[Federal Register Volume 78, Number 190 (Tuesday, October 1, 2013)]
[Proposed Rules]
[Pages 60559-60605]
[FR Doc No: 2013-23073]

Vol. 78

Tuesday,

No. 190

October 1, 2013

Part IV

Securities and Exchange Commission

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17 CFR Parts 229 and 249

Pay Ratio Disclosure; Proposed Rule

Federal Register / Vol. 78 , No. 190 / Tuesday, October 1, 2013 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229 and 249

[Release Nos. 33-9452; 34-70443; File No. S7-07-13]
RIN 3235-AL47

Pay Ratio Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing amendments to Item 402 of Regulation S-K to
implement Section 953(b) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act. Section 953(b) directs the Commission to amend
Item 402 of Regulation S-K to require disclosure of the median of the
annual total compensation of all employees of an issuer (excluding the
chief executive officer), the annual total compensation of that
issuer's chief executive officer and the ratio of the median of the
annual total compensation of all employees to the annual total
compensation of the chief executive officer. The proposed disclosure
would be required in any annual report, proxy or information statement
or registration statement that requires executive compensation
disclosure pursuant to Item 402 of Regulation S-K. The proposed
disclosure requirements would not apply to emerging growth companies,
smaller reporting companies or foreign private issuers.

DATES: Comments should be received on or before December 2, 2013.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-07-13 on the subject line; or
     Use the Federal Rulemaking ePortal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549-1090.

All submissions should refer to File Number S7-07-13. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. All comments received will be posted without change; we do
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Christina L. Padden, Attorney Fellow
in the Office of Rulemaking, at<PHONE_NUMBER>, in the Division of
Corporation Finance; 100 F Street NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are proposing amendments to Item 402 \1\
of Regulation S-K \2\ and a conforming amendment to Form 8-K \3\ under
the Securities Exchange Act of 1934 (the ``Exchange Act'').\4\
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    \1\ 17 CFR 229.303.
    \2\ 17 CFR 229.10 et seq.
    \3\ 17 CFR 249.220f.
    \4\ 15 U.S.C. 78a et seq.
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Table of Contents

I. Background
    A. Section 953(b) of the Dodd-Frank Act
    B. Comments Received
II. Discussion of the Proposed Amendments
    A. Introduction
    B. Scope of Section 953(b) of the Dodd-Frank Act
    1. Filings Subject to the Proposed Disclosure Requirements
    2. Registrants Subject to the Proposed Disclosure Requirements
    C. Proposed Requirements for Pay Ratio Disclosure
    1. New Paragraph (u) of Item 402 (Pay Ratio Disclosure)
    2. Employees Included in the Identification of the Median
    3. Identifying the Median
    4. Determination of Total Compensation
    5. Disclosure of Methodology, Assumptions and Estimates
    6. Clarification of the Meaning of ``Annual''
    7. Timing of Disclosure
    8. Status as ``Filed'' Not ``Furnished''
    D. Transition Matters
    1. Proposed Compliance Date
    2. Proposed Transition for New Registrants
III. General Request for Comment
IV. Economic Analysis
V. Paperwork Reduction Act
VI. Small Business Regulatory Enforcement Fairness Act
VII. Regulatory Flexibility Act Certification
VIII. Statutory Authority and Text of Amendments

I. Background

A. Section 953(b) of the Dodd-Frank Act

    Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ``Dodd-Frank Act'') \5\ directs the Commission to
amend section 229.402 of title 17, Code of Federal Regulations, to
require each issuer, other than an emerging growth company, as that
term is defined in Section 3(a) of the Securities Exchange Act of 1934,
to disclose in any filing of the issuer described in section 229.10(a)
of title 17, Code of Federal Regulations (or any successor thereto)--
the median of the annual total compensation of all employees of the
issuer, except the chief executive officer (or any equivalent position)
of the issuer; the annual total compensation of the chief executive
officer (or any equivalent position) of the issuer; and the ratio of
the median of the total compensation of all employees of the issuer to
the annual total compensation of the chief executive officer of the
issuer. Section 953(b) also requires that the total compensation of an
employee of an issuer shall be determined in accordance with section
229.402(c)(2)(x) of title 17, Code of Federal Regulations, as in effect
on the day before the date of enactment of the Dodd-Frank Act.\6\
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    \5\ Public Law 111-203, 124 Stat. 1376 (2010), as amended by
Public Law 112-106,126 Stat. 306 (2012).
    \6\ Public Law 111-203, sec. 953(b), 124 Stat. 1376, 1904
(2010), as amended by Public Law 112-106, sec. 102(a)(3), 126 Stat.
306, 309 (2012). Section 102(a)(3) of the Jumpstart Our Business
Startups Act (the ``JOBS Act'') amended Section 953(b) of the Dodd-
Frank Act to provide an exemption for registrants that are emerging
growth companies as that term is defined in Section 3(a) of the
Exchange Act.
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    We are proposing amendments to implement Section 953(b). We refer
to this disclosure of the median of the annual total compensation of
all employees of the issuer, the annual total compensation of the chief
executive officer of the issuer and the ratio of the two amounts as
``pay ratio'' disclosure.
    Section 953(b) of the Dodd-Frank Act does not amend the Securities
Act of 1933 (``Securities Act'') \7\ or the Exchange Act. Instead,
Section 953(b) directs the Commission to amend Item 402 of Regulation
S-K (``Item 402'') to add the pay ratio disclosure requirements
mandated by the Dodd-Frank Act. Although Section 953(b) defines some
terms used in the provision, commenters have raised questions about the
scope of the

statutory requirements and the need for additional interpretive
guidance.\8\
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    \7\ 15 U.S.C. 77a et seq.
    \8\ Comments submitted to the Commission in connection with
Section 953(b) are discussed generally in Section I.B. and
throughout this release as they relate to specific aspects of the
proposals.
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B. Comments Received

    In connection with rulemakings implementing the Dodd-Frank Act, we
have sought comment from the public before the issuance of a proposing
release. With respect to Section 953(b) of the Dodd-Frank Act, as of
September 15, 2013, we have received approximately 22,860 comment
letters and a petition with approximately 84,700 signatories.\9\ We
have considered these comments in proposing the rules described in this
release.
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    \9\ Comments related to the executive compensation provisions of
the Dodd-Frank Act, including Section 953(b), are available at
http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml. In connection with Section 953(b), the
Commission received approximately 260 unique comment letters and
approximately 22,600 form letters (posted on the Web site as Letter
Type A) as of September 15, 2013. The Commission also received a
petition (posted on the Web site as Letter Type B) with
approximately 84,700 signatories. In this release, references to
comment letters identify the commenter by the name of the
organization or individual submitting the letter. Letters by
commenters who submitted multiple letters are identified by date.
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    Commenters were divided in their recommended approaches to Section
953(b) and the implementation issues it raises. Comments from industry
groups, issuers, law firms and executive compensation professionals
generally raised concerns about the complexity of the Section 953(b)
requirements, the significant compliance costs that could be involved
and the potential inability for many companies to verify the accuracy
of their disclosure.\10\ These commenters generally asserted that this
type of disclosure would not be material to investors or useful to an
investment or voting decision, and they disputed the potential benefits
cited by commenters who supported the provision.\11\ Comments from
individual and institutional investors and some public policy
organizations generally outlined what they expected to be the benefits
of the mandated information and urged the Commission to implement the
provision in a way that would preserve those benefits.\12\
Notwithstanding these differing viewpoints, several commenters
supported a flexible approach to implementation that would retain the
potential benefits of the mandated disclosure, while avoiding the
additional compliance costs that a less flexible approach could
impose.\13\
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    \10\ See, e.g., letters from American Bar Association (``ABA'');
Center on Executive Compensation dated September 10, 2010 (``COEC
I''); Center on Executive Compensation dated November 11, 2011
(``COEC II''); Davis Polk & Wardwell LLP (``Davis Polk''); Business
Roundtable et al., (``Group of Trade Associations''); Society of
Corporate Secretaries and Governance Professionals (``SCSGP'');
Greta E. Cowart, Haynes & Boone LLP et al. (``Group of Exec. Comp.
Lawyers''); Protective Life Corporation; Towers Watson; Brian Foley
& Co.; and Pay Governance LLC. We discuss these costs in detail in
Section IV of this release.
    \11\ See, e.g., COEC I and letters from Brian Foley & Co.; Group
of Trade Associations; Meridian Compensation Partners, LLC; National
Association of Corporate Directors (``NACD''); and Retail Industry
Leaders Association (``RILA'').
    \12\ See, e.g., letters from AFL-CIO dated December 13, 2010
(``AFL-CIO I'') and AFL-CIO dated August 11, 2011 (``AFL-CIO II'');
Americans for Financial Reform; Batirente et al. (``Group of
International Investors''); J. Brown; K. Burgoyne; Calvert
Investment Management; Community Action Commission; CtW Investment
Group; Drucker Institute; Institute for Policy Studies; R. Landgraf;
D. Miron; Social Investment Forum; S. Towns; Trillium Asset
Management; UAW Retiree Medical Benefits Trust; and Walden Asset
Management. See also Letter Type A. We discuss these benefits in
detail in Section IV of this release.
    \13\ See, e.g., AFL-CIO II and letters from ABA; American
Benefits Council; COEC II; Protective Life Corporation; and Davis
Polk.
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    We discuss the concerns and recommendations from the commenters in
more detail throughout this release. We agree with commenters that,
depending on how Section 953(b) is implemented, the cost of compliance
with these new disclosure requirements could be, at least for some
registrants, substantial. The rules we are proposing are intended to
address commenters' concerns and are designed to lower the cost of
compliance while remaining consistent with Section 953(b).

II. Discussion of the Proposed Amendments

A. Introduction

    Section 953(b) imposes a new requirement on registrants to disclose
the median of the annual total compensation of all employees (excluding
the chief executive officer), the annual total compensation of the
chief executive officer and the ratio of the median disclosed to the
annual total compensation of the chief executive officer. Section
953(b)(2) specifies that, for purposes of Section 953(b), the total
compensation of an employee of an issuer shall be determined in
accordance with Item 402(c)(2)(x) of Regulation S-K. The Commission's
rules for compensation disclosure have traditionally focused on the
compensation of executive officers and directors.\14\ Although
registrants subject to Item 402 are required to provide extensive
information about the compensation of the principal executive officer
(``PEO'') and other named executive officers identified pursuant to
Item 402(a), current disclosure rules generally do not require
registrants to disclose detailed compensation information for other
employees in their filings with the Commission.\15\ Commenters have
observed that, because of the complexity of the requirements of Item
402(c)(2)(x), registrants typically compile information required by
Item 402(c) manually for the named executive officers, which they have
stated takes significant time and resources.\16\ We do not expect that
many registrants, if any, currently disclose or track total
compensation as determined pursuant to Item 402 for their
workforce.\17\

