to analyze
them.
---------------------------------------------------------------------------

    \567\ See letter from Corporate Secretaries.
---------------------------------------------------------------------------

3. Other Economic Effects
    Several commenters indicated that the pay ratio rule would promote
economic efficiency.\568\ In contrast, one commenter argued the rule
would inhibit economic efficiency without providing specific
details.\569\ As noted above, the pay ratio disclosure is not well
suited to compare pay practices across registrants, and thus, it is
unclear whether the final rule would affect economic efficiency. Some
commenters suggested that registrants may decide to alter their pay
structure or workforce structure in ways that are different from their
efficient labor market decisions.\570\ For example, one commenter
suggested that registrants may decide to shift their labor force to
workers employed by a third party or reduce their foreign
operations.\571\ Also, the same commenter asserted that registrants may
change the relative wages of employees in a way that increases the
median employee pay while reducing the pay of employees below the
median employee in the pay distribution.\572\ Another commenter
asserted that pressure for a registrant to maintain a low pay ratio
could also curtail the expansion of business operations into lower cost
geographies.\573\ We expect that such changes, if they were to occur,
would move the registrant away from efficient business practices and
could result in inefficient outcomes. Other commenters suggested,
however, that workforce restructuring in response to the pay ratio
disclosure was not likely.\574\ While we believe that registrants are
unlikely to make critical labor decisions solely to impact the pay
ratio disclosure, we cannot assess the prevalence of such effects at
this time because these commenters did not quantify or otherwise
provide data relevant to the expected changes in business practices.
---------------------------------------------------------------------------

    \568\ See, e.g., letters from Capital Strategies (asserting that
``The proposed rules would promote market efficiency as they would
steer investors to the best value CEO, that is, the one producing
the most returns for the least pay, when compared to peers.''),
Change to Win (asserting that CEO pay increases have been driven by
rent seeking behavior and ``if in fact the disclosures provided by
Section 953(b) do induce more investors to insist on limiting
executive pay, this will result in increased, rather than reduced,
economic efficiency''), and Form Letter D (``Disclosure of the pay
ratios will help the capital markets better allocate capital to
those companies that invest in their workforces.'').
    \569\ See letter from NIRI.
    \570\ See, e.g., letters from CEG (stating that the rule can be
``gamed by outsourcing lower wage jobs''), NIRI (stating that the
rule will adversely impact ``U.S. states and cities with lower labor
costs''), and Prof. Ray (arguing that employers will change their
corporate structure or employment arrangements as a response to the
pay ratio rule).
    \571\ See letter from Lou (``[S]ome companies will be
incentivized to outsource poorly paid jobs to increase the median
payment number. The flip side is the increase of administrative cost
and losses of profits generated by the to-be-outsourced department.