Registrants are required to present various elements of employee
compensation, on an aggregate basis, in the relevant line items of
their financial statements and related footnotes (such as accrued
payroll and benefits amounts recorded in current liabilities on the
balance sheet, or salary and bonus amounts included in selling and
administrative expenses or cost of goods sold on the income
statement).\18\ These amounts are calculated and presented in
accordance with the comprehensive set of accounting principles that the
registrant uses to prepare its primary financial statements. For
example, under United States generally accepted accounting principles
(``U.S. GAAP''), there are several accounting standards that relate to
compensation,\19\ and these standards are distinct from the
Commission's executive compensation disclosure rules. In addition, the
Commission's executive compensation disclosure rules differ from tax
accounting and reporting standards.\20\ Therefore, Section 953(b)
requires registrants to disclose specific information about non-
executive employee compensation that is not currently required for
disclosure, accounting or tax purposes.
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    \14\ Initially, disclosure requirements for executive and
director compensation were set forth in Schedule A to the Securities
Act and Section 12(b) of the Exchange Act, which list the type of
information to be included in Securities Act and Exchange Act
registration statements. In 1938, the Commission promulgated its
first executive and director compensation disclosure rules for proxy
statements. See Amended Proxy Rules, Release No. 34-1823 (Aug. 11,
1938) [3 FR 1991].
    From time to time thereafter, the Commission has amended its
executive and director compensation disclosure requirements in light
of changing trends in executive compensation and other issues, and,
more recently, to comply with the mandates of the Dodd Frank Act.
See, e.g., Solicitation of Proxies Under the Act, Release No. 34-
3347 (Dec. 18, 1942) [7 FR 10655]; Solicitation of Proxies, Release
No. 34-4775 (Dec. 11, 1952) [17 FR 11431]; Uniform and Integrated
Reporting Requirements: Management Remuneration, Release No. 33-6003
(Dec. 4, 1978) [43 FR 58181]; Disclosure of Executive Compensation,
Release No. 33-6486 (Sept. 23, 1983) [48 FR 44467]; Executive
Compensation Disclosure, Release No. 33-6962 (Oct. 16, 1992) [57 FR
48126]; Executive Compensation Disclosure; Securityholder Lists and
Mailing Requests, Release No. 33-7032 (Nov. 22, 1993) [58 FR 63010];
Executive Compensation and Related Person Disclosure, Release No.
33-8732A (Aug. 29, 2006) [71 FR 53158] (``2006 Adopting Release'');
Proxy Disclosure Enhancements, Release No. 33-9089A (Dec. 16, 2009)
[74 FR 68334]; and Shareholder Approval of Executive Compensation
and Golden Parachute Compensation, Release No. 33-9178 (Jan. 25,
2011)[76 FR 6010].
    \15\ Although the group of covered individuals for whom
disclosure is required has changed over time, the rules generally
have sought to require compensation disclosure for ``persons who, in
fact, function as key, policy-making members of management.''
Uniform and Integrated Reporting Requirements: Management
Remuneration, Release No. 33-5950 (July 28, 1978) [43 FR 34415], at
34416.
    \16\ See letter from Davis Polk. See also letter from R.
Morrison.
    \17\ See letter from Protective Life (noting that ``very few
employers routinely determine certain items of compensation for
individual `rank and file' employees, notably the values of stock
and stock option awards and the aggregate change in the actuarial
present value of defined benefit pension plan accruals. For most
employers, determining these amounts will require, for the first
time, calculations for all (or a large subset) of their
employees''). See also COEC I (``No public company currently
calculates each employee's total compensation as it calculates total
pay on the Summary Compensation Table for the named executive
officers, because disclosure of executive pay has a different
purpose than internal accounting.''); and letter from R. Morrison
(``Collecting, organizing, and analyzing this kind of data for all
employees in order to develop a median comp figure would be
extremely complex, time-consuming, and burdensome, assuming this is
even possible.'').
    \18\ ``Total compensation'' as determined pursuant to Item 402
is not an amount that is reported or calculated in connection with a
registrant's financial statements.
    \19\ See, e.g., FASB ASC 710, Compensation--General; ASC 715,
Retirement Benefits Compensation; ASC 960, Defined Benefit Pension
Plans; ASC 962, Defined Contribution Pension Plans; ASC 965, Health
and Welfare Benefit Plans; and ASC 718, Compensation--Stock
Compensation.
    \20\ For example, registrants that are subject to the United
States Internal Revenue Code [26 U.S.C. 1 et seq.] are required to
report certain compensation information for each employee to the
Internal Revenue Service, typically on Form W-2. The elements of
compensation that are required to be calculated and reported on Form
W-2 are not the same as those covered by Item 402 requirements, and
the reported amounts relate to the relevant calendar year for tax
purposes, rather than the registrant's fiscal year.
    Additionally, the compensation required to be disclosed under
Item 402 reflects the compensation that was awarded to, earned by or
paid to the executive officer during the fiscal year in contrast to
compensation reported on Form W-2, which reflects only compensation
that was includible in income for income tax purposes during the
calendar year regardless of when that compensation was earned. For
example, under Item 402, the value of stock options, deferred salary
and bonuses would be included in compensation in the period they
were awarded or earned. In contrast, for purposes of Form W-2,
income from stock options is generally included in income at the
time of exercise, and income relating to deferred salary and bonuses
is included only when those amounts are actually paid, which could
be in a future year.
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    Many commenters raised concerns about the significant compliance
costs that could result from requiring the use of ``total
compensation'' as defined in Item 402(c)(2)(x) to calculate employee
pay and requiring registrants to identify the median instead of the
average.\21\ According to these commenters, the primary driver of the
significant compliance costs is that many registrants, whether large
multinationals or companies of modest revenue size and market
capitalization, maintain multiple and complex payroll, benefits and
pension systems (including systems maintained by third party
administrators) that are not structured to easily accumulate and
analyze all the types of data that would be required to calculate the
annual total compensation for all employees in accordance with Item
402(c)(2)(x). Thus, in order to compile such disclosure, registrants
would either need to integrate these data systems or consolidate the
data manually, which, in both cases, would be, according to these
commenters, highly costly and time consuming.\22\
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    \21\ See, e.g., letters from Davis Polk (noting that compliance
will be ``highly costly and burdensome, with tremendous uncertainty
as to accuracy. Companies are justifiably concerned about the costs
and burdens to accomplish the formidable data collection and
calculation tasks for employees worldwide between the end of the
year and the first required filing.''); Frederick W. Cook & Co.,
Inc. (stating, ``the calculation of median total pay for all
employees other than the CEO is problematic, burdensome and perhaps
impossible for many issuers'') and Protective Life Corporation (``It
is difficult to overemphasize how burdensome this requirement could
be for large employers. Calculating annual total compensation is
much more complicated than simply adding up numbers that companies
already have available. . . . Since many large companies use outside
accounting, actuarial nd compensation and pension administration
firms to perform these calculations, the costs of disclosure will
increase accordingly.''). See also letters from ABA; COEC I; Group
of Exec. Comp. Lawyers; Group of Trade Associations; Meridian
Compensation Partners, LLC; NACD; and R. Morrison.
    \22\ See, e.g., letter from Group of Trade Associations (``There
is a widespread misconception that this information is readily
available at the touch of a button.'') See also COEC II and letters
from Group of Exec. Comp. Lawyers; Meridian Compensation Partners,
LLC; and R. Morrison.
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    The proposed rules to implement Section 953(b) are designed to
comply with the statutory mandate and to address commenters' concerns
regarding the potential costs of complying with the disclosure
requirement. Where we have exercised discretion in implementing the
statutory requirements, we are proposing alternatives that we believe
will reduce costs and burdens, while preserving what we believe to be
the potential benefits, as articulated by commenters, of the disclosure
requirement mandated by the Dodd-Frank Act. We note, however, that
neither the statute nor the related legislative history directly states
the objectives or intended benefits of the provision.\23\ Commenters
supporting Section 953(b) have emphasized that potential benefits could
arise from adding pay ratio-type information to the total mix of
executive compensation information.\24\ We have considered the
statutory mandate of Section 953(b) in the context of other executive
compensation disclosure under Item 402, and, where practicable, we have
sought to make the mandated disclosure of Section 953(b) work with the
existing executive compensation disclosure regime.
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    \23\ The requirements imposed by Section 953(b) originated in
the Senate. A provision identical to Section 953(b) was first
included in S. 3049, the ``Corporate Executive Accountability Act of
2010,'' which was sponsored by Senator Menendez and introduced on
February 26, 2010. In that bill, the provision accompanied a say-on-
pay provision. A provision identical to Section 953(b) next appeared
in S. 3217, the ``Restoring American Financial Stability Act of
2010'' sponsored by Senator Dodd and introduced on April 15, 2010,
which served as the basis for the Senate's amendments to H.R. 4173.
The legislative record includes only a few brief references to the
pay ratio disclosure requirements, each opposing the provision. See
156 Con. Rec. S3121 (daily ed. May 5, 2010) (statement of Sen.
Gregg) and 156 Cong. Rec. S4075 (daily ed. May 20, 2010) (statement
of Sen. Shelby). The April 30, 2010 report issued by the Senate
Committee on Banking, Housing and Urban Affairs does not mention the
pay ratio requirements other than a short statement by the minority.
See Report of the Senate Committee on Banking, Housing and Urban
Affairs to Accompany S. 3217 (``the Senate Report''), S. Rep. No.
111-176, at 245.
    The requirements of Section 953(b) were not discussed during the
conference committee's deliberations on the legislation. Similarly,
the Joint Explanatory Statement of the Committee of Conference does
not mention the pay ratio requirements in its summary of Title IX,
Subtitle E. See Conference Report on H.R. 4173, H. Rep. No. 111-517,
at 872.
    \24\ See, e.g., letters from Americans for Financial Reform
(``Existing requirements mandate disclosure of top executive
compensation only, encouraging companies to focus unduly on peer to
peer comparisons when setting CEO pay. . . . Disclosure of CEO-to-
worker pay ratios will encourage Boards of Directors to also
consider vertical pay equity within firms.''); Calvert Investment
Management (``The disclosure required by Section 953(b) will help
investors understand how issuers are distributing compensation
dollars throughout the firm in ways that may help improve employee
morale and productivity.''); CtW Investment Group (``The new
disclosure offers an insight into compensation within the entire
organization, and provides a different way for boards and
shareholders to evaluate the relative worth of a CEO.''); and UAW
Retiree Medical Benefits Trust (``[W]e view Section 953(b) as an
essential tool that will increase corporate board accountability to
investors . . . a comparison between CEO and employee pay may help
shareholders identify the board's strengths and weaknesses, and may
provide insight into [the board's] relationship with the CEO.'').

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    In light of the significant potential costs articulated by
commenters,\25\ we believe that it is appropriate for the proposed
rules to allow registrants flexibility in developing the disclosure
required by the statute. The proposal seeks to implement Section 953(b)
without imposing additional prescriptive requirements that are not
mandated by the Dodd-Frank Act and reflects our consideration of the
relative costs and benefits of this approach as opposed to a more
prescriptive one. For example, registrants would be able to choose from
several options in order to provide the disclosure. Registrants may
choose to identify the median using their full employee population or
by using statistical sampling or another reasonable method. In doing
so, the proposed requirements would allow registrants to choose a
statistical method to identify the median that is appropriate to the
size and structure of their own businesses and the way in which they
compensate employees, rather than prescribing a particular methodology
or specific computation parameters. Registrants may calculate the
annual total compensation for each employee included in the calculation
(whether the entire population or a statistical sample) and the PEO
using Item 402(c)(2)(x) and to identify the median using this method.
As an alternative, registrants may identify the median employee based
on any consistently applied compensation measure and then calculate the
annual total compensation for that median employee in accordance with
Item 402(c)(2)(x). The proposed requirements also would permit
registrants to use reasonable estimates in calculating 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. We
believe that this flexible approach is consistent with Section 953(b)
and could ease commenters' concerns about the potential burdens of
complying with the disclosure requirement. We do not believe that a
one-size-fits-all approach would be prudent, given the wide range of
registrants and the disparate burdens on registrants based on factors
such as their type of business and the complexity of their payroll
systems. We seek comment on whether the proposed rules address
sufficiently the practical difficulties of data collection and whether
there are other alternative approaches consistent with Section 953(b)
that could provide the potential benefits of pay ratio information at a
lower cost. We also seek comment on whether the flexible approach
proposed in this release appropriately implements Section 953(b).
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    \25\ The potential costs arising from the requirements of
Section 953(b), as well as the potential costs relating to the
proposed rules, are discussed in detail below in Section IV of this
release.
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    The details of the proposal are set forth in the sections below.
First, we interpret the scope of Section 953(b) with respect to the
filings and the registrants that are subject to the proposed
requirements. Next, we set forth the proposed new pay ratio disclosure
requirement in Item 402, to be designated paragraph (u), and provide
details on a variety of technical and interpretive issues, including:
     The employees that are to be included in the
identification of the median;
     identifying the median;
     determining ``total compensation;''
     disclosure of the methodology, assumptions and estimates
used;
     the meaning of ``annual'' in the context of ``annual total
compensation;''
     various timing matters that arise in connection with the
proposed requirements; and
     the status of the disclosure as ``filed'' rather than
``furnished.''

Finally, we address transition matters, including the proposed
compliance date for registrants that would be subject to the rules, and
proposed transition provisions for new registrants.

B. Scope of Section 953(b) of the Dodd-Frank Act

1. Filings Subject to the Proposed Disclosure Requirements
    In accordance with Section 953(b) of the Dodd-Frank Act, we are
proposing to require registrants to include pay ratio disclosure in any
filing described in Item 10(a) of Regulation S-K that requires
executive compensation disclosure under Item 402 of Regulation S-K.
Therefore, the proposed pay ratio disclosure would be required in
annual reports on Form 10-K,\26\ registration statements under the
Securities Act and Exchange Act, and proxy and information statements,
to the same extent that the requirements of these forms require
compliance with Item 402.\27\ We are not proposing changes to the
requirements of these forms relating to Item 402. Section 953(b) does
not direct the Commission to amend any of its forms to add the pay
ratio disclosure requirements to filings that do not already require
disclosure of Item 402 information, and we are not proposing to do so.
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    \26\ 17 CFR 249.310.
    \27\ Registrants would follow the instructions in each form to
determine whether Item 402 information is required, including any
instructions that allow for the omission of Item 402 information in
certain circumstances, such as General Instructions I(2)(c) and
J(1)(m) to Form 10-K containing special provisions for the omission
of Item 402 information by wholly-owned subsidiaries and asset-
backed issuers.
    As described below in Section II.C.7., the proposed requirements
do not require a registrant to update its pay ratio disclosure for
the most recently completed fiscal year until it files its annual
report on Form 10-K, or, if later, its proxy or information
statement for its next annual meeting of shareholders (or written
consents in lieu of such a meeting).
    In addition, we are proposing a transition period for compliance
by new registrants that are subject to Section 953(b), so that the
pay ratio requirement is not required in a registration statement on
Form S-1 [17 CFR 239.11] or Form S-11 [17 CFR 239.18] for an initial
public offering or registration statement on Form 10 [17 CFR
249.210]. See Section II.D.2. of this release.
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    Although some commenters suggested that Section 953(b)(1) requires
pay ratio disclosure in every Commission filing,\28\ other commenters
suggested that the statute, by referring to filings described in Item
10(a) of Regulation S-K, is intended to apply only to those filings for
which the applicable form requires Item 402 disclosure.\29\ We agree
with the latter reading of Section 953(b). We believe that reading
Section 953(b) to require pay ratio disclosure in filings that do not
contain other executive compensation information would not present this
information in a meaningful context. Because some commenters have
asserted that the pay ratio disclosure would provide another metric to
evaluate executive compensation disclosure,\30\ we believe that the
proposed pay ratio disclosure should be placed in context with other
executive compensation disclosure, such as the summary compensation
table required by Item 402(c) and the compensation discussion and
analysis required by Item 402(b), rather than provided on a stand-alone
basis. Therefore, we believe it is appropriate to read Section 953(b)
as requiring pay ratio disclosure in only those filings that are
required to include other Item 402 information.
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    \28\ See, e.g., COEC I and letters from American Benefits
Council; Compensia, Inc.; Davis Polk; SCSGP; and Towers Watson.
    \29\ See, e.g., letters from ABA and RILA.
    \30\ See, e.g., AFL-CIO I, House Letter and Senate Letter; and
letters from CtW Investment Group and UAW Retiree Medical Benefits
Trust.
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Request for Comment
    1. Should we require the pay ratio disclosure only in filings in
which Item 402 disclosure is required, as proposed? Should we require
the pay ratio disclosure in Commission forms that do

not currently require Item 402 disclosure? If so, which forms, and why?
Would disclosure be meaningful to investors where no other executive
compensation disclosures are required?
    2. Do registrants need any additional guidance about which filings
would require the proposed pay ratio disclosure? Are there
circumstances where the requirements of a particular form call for Item
402 information in certain circumstances, but the applicability of the
proposed pay ratio disclosure requirements may not be clear? If so,
please provide details about what should be clarified and what guidance
is recommended.
2. Registrants Subject to the Proposed Disclosure Requirements
    The proposed pay ratio disclosure requirements would apply to only
those registrants that are required to provide summary compensation
table disclosure pursuant to Item 402(c). We recognize that the
reference to ``each issuer'' in Section 953(b) could be read to apply
to all issuers that are not emerging growth companies, including
smaller reporting companies and foreign private issuers. As a result of
the specific reference in Section 953(b) to the definition of total
compensation contained in Item 402(c)(2)(x), and the absence of
direction to apply this requirement to companies not previously subject
to Item 402(c) requirements, we propose to limit the pay ratio
disclosure requirement to registrants that are subject to Item 402(c)
requirements, as described in more detail below.
a. Emerging Growth Companies Are Not Covered
    Under JOBS Act Section 102(a)(3), registrants that qualify as
emerging growth companies, as that term is defined in Section 3(a) of
the Exchange Act,\31\ are not subject to Section 953(b). To give effect
to the statutory exemption, we are proposing an instruction to Item
402(u) that provides that a registrant that is an emerging growth
company is not required to comply with Item 402(u).\32\
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    \31\ 15 U.S.C. 78c(a).
    \32\ See proposed Instruction 6 to Item 402(u).
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b. Smaller Reporting Companies Are Not Covered
    Section 953(b) requires total compensation to be calculated in
accordance with Item 402(c)(2)(x). Smaller reporting companies (as
defined in Item 10(f)(1) of Regulation S-K) \33\ are permitted to
follow the scaled disclosure requirements set forth in Items 402(m)-(r)
instead of complying with the disclosure requirements set forth in
Items 402(a)-(k) and (s),\34\ and therefore are not required to
calculate compensation in accordance with Item 402(c)(2)(x). The
requirement set forth in Item 402(n) for disclosure of summary
compensation table information, which includes disclosure of ``total
compensation,'' does not require smaller reporting companies to include
all of the same types of compensation required to be included in total
compensation for other registrants under Item 402(c)(2).\35\ We believe
that by requiring the use of Item 402(c)(2)(x) to calculate total
compensation (without mention of Item 402(n)(2)(x)), Congress intended
to exclude smaller reporting companies from the scope of Section
953(b). In addition, requiring smaller reporting companies to provide
the pay ratio disclosure consistent with the requirement for other
registrants would require smaller reporting companies to collect data
and calculate compensation for the PEO in a manner they otherwise would
not be required to calculate compensation. Thus, we do not believe this
is the intent of the provision.
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    \33\ 17 CFR 229.10(f)(1).
    \34\ See Item 402(l). Smaller reporting companies are permitted
to choose compliance with either the scaled disclosure requirements
or the larger company disclosure requirements on an ``a la carte''
basis. As discussed in the scaled disclosure adopting release, the
staff evaluates compliance by smaller reporting companies with only
the Regulation S-K requirements applicable to smaller reporting
companies, even if the company chooses to comply with the larger
company requirements. See Smaller Reporting Company Regulatory
Relief and Simplification, Release No. 33-8876 (Dec. 19, 2007) [73
FR 934], at 941.
    \35\ Specifically, under Item 402(n)(2)(viii), smaller reporting
companies are not required to include the aggregate change in the
actuarial present value of pension benefits that is required for
companies subject to Item 402(c)(2)(viii).
---------------------------------------------------------------------------

    Therefore, as proposed, the pay ratio disclosure requirements would
not apply to smaller reporting companies. To make this clear, we are
proposing a technical amendment to paragraph (l) of Item 402, to add
proposed paragraph (u) to the list of items that are not required for
smaller reporting companies.
c. Foreign Private Issuers and MJDS Filers Are Not Covered
    Foreign private issuers that file annual reports and registration
statements on Form 20-F and MJDS filers that file annual reports and
registration statements on Form 40-F would not be required to provide
the proposed pay ratio disclosure, because those forms do not require
Item 402 disclosure.\36\ We do not read Section 953(b) as requiring the
Commission to expand the scope of Item 402 to apply to companies that
are not currently subject to the executive compensation disclosure
requirements set forth in Item 402. Accordingly, we are not proposing
to amend Form 20-F or Form 40-F, and the proposed pay ratio disclosure
requirements would not be applicable to foreign private issuers or MJDS
filers. In addition, we are not proposing any changes to existing Item
402(a)(1), which provides for the treatment of foreign private issuers.
Accordingly, foreign private issuers that file annual reports on Form
10-K will continue to be able to satisfy Item 402 requirements by
following the requirements of Items 6.B and 6.E.2 of Form 20-F and
would not be required to make the pay ratio disclosure mandated by
Section 953(b). In addition, requiring foreign private issuers and MJDS
filers to provide the pay ratio disclosure consistent with the
requirement for other registrants would require these registrants to
collect data and calculate compensation for the PEO in a manner they
otherwise would not be required to calculate compensation. Thus, we do
not believe this is the intent of the provision.
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    \36\ The term ``MJDS filers'' refers to registrants that file
reports and registration statements with the Commission in
accordance with the requirements of the U.S.- Canadian
Multijurisdictional Disclosure System (the ``MJDS''). The definition
for ``foreign private issuer'' is contained in Exchange Act Rule 3b-
4(c) [17 CFR 240.3b-4(c)]. A foreign private issuer is any foreign
issuer other than a foreign government, except for an issuer that,
as of the last business day of its most recent fiscal year, has more
than 50% of its outstanding voting securities held of record by
United States residents and any of the following: A majority of its
officers and directors are citizens or residents of the United
States, more than 50% of its assets are located in the United
States, or its business is principally administered in the United
States.
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Request for Comment
    3. Should the pay ratio disclosure requirements, as proposed, apply
only to those registrants that are required to provide summary
compensation table disclosure pursuant to Item 402(c)? If not, to which
registrants should pay ratio disclosure requirements apply?
    4. Should we revise the proposal so that smaller reporting
companies would be subject to the proposed pay ratio disclosure
requirements? If so, why? If so, also discuss how smaller reporting
companies should calculate total compensation for employees and the
PEO. For example, should they be required to calculate total
compensation in accordance with Item 402(c)(2)(x) instead of the scaled
disclosure requirements? In the alternative, should smaller reporting
companies be required to provide a modified version of the pay ratio
disclosure? If so, why, and what should that modified version entail?

Should it be based on the compensation amounts required under the
scaled disclosure requirements applicable to smaller reporting
companies, such as a ratio where the PEO compensation and other
employee compensation are calculated in accordance with Item
402(n)(2)(x)? Please provide information as to particular concerns that
smaller reporting companies may have. Please discuss whether the
disclosure would be useful to investors in smaller reporting companies.
    5. Should we amend either Form 20-F or Form 40-F to include
disclosure that is similar to the proposed pay ratio disclosure
requirements? If so, why? Assuming we would not otherwise subject
foreign private issuers to the executive compensation disclosure rules,
what modifications would be needed to address the different reporting
requirements that foreign private issuers and MJDS filers have for
executive compensation disclosure in order to require pay ratio
disclosure? In particular, how should these registrants calculate total
compensation (for the PEO and for employees) for purposes of such a
requirement? Please provide information as to particular concerns that
foreign private issuers or MJDS filers may have if they were required
to comply with such a requirement. Please discuss whether the
disclosure would be useful to investors, particularly in the absence of
the executive compensation disclosure that would accompany disclosure
of the ratio for registrants subject to Item 402 disclosure.

C. Proposed Requirements for Pay Ratio Disclosure

1. New Paragraph (u) of Item 402 (Pay Ratio Disclosure)
    We are proposing new paragraph (u) of Item 402 that would require
disclosure of:
    (A) The median of the annual total compensation of all employees of
the registrant, except the principal executive officer of the
registrant;
    (B) the annual total compensation of the principal executive
officer of the registrant; and
    (C) the ratio of the amount in (A) to the amount in (B), presented
as a ratio in which the amount in (A) equals one or, alternatively,
expressed narratively in terms of the multiple that the amount in (B)
bears to the amount in (A).
    For consistency with existing Item 402 requirements, the proposed
requirements would use the defined term ``PEO'' (principal executive
officer), instead of the term ``chief executive officer'' used in
Section 953(b).\37\ PEO is defined in Item 402(a)(3) as an ``individual
serving as the registrant's principal executive officer or acting in a
similar capacity during the last completed fiscal year.'' We believe
that this consistency would simplify compliance for registrants and
would clarify how the pay ratio disclosure relates to the PEO's total
compensation figure disclosed in the summary compensation table. We
also believe that this change in terminology is consistent with Section
953(b).
---------------------------------------------------------------------------

    \37\ The term chief executive officer in the executive
compensation rules was replaced by the term ``principal executive
officer'' as part of the 2006 amendments to Item 402 of Regulation
S-K in order to maintain consistency with the nomenclature used in
Item 5.02 of Form 8-K. See 2006 Adopting Release, supra note 14, at
n. 326.
---------------------------------------------------------------------------

    Section 953(b) specifies that registrants must disclose the ratio
of the median of the annual total compensation of all employees to the
PEO's annual total compensation. We note that three commenters raised
concerns about the presentation of the pay ratio in the order set forth
in Section 953(b).\38\ These commenters noted that the customary manner
of presenting similar types of ratios would include the PEO's annual
total compensation in the numerator and the median of the annual total
compensation of all employees in the denominator and would typically be
expressed in terms of the multiple that the PEO amount bears to the
median amount (such as ``PEO pay is X times the median employee pay'').
These commenters recommended that we allow registrants to present the
ratio in this more customary manner.
---------------------------------------------------------------------------

    \38\ See letters from Compensia, Inc. (``For example, if the
annual total compensation of a company's chief executive officer was
$3,750,000 and the median of the annual total compensation of all
employees was $75,000, then as currently formulated, the required
disclosure would be 0.02 to 1, rather than the commonly understood
calculation of 50 to 1.''); Frederick W. Cook & Co., Inc.; and Group
of Exec. Comp. Lawyers (``For example, if CEO pay were 2 million and
the median annual compensation of all employees were $25,000, the
statute literally requires a disclosure that the median annual
compensation of all employees is 1/80 of the CEO's pay.'').
---------------------------------------------------------------------------

    Although Section 953(b) calls for a ratio showing the median of the
annual total compensation of all employees to the PEO's annual total
compensation, it does not specify how the ratio should be expressed. In
order to promote consistent presentation and address the potential for
confusion, the proposed pay ratio disclosure requirements specify that
the ratio must be expressed as a ratio in which the median of the
annual total compensation of all employees is equal to one, or,
alternatively, expressed narratively in terms of the multiple that the
PEO total compensation amount bears to the median of the annual total
compensation amount. For example, if the median of the annual total
compensation of all employees of a registrant is $45,790,\39\ and the
annual total compensation of a registrant's PEO is $12,260,000,\40\
then the pay ratio disclosed would be ``1 to 268'' (which could also be
expressed narratively as ``the PEO's annual total compensation is 268
times that of the median of the annual total compensation of all
employees'').
---------------------------------------------------------------------------

    \39\ Average salary for all occupations, U.S. Bureau of Labor
Statistics, May 2012 National Occupational Employment and Wage
Estimates United States, available at http://www.bls.gov/oes/current/oes_nat.htm#00-0000.
    \40\ Derived from 2012 Average CEO at S&P 500 Index Companies,
AFL-CIO, Trends in CEO Pay, available at http://www.aflcio.org/Corporate-Watch/CEO-Pay-and-the-99/Trends-in-CEO-Pay.
---------------------------------------------------------------------------

    We believe that the proposed requirements for the expression of the
ratio would help to address the concerns of commenters and are
consistent with the statute. It does not appear that the order of the
ratio specified in Section 953(b) would impact investor understanding
or the usefulness, as expressed by some commenters,\41\ to investors of
the proposed pay ratio disclosure.
---------------------------------------------------------------------------

    \41\ The commenters asserting that Section 953(b) disclosure
would be useful to investors did not raise the order of the ratio
components as a factor that would diminish the meaningfulness of the
information. These commenters are listed at notes 155 through 165,
infra.
---------------------------------------------------------------------------

Request for Comment
    6. Are there any other presentation issues that companies need
guidance on or that should be clarified in the pay ratio disclosure
requirements? If so, please provide details about such issues and any
recommended guidance that should be provided.
2. Employees Included in the Identification of the Median
a. All Employees
    Section 953(b) expressly requires disclosure of the median of the
annual total compensation of ``all employees.'' Consistent with that
mandate, the proposed requirements state that ``employee'' or
``employee of the registrant'' includes any full-time, part-time,
seasonal or temporary worker employed by the registrant or any of its
subsidiaries \42\ (including officers other

than the PEO).\43\ Therefore, under the proposed requirements, ``all
employees'' covers all such individuals. In contrast, workers who are
not employed by the registrant or its subsidiaries, such as independent
contractors or ``leased'' workers or other temporary workers who are
employed by a third party, would not be covered.\44\
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    \42\ By directing the Commission to amend Item 402, we believe
that Section 953(b) is intended to cover employees on an enterprise-
wide basis, including both the registrant and its subsidiaries,
which is the same approach as that taken for other Item 402
information. See Item 402(a)(2) and Instruction 2 to Item 402(a)(3).
Because this issue was not addressed by commenters, we specifically
request comment below on this approach.
    In the context of Item 402 disclosure, a subsidiary of a
registrant is an affiliate controlled by the registrant directly or
indirectly through one or more intermediaries, as set forth in the
definition of ``subsidiary'' under both Securities Act Rule 405 and
Exchange Act Rule 12b-2. Therefore, for purposes of the proposed pay
ratio disclosure, an employee would be covered by the disclosure
requirements if he or she is employed by the registrant or a
subsidiary of the registrant as defined in Rule 405 and Rule 12b-2.
    \43\ Rule 405 under the Securities Act states that the term
``employee'' does not include a director, trustee or officer. The
parenthetical ``(including officers other than the PEO)'' in Item
402(u)(3) of the proposed rules is intended to clarify that
officers, as that term is defined under Rule 405, are not excluded
from the definition of employee for purposes of the proposed pay
ratio disclosure requirements.
    \44\ For example, if a registrant pays a fee to another company
(such as a management company or an employee leasing agency) that
supplies workers to the registrant, and those workers receive
compensation from that other company, those workers would not be
counted as employees of the registrant for purposes of the proposed
rules.
---------------------------------------------------------------------------

    We note that commenters were split in their support for a rule that
would include all employees of the issuer,\45\ rather than only
covering full-time U.S. workers.\46\ Many commenters raised concerns
that the inclusion of workers located outside the United States, as
well as employees that are not permanent, full-time employees, would
render the comparison to the PEO less meaningful, while at the same
time imposing significant costs on registrants that have global
operations.\47\ According to these commenters, the international
variation in compensation arrangements and benefits, in addition to
cost-of-living differences and currency fluctuations, could distort the
comparability of employee compensation to that of a PEO based in the
United States.\48\ In addition, these commenters noted that the types
of compensation that are recorded in payroll and benefits systems
outside the United States may vary from those recorded as compensation
in the United States due to local accounting standards and tax
regulations. Because of these variations, they further suggest that
requiring registrants to recompute or adjust the output of payroll
systems to include non-payroll items that would be reportable as
compensation under Item 402 has the potential to impose significant
compliance costs.\49\
---------------------------------------------------------------------------

    \45\ See AFL-CIO I and letters from Americans for Financial
Reform; CtW Investment Group; Group of International Investors;
Senator Menendez; Social Investment Forum; Trillium Asset
Management; UAW Medical Benefits Trust; and Walden Asset Management.
    \46\ See COEC I and letters from ABA; American Benefits Council;
Brian Foley & Co.; Group of Exec. Comp. Lawyers; NACD; Protective
Life Corporation; RILA; SCSGP; and Towers Watson.
    \47\ See COEC I and letters from ABA; American Benefits Council;
Brian Foley & Co.; Group of Exec. Comp. Lawyers; NACD; Protective
Life Corporation; RILA; SCSGP; and Towers Watson.
    \48\ See, e.g., letter from Group of Exec. Comp. Lawyers.
    \49\ Id.
---------------------------------------------------------------------------

    In contrast, one commenter asserted that the provision was intended
to cover all employees of the issuer, including full-time, part-time,
U.S. and non-U.S. employees.\50\ Some commenters asserted that the
exclusion of non-U.S. and non-full-time employees would diminish the
meaningfulness of the pay ratio disclosure to investors.\51\ Some of
these commenters suggested allowing companies to present separate pay
ratios covering U.S. and non-U.S. employees, which they believed could
mitigate concerns that the comparison of the PEO to workers located
outside of the United States could distort the disclosure.\52\
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    \50\ See letter from Senator Menendez, the sponsor of Section
953(b) (``Specifically, I want to clarify that when I wrote `all'
employees of the issuer, I really did mean all employees of the
issuer. I intended that to mean both full-time and part-time
employees, not just full-time employees. I also intended that to
mean all foreign employees of the company, not just U.S.
employees.'').
    \51\ See AFL-CIO I and letters from Americans for Financial
Reform; CtW Investment Group; Group of International Investors;
Institute for Policy Studies; and UAW Medical Benefits Trust. But
see letter from Social Investment Forum (``[W]e acknowledge that a
comparison of a U.S. CEO's pay to the median for U.S. employees is
the most useful comparison as a factor for the compensation
committee in establishing executive pay packages.'') and letter from
Walden Asset Management (``[F]or the purposes of analyzing trends in
executive pay for U.S. executives, statistics comparing compensation
of NEOs to the median U.S. employee [are] most useful.'').
    \52\ See AFL-CIO I and letters from Americans for Financial
Reform; Walden Asset Management; and Social Investment Forum (``We
recommend that the SEC require two statistics, one on pay disparity
with only U.S. workers and another for non-U.S. workers so that
investors can better study pay disparity trends and inherent
risks.'').
---------------------------------------------------------------------------

    We acknowledge the concerns of commenters that the inclusion of
non-U.S. employees raises compliance costs for multinational companies,
introduces cross-border compliance issues, and could raise concerns
about the impact of non-U.S. pay structures on the comparability of the
data to companies without off-shore operations. We also recognize that
differences in relative compliance costs may have an adverse impact on
competition. We have weighed these considerations and are proposing
that the requirement cover all employees without carve-outs for
specific categories of employees. Although we believe that the
inclusion of non-U.S. employees in the calculation of the median is
consistent with the statute, we have considered ways to address the
costs of compliance that commenters attribute to the provision's
coverage of a registrant's global workforce.
    In particular, we are cognizant that data privacy laws in various
jurisdictions could have an impact on gathering and verifying the data
needed to identify the median of the annual total compensation of all
employees. Commenters have asserted that, in some cases, data privacy
laws could prohibit a registrant's collection and transfer of
personally identifiable compensation data that would be needed to
identify the median.\53\ We also understand that in many cases, the
collection or transfer of the underlying data is made burdensome by
local data privacy laws, but is not prohibited.
---------------------------------------------------------------------------

    \53\ See COEC II and letters from Davis Polk; Group of Exec.
Comp. Lawyers; and SCSGP.
---------------------------------------------------------------------------

    For example, we acknowledge that multinational companies based in
the United States may need to ensure compliance with data privacy
regulations in transmitting personally identifiable human resources
data (``personal data'') of European Union (``EU'') persons onto global
human resource information system networks in the United States,
sending personal data in hard copy from the European Union to the
United States, as well as personal data ``onward transfers'' to third-
party payroll, pension and benefits processors outside of the European
Union.\54\ In some EU Member States, employee consent is required,
while in others, consent may not be sufficient.\55\ Commenters also
have asserted that other jurisdictions, such as Peru, Argentina, Canada
and Japan also have data privacy laws that could be implicated by the
gathering of data for purposes of the proposed pay ratio
disclosure.\56\
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    \54\ The EU Directive 95/46/EC, 1995 O.J. L 281 (European Union
Directive on the Protection of Individuals with Regard to the
Processing of Personal Data and on the Free Movement of Such Data)
sets forth the regulatory framework governing the transfer of
personal data from an EU Member State to a non-EU country.
    \55\ See letter from Group of Exec. Comp. Lawyers.
    \56\ Id.
---------------------------------------------------------------------------

    Although we are not proposing any additional accommodation to
address this concern, we believe that the flexibility afforded to all
registrants under the proposed rules could permit registrants to manage
any potential costs

arising from applicable data privacy laws. For example, consistent with
the proposed requirements, registrants in this situation would be
permitted to estimate the compensation of affected employees. We
request comment below on whether the proposed flexibility afforded to
registrants in selecting a method to identify the median, such as the
use of statistical sampling or other reasonable estimation techniques
and the use of consistently applied compensation measures to identify
the median employee, could enable registrants to better manage any
potential costs and burdens arising from local data privacy regulations
or if there are other alternatives that would be consistent with
Section 953(b). Commenters did not provide us with information about
applicable data privacy laws sufficient to analyze how the flexibility
allowed to all registrants under the proposed requirements could impact
the potential costs arising from such laws, and we request information
about the specific impact these matters would have on collecting or
transferring data needed to comply with the proposed requirements.
Request for Comment
    7. Are there alternative ways to fulfill the statutory mandate of
covering ``all employees'' that could reduce the compliance costs and
cross-border issues raised by commenters? For example, would it be
consistent with the statute to permit registrants to exclude non-U.S.
employees from the calculation of the median? Would it be consistent
with the statute to permit registrants to exclude non-full-time
employees from the calculation of the median? If not, could these
alternatives be implemented in a way that would be consistent with the
statute?
    8. Should registrants be allowed to disclose two separate pay
ratios covering U.S. employees and non-U.S. employees in lieu of the
pay ratio covering all U.S. and non-U.S. employees? Why or why not?
Should we require registrants to provide two separate pay ratios, as
requested by some commenters? \57\ What should the separate ratios
cover (e.g., should there be one for U.S. employees and one for non-
U.S. employees, or should there be one for U.S. employees and one
covering all employees)? If separate ratios are required, should this
be in addition to, or in lieu of, the pay ratio covering all U.S. and
non-U.S. employees? Would such a requirement increase costs for
registrants? Would it increase the usefulness to investors of the
disclosure?
---------------------------------------------------------------------------

    \57\ See AFL-CIO I and letters from Americans for Financial
Reform; Walden Asset Management; and Social Investment Forum.
---------------------------------------------------------------------------

    9. Please identify the applicable data privacy laws or regulations
that could impact the collection or transfer of the data needed to
comply with the proposed pay ratio requirement. Please also identify
whether there are exclusions, exemptions or safe harbors that could be
used to collect or transfer such data. Please quantify, to the extent
practicable, the impact of such laws on registrants subject to Section
953(b), such as an estimate of the number of registrants affected or
the average percentage of employees affected. How would the proposed
flexibility afforded to all registrants (i.e., selecting a method to
identify the median, the use of statistical sampling or other
reasonable estimation techniques and the use of consistently applied
compensation measures to identify the median employee) impact any
potential costs and burdens arising from local data privacy laws? In
particular, would a registrant be able to make a reasonable estimation
of the total compensation for affected employees? Would a registrant be
able to select a consistent compensation measure that is not subject to
local data privacy laws? If not, are there alternative ways to meet the
statutory mandate of Section 953(b) that would reduce the costs and
burdens arising from local data privacy laws?
    10. Are there applicable local data privacy laws that would
prohibit the collection or transfer of data necessary to calculate the
annual total compensation of an employee or group of employees or the
identification of a median employee using a consistent compensation
measure? In that situation, would a registrant be able to reasonably
estimate compensation? If not, are there alternatives to the proposed
rule that would address such a situation while still being consistent
with Section 953(b)? Should any such alternatives be permitted? If an
alternative should be permitted, what limitations or conditions should
be imposed on using the alternative? For example, should registrants be
required to disclose the approximate number of employees affected and
identify the law that prohibits the collection or transfer of data?
Please discuss whether any such alternatives would significantly impact
the pay ratio disclosure.
    11. Should the rule cover employees of a registrant's subsidiaries
as defined in Rule 405 and Rule 12b-2, as proposed? Are there any
situations where an entity meets the subsidiary definition but its
employees should not be included for purposes of the proposed
requirement? For example, should the rule be limited to subsidiaries
that consolidate their financial statements with those of the
registrant? Should the rule not apply to subsidiaries of certain types
of registrants, such as the portfolio companies of business development
companies? Please provide details of any recommended limitations.
    12. Alternatively, should the requirements be limited to employees
that are employed directly by the registrant (i.e., excluding employees
of its subsidiaries)? Would such a limitation be consistent with
Section 953(b)? How would such a limitation affect the potential
benefits of the disclosure? Would such a limitation have other impacts,
such as incentivizing registrants to alter their corporate structure,
and, if so, are there alternative ways that the rule could address
those impacts?
    13. Should Section 953(b) be read to apply to ``leased'' workers or
other temporary workers employed by a third party? Does the proposed
approach to such workers raise costs or other compliance issues for
registrants, or impact potential benefits to investors, that we have
not identified? Do registrants need guidance or instructions for
determining how to treat employees of partially-owned subsidiaries or
joint ventures? If so, what should such guidance or instructions
entail?
    14. Is it likely that registrants would alter their corporate
structure or employment arrangements to reduce the number of employees
covered by the proposed requirements? How should we tailor the proposed
requirements to address such an impact?
    15. Does the proposed inclusion of all employees raise competition
concerns? If so, are there some industries or types of registrants that
would be more affected than others? How should we tailor the proposed
requirements to address such concerns?
b. Calculation Date for Determining Who Is An Employee
    The proposed requirement defines ``employee'' as an individual
employed as of the last day of the registrant's last completed fiscal
year.\58\ This calculation date for determining who is an employee
would be consistent with the one used for the determination of the
three most highly compensated executive officers under Item

402(a)(3)(iii). Two commenters expressly supported this approach.\59\
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    \58\ Proposed Item 402(u)(3).
    \59\ See letters from RILA (``For consistency with the
requirements of Item 402, we believe the best option is to determine
the median total annual salary of the issuer's employees as of the
close of the most recently completed fiscal year.'') and Towers
Watson (``[I]t will be necessary to fix the employee group as of a
particular date[hellip]The last day of the prior year would seem an
obvious choice.'').
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    Additionally, two commenters suggested that only employees that
have been employed for the entire annual period (and as of the last day
of the fiscal year) should be covered.\60\ The composition of a
company's workforce typically changes throughout the fiscal year, and
in some industries and businesses, it can change constantly. Although
Section 953(b) requires the median calculation to cover all employees,
it does not prescribe a particular calculation date for the
determination of who should be treated as an employee for that purpose.
We believe that a bright line calculation date for determining who is
an employee would ease compliance for registrants by eliminating the
need to monitor changing workforce composition during the year, while
still providing a recent snapshot of the entire workforce.\61\ We agree
with the commenters who suggest that the most appropriate calculation
date is one that is consistent with the calculation date for
determining the named executive officers under current Item 402
requirements.
---------------------------------------------------------------------------

    \60\ See letters from ABA and RILA. One of these commenters
suggested that the use of the word ``annual'' in Section 953(b)
could be interpreted as limiting the scope of the provision to only
those employees that have been employed for the full fiscal year.
See letter from ABA.
    \61\ We note that a requirement to track which employees have
been continuously employed for the entire annual period could
increase costs for registrants, although, as discussed below, we are
permitting registrants to annualize the compensation of certain
employees.
---------------------------------------------------------------------------

    In proposing this approach, we have assumed that the potential
benefits of the disclosure mandated by Section 953(b) would not be
significantly diminished by covering only individuals employed on a
specific date at year-end, rather than covering every individual who
was employed at any time during the year. Although we believe that this
approach could help contain compliance costs for registrants, we
acknowledge that it could have other costs. For example, this approach
would not capture seasonal or temporary employees that are not employed
at year-end. This would enable a registrant with a significant amount
of such workers to calculate a median that does not fully reflect the
workforce that is required to run its business. It could also cause the
proposed requirements to be costlier for, and thereby have an anti-
competitive impact on, registrants whose temporary or seasonal workers
are employed at year-end as opposed to other times during the year.
Finally, it is possible, although commenters have asserted that it is
remote, that registrants could try to structure their employment
arrangements to reduce the number of workers employed on the
calculation date.\62\
---------------------------------------------------------------------------

    \62\ See AFL-CIO I (``The disclosure of compensation data under
Section 953(b) will not have unintended consequences on public
company employment decisions.'').
---------------------------------------------------------------------------

Request for Comment
    16. Is the proposed calculation date workable for registrants? If
not, what date should be used (e.g., the last day of the registrant's
second (or third) fiscal quarter) and why?
    17. In the alternative, should registrants be permitted the
flexibility to choose a calculation date for this purpose? Why or why
not? If so, should we require the registrant to disclose why a
particular date was chosen? Should such flexibility be limited to
certain circumstances? If so, what principles should apply in
identifying those circumstances?
    18. Is it appropriate to limit the scope of covered employees to
those who were employed on the last day of the registrant's fiscal
year, as proposed? Why or why not? Is consistency with other Item 402
disclosure important in this context? Would this approach ease
compliance costs for registrants? What impact would this calculation
date have on registrants that employ seasonal workers and would the
exclusion of seasonal workers not employed on the calculation date
likely have an impact on the median or the ratio? Please provide data,
such as an estimate of the number of registrants that employ seasonal
workers and the average percentage of seasonal employees that would
likely be excluded. Is it likely that registrants might structure their
employment arrangements to reduce the number of workers employed on the
calculation date? Are there other costs that would be incurred using
this approach that we should consider? Would the proposed calculation
date have a meaningful impact on the potential usefulness of the
disclosure for investors? Are there other ways to deal with defining
the scope of covered employees that are more effective at reducing
costs and providing meaningful disclosure?
    19. Should registrants be required to include any individual who
was employed at any time during the year, or for some minimum amount of
time (and if so, what amount of time) during the year?
    20. Should the rule only apply to employees employed for the full
fiscal year? Why or why not?
c. Adjustments for Certain Employees
    Some commenters raised questions about how to treat employees who
were not employed during the entire fiscal year and recommended that
companies be permitted to annualize the compensation for these
employees in order to more accurately reflect the employment
relationship.\63\ We agree that in instances where the employment
relationship is permanent, and not temporary or seasonal, registrants
should be permitted to annualize the total compensation for an employee
who did not work for the entire year, such as a new hire or an employee
who took an unpaid leave of absence during the period.\64\
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    \63\ See, e.g., letters from Davis Polk; Frederick W. Cook &
Co.; Social Investment Forum; RILA, Walden Asset Management; and
Trillium Asset Management.
    \64\ RILA noted employees on leave under the Family and Medical
Leave Act of 1993 [29 U.S.C. 2601 et seq.] and employees called for
active military duty as common examples.
---------------------------------------------------------------------------

    Accordingly, the proposed requirements include an instruction that
states that total compensation may be annualized for all permanent
employees (other than those in temporary or seasonal positions) who
were employed for less than the full fiscal year.\65\ We are not
proposing to require registrants to perform this type of adjustment,
however, because we do not believe that the costs of requiring
companies to make an extra calculation would be justified.
---------------------------------------------------------------------------

    \65\ By use of the term ``employee,'' this proposed instruction
would apply to individuals who were employed on the last day of the
fiscal year (the calculation date).
---------------------------------------------------------------------------

    The proposed instruction is limited to permanent employees. In
addition, as proposed, the instruction would not permit a registrant to
annualize some eligible employees and not others. As discussed below,
this instruction also would not permit adjustments that would cause the
ratio to not reflect the actual composition of the workforce, such as
annualizing the compensation of seasonal or temporary workers.
Depending on the facts and circumstances, it could be appropriate for a
registrant to annualize the compensation for a permanent part-time
worker who has only worked a portion of the year (such as an employee
who is permanently employed for three days a week and who took an
unpaid leave

of absence under the Family and Medical Leave Act). In such a case, the
adjustment should reflect compensation for the employee's part-time
schedule over the entire year, but should not adjust the part-time
schedule to a full-time equivalent schedule.
    In proposing this approach, we have assumed that this annualizing
adjustment would not significantly diminish the potential usefulness of
the disclosure mandated by Section 953(b). For example, we would not
expect that annualizing the salary of a permanent new hire would impact
the potential ability of an investor to use the pay ratio disclosure as
an indicator of employee morale or to gain an understanding of a
registrant's investment in human capital, which some commenters have
identified as potential benefits of the disclosure under Section
953(b).\66\ We also note that some of the commenters that support
Section 953(b) disclosure were also supportive of allowing annualizing
adjustments for employees employed for less than the full year.\67\
---------------------------------------------------------------------------

    \66\ See AFL-CIO I and letters from; Calvert Investment
Management; CtW Investment Group; Group of International Investors;
Americans for Financial Reform; Drucker Institute; Institute for
Policy Studies; Social Investment Forum; Trillium Asset Management;
and UAW Retiree Medical Benefits Trust.
    \67\ See letters from Social Investment Forum and Trillium Asset
Management.
---------------------------------------------------------------------------

    By permitting but not requiring registrants to annualize
compensation for these employees, the comparability of disclosure
across companies could be reduced. As discussed elsewhere in this
release,\68\ we do not believe that precise comparability or conformity
of disclosure from registrant to registrant is necessarily achievable
due to the variety of factors that could cause the ratio to differ,
and, accordingly, we do not believe that the costs associated with
attempting to promote precise comparability in this respect would be
justified.
---------------------------------------------------------------------------

    \68\ See Section IV of this release.
---------------------------------------------------------------------------

    Although we are proposing to permit the annualizing adjustments
described above, we believe that some of the assumptions or adjustments
suggested by commenters for calculating the annual total compensation
of employees might present a distorted picture of the actual
composition of a registrant's workforce or compensation practices. We
believe that certain adjustments or assumptions, such as full-time
equivalent adjustments for part-time workers, annualizing adjustments
for temporary or seasonal employees, and cost-of-living adjustments for
non-U.S. workers, would cause the median to not be reasonably
representative of the registrant's actual employment and compensation
arrangements for its workforce during the period and could, therefore,
diminish the potential usefulness of the disclosure. Therefore, the
proposed disclosure requirements would not permit such adjustments.
    For example, under the proposed rules, a retailer that hires a
seasonal worker at minimum wage for three months during the holiday
season would need to calculate annual total compensation for that
employee as three months at $7.25/hour ($3,480) and could not
``annualize'' the wages as if the seasonal worker was paid for a full
12 months of work ($13,920). In this example, if the seasonal worker
was not still employed by the registrant on the last day of the
registrant's fiscal year, the registrant would exclude that worker from
the calculation of the median.\69\
---------------------------------------------------------------------------

    \69\ See proposed Item 402(u)(3).
---------------------------------------------------------------------------

    We understand that some commenters believe that these types of
adjustments could allow for a more meaningful comparison between the
compensation of the PEO and that of the registrant's employees,
especially where those employees are not full-time, U.S. employees.\70\
We are concerned, however, that adjusting for these variables could
distort an understanding of the registrant's compensation practices.
For example, if a registrant with a workforce primarily located in
jurisdictions with a lower cost of living than the United States
adjusted the annual total compensation of those employees using
purchasing power parity statistics, the median of the annual total
compensation of all its employees would likely increase. Likewise, if a
registrant with a workforce that is primarily part-time or seasonal
adjusted the annual total compensation of those employees using full-
time equivalent adjustments, the median of the annual total
compensation of all its employees would likely increase. In these
scenarios, the registrant's pay ratio would show less of a disparity in
compensation levels, while its labor costs would appear to be higher
than they actually were. We believe that, rather than making the
disclosure more meaningful, such a result could diminish the potential
usefulness of the disclosure because the ratio would show a less
accurate reflection of actual workforce compensation and could permit a
registrant to alter the reported ratio to achieve a particular
objective with the ratio disclosure.
---------------------------------------------------------------------------

    \70\ See letters from American Benefits Council; Americans for
Financial Reform; Davis Polk; Frederick W. Cook & Co., Inc.; RILA;
Social Investment Forum; Trillium Asset Management; and Walden Asset
Management.
---------------------------------------------------------------------------

Request for Comment
    21. Is it appropriate to allow registrants to annualize the
compensation for non-seasonal, non-temporary employees that have only
worked part of the year, as proposed? Why or why not? Would allowing
annualizing the compensation for these employees likely impact the
median or the pay ratio?
    22. In the alternative, should registrants be required to annualize
the compensation for these employees? Why or why not?
    23. Should we require all registrants that rely on the proposed
instruction to annualize compensation for these employees to disclose
that they have done so (or only when the adjustment is material, as
would be required under the proposed instruction for disclosure of
material assumptions, adjustments and estimates)? Why or why not? If
so, what should the disclosure entail? For example, should the
registrant only be required to state that it has relied on the
instruction, or should it also be required to discuss the number or
percentage of employees for which compensation was annualized?
    24. Should we allow full-time equivalent adjustments for part-time
employees and temporary or seasonal employees, as recommended by some
commenters? \71\ Should we allow cost-of-living adjustments for non-
U.S. employees as recommended by some commenters? \72\ If so in either
case, please explain why. In particular, please address the potential
concern that these kinds of adjustments could cause the ratio to be a
less accurate reflection of actual workforce compensation. Is there an
alternative way to mitigate this concern?
---------------------------------------------------------------------------

    \71\ See letters from Americans for Financial Reform; Frederick
W. Cook & Co., Inc.; and RILA.
    \72\ See generally letter from CtW Investment Group.
---------------------------------------------------------------------------

3. Identifying the Median
    Commenters have suggested that a potential purpose of the pay ratio
disclosure is to allow investors to evaluate the annual total
compensation of the PEO within the context of the registrant's internal
compensation practices.\73\ We note that Congress

specifically chose ``median'' as the point of comparison for Section
953(b), rather than the average,\74\ and, therefore, the proposed pay
ratio requirements also require the median to be used.
---------------------------------------------------------------------------

    \73\ See letter from Senator Menendez (``I wrote this provision
so that investors and the general public know whether public
companies' pay practices are fair to their average employees,
especially compared to their highly compensated CEOs.'').
    See also Representative Keith Ellison, et al. (``House Letter'')
and Senator Robert Menendez et al. (``Senate Letter'') (noting that
Section 953(b) ``requires disclosure by public companies of the
ratio between the compensation of their CEO and the typical worker
at that company . . . and while comprehensive data will not be
available until this provision takes effect, there is no question
that CEO pay is soaring compared to that of average workers.'').
    \74\ Some commenters raised the possibility of using an average
rather than a median, which they believed would reduce the costs of
compliance. See, e.g., letters from American Benefits Council and
Brian Foley & Co.
---------------------------------------------------------------------------

    Section 953(b) does not expressly set forth a methodology that must
be used to identify the median, nor does it mandate that the Commission
must do so in its rules. In order to allow the greatest degree of
flexibility while remaining consistent with the statutory provision,
the proposed requirements do not specify any required calculation
methodologies for identifying the median. Instead, we are providing
instructions and guidance designed to allow registrants to choose from
several alternative methods to identify the median, so that they may
use the method that works best for their own facts and circumstances.
As discussed in detail below, we believe that even a registrant with a
large number of employees should be able to provide the proposed
disclosure in a relatively cost-efficient manner based on statistical
sampling, estimates and the use of any consistently applied
compensation measure to identify the median. For instance, an employer
with a large number of employees could take a random sample of
employees (as discussed further below, the size of the sample needed
would typically depend on the overall distribution of compensation
across employees) and determine the annual cash compensation, or any
other consistently applied compensation measure, for those employees.
Identifying the median employee would not necessarily require a
determination of exact compensation amounts for each employee in the
sample. The registrant could exclude the employees in the sample that
have extremely low or extremely high pay because they would fall on
either end of the spectrum of pay and, therefore, not be the median
employee. Once the registrant identifies the median employee based on
the selected compensation measure applied to each remaining employee in
the sample, the registrant would calculate that employee's annual total
compensation in accordance with Item 402(c)(2)(x) and disclose that
amount as part of the pay ratio disclosure.
    We believe that allowing a registrant to choose a method that works
best for its particular facts and circumstances should help registrants
to comply with the disclosure requirements in a relatively cost-
efficient manner while still achieving the purpose of Section 953(b).
As such, the proposed requirements permit registrants to identify the
median by using a number of different methods, such as calculating
total compensation for each employee using Item 402(c)(2)(x), using
reasonable estimates, and/or statistical sampling.\75\ We are not
prescribing what a reasonable estimate would entail because we believe
that would necessarily depend on the registrant's particular facts and
circumstances. In addition, the proposed rules do not prescribe
specific estimation techniques or confidence levels for an estimated
median because we believe that companies would be in the best position
to determine what is reasonable in light of their own employee
population and access to compensation data. As discussed in Section
II.C.5. below, we are proposing to require that the methodology and any
material assumptions, adjustments or estimates used to identify the
median be briefly disclosed and consistently used, and any estimated
amounts be clearly identified as such. We are proposing this approach
because we believe that the appropriate and most cost effective
methodology would necessarily depend on a registrant's particular facts
and circumstances, including, among others, such variables as:
---------------------------------------------------------------------------

    \75\ We discuss the specific recommendations of commenters
regarding the use of statistical sampling techniques below in this
section.
---------------------------------------------------------------------------

     The size and nature of the workforce;
     the complexity of the organization;
     the stratification of pay levels across the workforce;
     the types of compensation the employees receive;
     the extent that different currencies are involved;
     the number of tax and accounting regimes involved;
     the number of payroll systems the registrant has and the
degree of difficulty involved in integrating payroll systems to readily
compile total compensation information for all employees.

We believe that these likely are the same factors that would cause
substantial variation in the costs of compliance. By not prescribing
specific methodologies that must be used, the proposed requirements
would allow registrants to choose a method for identifying the median
that is appropriate to the size, structure and compensation practices
of their own businesses, including identifying the median employee
based on any consistently applied compensation measure. In addition,
this flexibility could enable registrants to manage compliance costs
more effectively. We also believe that, by allowing registrants to
better manage costs, a flexible approach could mitigate, to some
extent, any potential negative effects on competition arising from the
mandated requirements.\76\ We recognize, however, that a flexible
approach could increase uncertainty for registrants that prefer more
specificity on how to comply with the proposed rules, particularly for
those registrants that do not use statistical analysis in the ordinary
course of managing their businesses.
---------------------------------------------------------------------------

    \76\ See the discussion in Section IV of this release.
---------------------------------------------------------------------------

    We acknowledge that commenters provided a variety of
recommendations for identifying the median aimed at reducing compliance
costs or providing a roadmap for registrants to use to ensure
compliance. For example, one commenter suggested that the Commission
should establish safe harbor methodologies that authorize registrants
to identify the median using a sampling method that is reasonably
representative of its workforce, that could be certified by an
independent expert or that exceeds a minimum number or percentage of
the issuer's total employees.\77\ Another commenter suggested that the
Commission prescribe a ``menu of alternatives'' from which a registrant
may select the calculation method that works best in its situation to
facilitate disclosure that is meaningful while minimizing data
collection costs; registrants would then be required to explain the
method and assumptions used.\78\ Several commenters recommended that
registrants be permitted to use reasonable estimation techniques to
identify median compensation for all employees and to determine all
forms of compensation, including annual changes in pension value.\79\
In considering these alternatives, we favored the recommendations that
did not call for prescriptive requirements in order to avoid the
additional costs that a less flexible approach could impose. In
particular, we believe that the use of reasonable estimates could
afford

registrants flexibility without imposing prescriptive requirements that
may not be workable for all types of registrants. In addition, we
highlight below two alternatives recommended by commenters that would
be permitted under the proposal.
---------------------------------------------------------------------------

    \77\ See American Benefits Council.
    \78\ See letter from Group of Exec. Comp. Lawyers.
    \79\ See COEC I and letters from Meridian Compensation Partners,
LLC and SCSGP.
---------------------------------------------------------------------------

    Use of Statistical Sampling. Two commenters suggested that
companies should be permitted to identify the median through a sampling
technique or other statistically reasonable method.\80\ Two other
commenters also provided views on statistical sampling. One commenter,
based on a survey of 95 registrants, disagreed that statistical
sampling methodology would reduce the compliance burden for companies
because of the wide variability in pay practices and recordkeeping and
asserted that requiring statistical sampling would introduce further
complexity.\81\ Another commenter supported the use of statistical
sampling and described a random sampling technique that could yield an
accurate and unbiased estimate of a registrant's actual median
compensation using a relatively small sample size.\82\ This commenter
asserted that more complicated procedures, such as stratified sampling,
would be unnecessary, regardless of company size, how many countries it
operates in or how many subsidiaries it has.\83\
---------------------------------------------------------------------------

    \80\ See AFL-CIO II (``The SEC can minimize issuer compliance
costs by permitting the use of random statistical sampling to
calculate the median. . . . Because the median is a statistical term
that is frequently used to describe a set of observations randomly
drawn from a larger population, it is reasonable for the SEC to
permit issuers to sample their employee populations to calculate the
median.'') and letter from Davis Polk (``We recommend that the
Commission permit companies to identify a single employee, via a
sampling technique or other statistically reasonable method, among
its employee base as the representative for median compensation.'').
    \81\ See COEC II (noting that sampling ``would introduce
additional complexity by requiring the development of a methodology
to determine the appropriate stratification of the sample
population, develop and assess the appropriate confidence intervals
to enhance the reliability of the data collected and ensure that
comparable forms of compensation are included across the varying pay
practices that are common in different regions of the world.'').
    \82\ See letter from M. Ohlrogge.
    \83\ The commenter assumed that any compensation distribution is
lognormal and that the variance of compensation distribution within
a company is given as a constant number. We believe, however, that
this may not be a practical assumption because, as described in
detail in Section IV of this release, each registrant would have a
company-specific compensation variance, which is impossible to be
generally assumed. In addition, registrants that have multiple
business or geographical segments may not necessarily have lognormal
distribution of wages.
---------------------------------------------------------------------------

    As we discuss in more detail in the economic analysis section of
this release, the variance of underlying compensation distributions
(that is, how widely employee compensation is spread out or distributed
around the mean) can materially affect the sample size needed for
reasonable statistical sampling.\84\ Variation in the types of
employees at a registrant across business units and geographical
regions can also add complexity to the sampling procedure. While we
generally agree that a relatively small sample size would be
appropriate in certain situations, a reasonable determination of sample
size would ultimately depend on the underlying distribution of
compensation data.\85\ As a result, compliance costs would vary across
registrants according to the characteristics of their compensation
distributions. Nevertheless, we believe that permitting registrants to
use statistical sampling may lead to a reduction in compliance costs as
compared to other methods of identifying the median.
---------------------------------------------------------------------------

    \84\ Our analysis, further discussed in Section IV of this
release, uses mean and median wage estimates from the Bureau of
Labor Statistics (BLS) at the 4-digit NAICS industry level (290
industries) and assumes a lognormal wage distribution, a 95%
confidence interval with 0.5% margin of error. The analysis focuses
on the registrants that have a single business or geographical unit.
The analysis also assumes that when the sampling is implemented, the
sampling method would be a true random sampling, i.e., it would not
be biased by region, occupation, rank, or other factor. In our
analysis, the appropriate sample size for the registrants with a
single business or geographical unit varies between 81 and 1,065
across industries, with the average estimated sample size close to
560.
    \85\ We believe that reasonable estimates of the median for
registrants with multiple business lines or geographical units could
be arrived at through more than one statistical sampling approach.
All approaches, however, require drawing observations from each
business or geographical unit with a reasonable assumption on each
unit's compensation distribution and inferring the registrant's
overall median based on the observations drawn. Certain cases may
not easily generate confidence intervals around the estimates or
prescribe the appropriate minimum sample size. See Section IV of
this release for further discussion.
---------------------------------------------------------------------------

    We note that the identification of a median employee does not
necessarily require a determination of exact compensation amounts for
every single employee included in the sample. A registrant could,
rather than calculating exact compensation, identify the employees in
the sample that have extremely low or extremely high pay and that would
therefore fall on either end of the spectrum of pay. Since identifying
the median involves finding the employee in the middle, it may not be
necessary to determine the exact compensation amounts for every
employee paid more or less than that employee in the middle. Instead,
just noting that the employees are above or below the median would be
sufficient for finding the employee in the middle of the pay spectrum.
    Use of a Consistently Applied Compensation Measure. Several
commenters raised concerns about expected compliance costs arising from
the complexity of the ``total compensation'' calculation under Item
402(c)(2)(x) and, in particular, the determination of total
compensation in accordance with Item 402(c)(2)(x) for employees when
identifying the median.\86\ To address these concerns, several
commenters recommended allowing companies to use total direct
compensation (such as annual salary, hourly wages and any other
performance-based pay) or cash compensation to first identify a median
employee and then calculate that median employee's annual total
compensation in accordance with Item 402(c)(2)(x).\87\ We agree that
this approach would provide a workable identification of the median for
many registrants, and we expect that the costs of compliance would be
reduced if registrants were permitted to identify the median using a
less complex, more readily available figure, such as salary and wages,
rather than total compensation as determined in accordance with Item
402(c)(2)(x). This approach could also help reduce costs for
registrants that are not able to reduce costs using statistical
sampling techniques.\88\ Because some commenters have indicated that
using cash compensation could be just as burdensome to calculate for
registrants with multiple payroll systems in various countries,\89\ we
are not proposing to require companies to use a specific compensation
measure, like cash compensation or total direct compensation, when they
are identifying the median employee. Instead, we believe that
registrants would be in the best position to select a compensation
measure that is appropriate to their own facts and

circumstances and that a consistently applied compensation measure
would result in a reasonable estimate of a median employee at a
substantially reduced cost. Therefore, the proposed instructions would
permit a registrant to identify a median employee based on any
consistently applied compensation measure, such as compensation amounts
reported in its payroll or tax records, as long as the registrant
briefly discloses the measure that it used (e.g. ``We found the median
using salary, wages and tips as reported to the U.S. Internal Revenue
Service on Form W-2 and the equivalent for our non-U.S.
employees.'').\90\
---------------------------------------------------------------------------

    \86\ See, e.g., COEC I and II and letters from American Benefits
Council; Brian Foley & Co.; Group of Exec. Comp. Lawyers; Group of
Trade Associations; Protective Life Corporation; SCSGP; and Towers
Watson.
    \87\ See AFL-CIO II and letters from ABA; American Benefits
Council; Americans for Financial Reform; CtW Investment Group;
Protective Life Corporation; RILA; and SCSGP.
    \88\ Registrants would be permitted to use a consistently-
applied compensation measure to identify the median employee
regardless of whether they use statistical sampling.
    \89\ See COEC II (asserting that cash compensation is not an
appropriate substitute since non-cash remuneration makes up a
substantial part of compensation in certain parts of the world, and
cash compensation would still need to be gathered manually for many
registrants due to variances in payroll systems and tax regimes).
    \90\ As discussed in Section II.C.4 below, a registrant using a
consistently applied compensation measure for purposes of
identifying the median would be required to calculate and disclose
the annual total compensation for that median employee using the
definition of total compensation in Item 402(c)(2)(x).
---------------------------------------------------------------------------

    We also understand from commenters that the annual period used for
payroll or tax recordkeeping can sometimes differ from the registrant's
fiscal year, and, therefore, for purposes of determining the annual
compensation amounts when using a consistently applied compensation
measure, the proposed instructions also permit the registrant to use
the same annual period that is used in the payroll or tax records from
which the compensation amounts are derived. We are not proposing to
define or limit what would qualify as payroll or tax records. We note,
however, that this proposed accommodation is intended to be construed
broadly enough to allow registrants to use information that they
already track and compile for payroll or tax purposes. We are persuaded
by commenters who asserted that permitting companies to use
compensation information in the form that it is maintained in their own
books and records would reduce compliance costs without appreciably
affecting the quality of the disclosure.
    Two commenters suggested that registrants should be permitted to
calculate the ratio using employee earnings estimates available through
the U.S. Department of Labor's Bureau of Labor Statistics (``BLS''),
which they believed would reduce costs for registrants and promote
comparability across companies.\91\ Although we agree that such an
approach would greatly reduce the compliance burden for registrants, we
do not believe it would be consistent with Section 953(b). In addition,
we do not believe it would be useful for the Commission to require
registrants to compile and disclose information that investors are
already able to calculate using publicly available information.
---------------------------------------------------------------------------

    \91\ See COEC II and letter from Group of Exec. Comp. Lawyers.
One of these commenters asserts that using BLS statistics would
likely result in ratio with a higher disparity than comparing PEO
compensation to median employee compensation, and, ``if a company
decides to avoid the cost and other burdens of an actual median
computation by publishing a statistic that shows a higher disparity,
it should be allowed to do so.'' See letter from Group of Exec.
Comp. Lawyers.
---------------------------------------------------------------------------

    Although the proposed flexible approach could reduce the
comparability of disclosure across registrants, we do not believe that
precise conformity or comparability of the ratio across companies is
necessary. Some commenters believe that a primary benefit of the pay
ratio disclosure would be providing a company-specific metric that
investors could use to evaluate the PEO's compensation within the
context of his or her own company,\92\ rather than a benchmark for
compensation arrangements across companies. Accordingly, we do not
believe that improving the comparability of the disclosure across
companies by mandating a specific method for identifying the median
would be justified in light of the costs that would be imposed on
registrants by a more prescriptive rule. We do not believe that
mandating a particular methodology would necessarily improve the
comparability across companies because of the numerous other factors
that could also cause the ratios to be less meaningful for company-to-
company comparison.\93\ We believe that greater comparability across
companies could increase the likelihood that a registrant's competitors
could infer proprietary or sensitive information about the registrant's
business,\94\ which could increase the costs to registrants of the
proposed requirements.
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    \92\ See, e.g., Senate Letter; House Letter; and AFL-CIO I; and
letters from CtW Investment Group and UAW Retiree Medical Benefits
Trust.
    \93\ These factors could include, among others, variations in
the way companies organize their workforces to accomplish similar
tasks; variations in pay between companies for identical tasks;
differences in the geographical distribution of employees (domestic
or international, as well as in high- or low-cost areas); degree of
vertical integration; reliance on contract and outsourced workers;
ownership structure; and differences in industry and business type.
    \94\ Where pay ratio information is more ``precisely''
comparable between companies in the same industry, information about
median pay could allow inferences about the business, such as how a
company and its workforce is structured, what its compensation
practices are, its labor costs and use of outsourcing.
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    Finally, we recognize that allowing registrants to select a
methodology for identifying the median, including identifying the
median employee based on any consistently applied compensation measure
and allowing the use of reasonable estimates, rather than prescribing a
methodology or set of methodologies, could permit a registrant to alter
the reported ratio to achieve a particular objective with the ratio
disclosure, thereby potentially reducing the usefulness of the
information. We believe that requiring the use of a consistently
applied compensation measure should lessen this concern. We request
comment on whether the flexibility of the proposed requirements would
allow a registrant to distort its pay ratio in material respects.
Request for Comment
    25. Should registrants be permitted, as proposed, to choose a
method to identify the median that is workable for the company based on
its particular facts and circumstances? Will registrants be able to use
the proposed approach to identify the median? Do registrants need
additional guidance or instructions to be able to use the proposed
approach to identify the median? If so, what additional guidance is
needed?
    26. Do registrants need further guidance on the permitted use of
reasonable estimates in identifying the median? If so, what should that
guidance be? In the alternative, should the proposed requirement
expressly disallow the use of reasonable estimates? Please explain how
the usefulness of the pay ratio disclosure would be affected by the use
of reasonable estimates. Should the rule specify requirements for
statistical sampling or any other estimation methods, such as
appropriate sample sizes for reasonable estimates or requiring the
results to meet specified confidence levels? Why or why not? If so,
what should the requirements be? For example, should the estimate have
at least a 90% (or 85%, or some other percentage) confidence level?
    27. Are registrants likely to use statistical sampling to identify
the median? How would registrants conduct the sampling? Would it be
outsourced or conducted by internal personnel? How much would
statistical sampling cost? Would the use of statistical sampling
address costs relating to the inclusion of non-U.S. employees in the
calculation?
    28. Should registrants be permitted, as proposed, to identify the
median employee using a consistently applied compensation measure? Why
or why not? How would this impact compliance costs? Would this address
costs arising from having employees in multiple jurisdictions and
payroll systems? Should there be any limitations on the

types of compensation measures that can be used? What compensation
measure would registrants likely use for this purpose? How would that
measure compare to total compensation calculated under Item
402(c)(2)(x)? How would the use of that measure affect the median (e.g.
would it likely generate a median that is a reasonable approximation of
the median of Item 402(c)(2)(x) total compensation)? What impact, if
any, would the use of a consistently applied compensation measure have
on the usefulness of the pay ratio disclosure? How could the proposed
rules be changed to address any such impact? Are there any
circumstances where it would be inappropriate to permit a registrant to
use a consistently applied compensation measure to identify the median
employee?
    29. Should we, as proposed, permit registrants to use the time
period that is used for payroll or tax recordkeeping when identifying
the median employee based on consistently applied compensation
measures, whether or not the time periods correspond with the last
completed fiscal year or the tax year? Why or why not? Are there any
parameters that should be set, such as requiring the period to end
within a designated amount of time before the filing of the proxy or
information statement relating to the annual meeting of shareholders or
written consents in lieu of such meeting or annual report, as
applicable, in which updated pay ratio information is required (such as
3 months, 6 months, 9 months or 12 months) or, alternatively, a period
ending no more than 9 months (or 12 months or another amount of time)
following the last annual meeting of shareholders? Should such
flexibility only be permitted where the registrant's fiscal year-end is
different from calendar year-end? Are we correct that this
accommodation would decrease costs for registrants? Would the use of
different time periods for different employees have an adverse impact
on the disclosure? Would such flexibility meaningfully reduce the
comparability of the median of the annual total compensation of all
employees to the annual total compensation of the PEO, or otherwise
impair the potential usefulness to investors of the pay ratio
disclosure?
    30. Could the flexibility of the proposed requirements allow a
registrant to distort its pay ratio in material respects? If so,
explain how.
    31. Is our belief correct that allowing flexibility in identifying
the median could minimize the potential anti-competitive impact of the
costs of compliance? Would the proposed flexibility address other
impacts on competition that could arise from the proposed requirements?
Could a registrant's competitors infer proprietary or sensitive
information about a company's business operations, strategy or labor
cost-structure from the disclosure of the median of the annual total
compensation of all employees? If so, how can this impact be addressed?
    32. Are there alternative ways to satisfy the statutory mandate?
Please be specific.
4. Determination of Total Compensation
    As mandated by Section 953(b), the proposed requirements would
define ``total compensation'' by reference to Item 402(c)(2)(x). We
note that Section 953(b) refers to Item 402(c)(2)(x) as in effect on
the day before the date of enactment of the Dodd-Frank Act, or July 20,
2010. No substantive amendments have been made to Item 402(c) since
that date.\95\ Therefore, the proposed requirements would refer to Item
402(c)(2)(x), without reference to the rules in effect on July 20,
2010. We expect to address the impact on the proposed rules of any
future amendments to Item 402(c)(2)(x) if and when such future
amendments are considered.
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    \95\ There have been technical amendments since that date. In
August 2011, certain references to U.S. GAAP requirements in the
instructions to Item 402 were updated to reflect the FASB's
Accounting Standards Codification. See Technical Amendments to
Commission Rules and Forms Related to the FASB's Accounting
Standards Codification, Release No. 33-9250 (Aug. 8, 2011) [76 FR
50117].
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    Commenters have observed that, because of the complexity of the
requirements of Item 402(c)(2)(x), registrants typically compile
information required by Item 402(c) manually for the named executive
officers, which they have stated takes significant time and
resources.\96\ To address this issue, some of these commenters made
various recommendations to simplify the total compensation definition,
such as including only cash compensation, only cash compensation and
equity-based compensation, or only compensation that is reported to the
U.S. Internal Revenue Service on Form W-2.\97\ As discussed above, we
are proposing to allow registrants to identify the median in a variety
of ways, including by identifying the median employee using any
consistently applied compensation measure and then determining and
disclosing the Item 402(c)(2)(x) total compensation for that median
employee. As proposed, a registrant would be permitted to calculate
total compensation for all employees in accordance with Item
402(c)(2)(x), but would only be required to calculate and disclose such
information for the median employee.\98\ Because the total compensation
calculation using Item 402(c)(2)(x) would only be required for one
additional employee (the median employee), we are not proposing to
simplify the total compensation definition that is required to be used
to disclose the median employee compensation and the ratio.
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    \96\ See letter from Davis Polk. See also letter from R.
Morrison.
    \97\ See COEC I and letters from American Benefits Council;
Brian Foley; Group of Exec. Comp. Lawyers; Protective Life
Corporation; SCSGP; and Towers Watson.
    \98\ Given the specificity of the definition used in Section
953(b), the proposed requirements incorporate the Item 402(c)(2)(x)
definition of total compensation as it is set forth in Section
953(b) for purposes of disclosing the median of the annual total
compensation of employees and the pay ratio.
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    Some commenters have recommended that registrants be permitted to
use reasonable estimates to determine the value of the various elements
of total compensation for employees in accordance with Item
402(c)(2)(x).\99\ We believe that the use of reasonable estimates would
not diminish the potential usefulness of the pay ratio disclosure as a
general point of comparison of PEO pay to employee pay within a
company, and we believe that the use of reasonable estimates would be
consistent with Section 953(b). Furthermore, we expect that
requirements that allow registrants to use reasonable estimates in
these calculations would impose lower compliance costs than
requirements that prohibit the use of estimates. Accordingly, the
proposed pay ratio requirements permit the use of reasonable estimates
in determining any elements of total compensation of employees other
than the PEO under Item 402(c)(2)(x), including when disclosing the
annual total compensation of the median employee identified using a
consistently applied compensation measure. If a registrant uses
estimates, instructions to the proposed rule require that the resulting
disclosure would need to be clearly identified as an estimated amount
and include a brief description of the estimation methods used by the
registrant.\100\ In using an estimate for annual total compensation (or
for a particular element of total compensation), a registrant should
have a reasonable basis to conclude that the estimate approximates the
actual amount of compensation under Item

402(c)(2)(x) (or for a particular element of compensation under Item
402(c)(2)(iv)-(ix)) awarded to, earned by or paid to those employees.
We are not prescribing what a reasonable basis would entail because we
believe that would necessarily depend on the registrant's particular
facts and circumstances.
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    \99\ See COEC I and letters from ABA and SCSGP.
    \100\ See proposed Instruction 2 to Item 402(u).
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    Because the requirements of Item 402(c)(2)(x) were promulgated to
address executive officer compensation, rather than compensation for
all employees, we have considered the difficulties that registrants
could face in applying the requirements of Item 402(c)(2)(x) to
employees that are not executive officers.\101\ First, to assist
registrants in applying the definition of ``total compensation'' to an
employee that is not an executive officer, the proposed requirements
state that, in determining the total compensation of employees in
accordance with Item 402(c)(2)(x), references to ``named executive
officer'' in Item 402 and the related instructions may be deemed to
refer instead, as applicable, to ``employee.'' Also, the proposed
requirements clarify that, for non-salaried employees, references to
``base salary'' and ``salary'' in Item 402 may be deemed to refer
instead, as applicable, to ``wages plus overtime.'' \102\
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    \101\ See letter from RILA (``From a practical prospective, Item
402 raises a host of complexities when applied to an issuer's
overall employee population for purposes of calculating the [pay
ratio].'').
    One commenter drew an analogy to the U.S. Treasury regulations
[31 CFR Part 30] that required TARP recipients to identify their 100
most highly compensated employees using the definition of total
compensation under Item 402; however, the Treasury regulations
notably permitted the exclusion of actuarial increases in pension
plans and above market earnings on deferred compensation. See letter
from ABA (``In our experience, TARP companies found that calculating
`total compensation' to identify their 100 highest paid employees
required weeks of work, and presented numerous interpretive issues
that do not typically arise when calculating total compensation of
executive officers.'').
    \102\ Letter from RILA (noting `` `salary' and `bonus'
presumably would translate into total hourly wages plus overtime for
non-salaried employees'').
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    In addition, we understand that certain elements of total
compensation may raise particular valuation issues that do not
typically arise in the context of compensation for named executive
officers. For example, in the case of pension benefits provided to
union members in connection with a multi-employer defined benefit
pension plan,\103\ commenters have noted that the participating
employers typically do not have access to information (or do not have
access in the timeframe needed to compile pay ratio disclosure) from
the plan administrator that would be needed to calculate the aggregate
change in actuarial present value of the accumulated benefit of a
particular individual under the plan.\104\ In such circumstances, we
believe it would be appropriate for a registrant to use reasonable
estimates as described above in determining an amount that reasonably
approximates the aggregate change in actuarial present value of an
employee's defined pension benefit for purposes of Item
402(c)(2)(viii).
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    \103\ See letter from RILA (noting ``in cases involving multi-
employer plans for union employees, the availability of the required
information may be a significant issue when the plan is not required
to provide such data on each beneficiary''). See also, J. Goldstein,
Cost Benefit Analysis of Pay Disparity Disclosure, Oct. 16, 2010,
available at http://blogs.law.harvard.edu/corpgov/2010/10/16/cost-benefit-analysis-of-pay-disparity-disclosure/.
    \104\ Section 101(k) and related regulations under the Employee
Retirement Income Security Act of 1974, as amended [21 U.S.C.
1021(k)], govern the requirements for plan administrators to provide
actuarial reports relating to the plan. Under the rules, a plan
administrator has thirty days to respond to a request for an
actuarial report, and it is not required to provide access to any
reports that have not been its possession for more than thirty days.
In addition, the rules prohibit the disclosure of reports that
include information that the plan administrator reasonably
determines to be ``personally identifiable information regarding a
plan participant, beneficiary . . . or contributing employer.'' See
29 CFR 2520.101-6.
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    Commenters have also mentioned that interpretive questions will
likely arise for registrants with non-U.S. employees in terms of how to
value certain unique types of employee compensation given only in
certain countries,\105\ including personal benefits such as housing.
Because we understand that compensation arrangements vary significantly
both in the United States and globally, we do not believe it would be
practicable for purposes of the proposed requirements to provide
detailed, prescriptive rules on valuing particular types of employee
compensation. We note, however, that the instructions to Item
402(c)(2)(ix) would permit the exclusion of personal benefits as long
as the total value for the employee is less than $10,000 and that
personal benefits should be valued on the basis of the aggregate
incremental cost to the registrant.\106\ In calculating any such
amounts for purposes of determining the total compensation of employees
other than the PEO, we are proposing that a registrant could use
reasonable estimates in the manner described above.
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    \105\ See letters from SCSGP and Group of Exec. Comp. Lawyers.
We discuss comments relating to non-U.S. employees in more detail in