Section II.C.2 of this release.
    \106\ See Instruction 4 to Item 402(c)(2)(ix). This instruction
applies to perquisites and personal benefits. Accordingly,
perquisites provided to executive officers who are included in the
identification of the median should be treated as set forth in
Instruction 4. For this purpose, however, benefits that are provided
to all employees or all salaried employees would not be considered
``perquisites.''
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    In addition, questions have been raised involving the valuation of
government-mandated pension plans,\107\ and at least one commenter has
noted that the valuation of these plans can be difficult.\108\ Another
commenter has noted that cross-border differences in government-
mandated pension plans raise additional complexity for registrants
calculating total compensation for employees located outside the United
States.\109\ In light of these comments, we acknowledge that some
registrants may need clarity as to how to treat government-mandated
pension plans for purposes of calculating an employee's total
compensation and, specifically, for purposes of determining the
aggregate change in actuarial present value of defined pension benefits
under Item 402(c)(2)(viii).
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    \107\ See J. Goldstein, supra note 103.
    \108\ See letter from Group of Exec. Comp. Lawyers. This
commenter raised the issue in the context of a discussion of cross-
border differences in the availability of government-mandated
retirement benefits, which this commenter believed would cause
comparisons of employees across jurisdictions to be distorted. This
commenter further suggested that the difficulty in valuing
government-mandated pension benefits for individual employees would
make it difficult for registrants to adjust the ratio for these
differences. As described above in Section II.C.3., we believe that
such an adjustment would not comply with the proposed requirements.
    \109\ See letter from Davis Polk (``The information for non-U.S.
employees is complicated by local severance benefits and pension
rights and related accounting outside the U.S.'').
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    In most cases, amounts relating to a government-mandated pension
plan would not be included in an employee's total compensation, just as
these amounts would not be included under current rules applicable to
named executive officers. We note, in particular, that Item
402(c)(2)(viii) applies to a defined benefit plan, which, as explained
in the 2006 Adopting Release, is a retirement plan in which the company
pays the executive specified amounts at retirement that are not tied to
the investment performance of the contributions that fund the
plan.\110\ The 2006 Adopting Release states that the disclosure
required by Item 402(c)(2)(viii) is intended to permit a full
understanding of the company's compensation obligations to named
executive officers, given that defined

benefit plans guarantee what can be a lifetime stream of payments and
allocate risk of investment performance to the company and its
shareholders.\111\ In contrast, under many government-mandated pension
plans, the employee ultimately receives the pension benefit payment
from the government, not the employer, and the purpose of the mandated
pension benefit is not to provide compensation to the employee from the
employer.\112\ Notwithstanding any amounts that an employer may be
obligated to pay (typically as a tax) to the government in respect of
an employee or amounts the employee may be obligated to have withheld
from wages and paid to the government,\113\ where the pension benefit
is being provided to the employee from the government and not by the
registrant, a government-mandated defined benefit pension plan would
not be considered a ``defined benefit plan'' for purposes of Item
402(c)(2)(viii) and any accrued pension benefit under such a plan would
not be considered compensation for purposes of Item 402(c)(2)(x).
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    \110\ See 2006 Adopting Release, supra note 14, at 53175. This
definition serves to distinguish defined benefit pension plans from
defined contribution plans, in which the amount payable at
retirement is tied to the performance of the contributions that fund
the plan.
    \111\ Id.
    \112\ Although Item 402(a)(2) includes in compensation
transactions between a registrant and a third party where the
purpose of the transaction is to furnish compensation to the
employee, we generally would not consider a government-mandated
pension plan to be such a transaction.
    \113\ As under current rules, amounts an employer pays to the
government in respect of an employee are obligations of the
registrant to that government and would not be ``compensation'' for
purposes of Item 402(c)(2)(x).
    Note, however, pursuant to Item 402(c)(2)(ix), tax gross-ups are
included in total compensation. Therefore, if a registrant pays an
employee's required contribution to the government (i.e., the
registrant satisfies the employee's obligation to the government),
the amount of the employee's contribution that is paid by the
registrant would be includable in total compensation as a tax gross-
up.
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    Finally, we acknowledge the concern from some commenters that the
application of the definition of total compensation under Item
402(c)(2)(x) to employees that are not executive officers could
understate the overall compensation paid to such employees.\114\ One of
these commenters explains that ``[b]y design, Item 402 captures all of
the various compensation components received by a named executive
officer, excluding certain limited items like benefits under non-
discriminatory plans (e.g., healthcare) and perquisites and personal
benefits that aggregate less than $10,000. . . . Applied to an average
worker, however, these rules will work in the opposite direction. By
excluding certain benefit plans and perquisites (e.g., employee
discounts, transportation/parking benefits, education assistance) that
do not exceed the $10,000 threshold, the rules understate the average
employee's real total compensation. Relative to wages, benefits like
healthcare and employee discounts both add significant economic value
for an employee and are a prime motivator for the average employee when
applying for and maintaining employment.'' \115\ From this perspective,
the omission of these components from the annual total compensation of
employees, could render the ratio less meaningful, particularly for the
purpose, suggested by some commenters, of evaluating employee morale.
We note, however, that these exclusions are permissive, rather than
mandatory.\116\ Therefore, registrants would be permitted, at their
discretion, to include personal benefits (and perquisites in the case
of employees that are executive officers) that aggregate less than
$10,000 and compensation under non-discriminatory benefit plans in
calculating the annual total compensation of employees. In order to be
consistent, the PEO total compensation used in the related pay ratio
disclosure would also need to reflect the same approach to these items
as is used for employees, and the registrant should explain any
difference between the PEO total compensation used in the pay ratio
disclosure and the total compensation amounts reflected in the summary
compensation table.
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    \114\ See letters from RILA and Protective Life Corporation.
    \115\ See letter from RILA; however, as discussed above, by
definition, benefits provided on a non-discriminatory basis to all
employees would not be considered perquisites.
    \116\ See Item 402(c)(ix)(A) and Item 402(a)(6)(ii).
---------------------------------------------------------------------------

Request for Comment
    33. Are there other alternatives to calculating total compensation
in accordance with Item 402(c)(2)(x) that would be consistent with
Section 953(b)?
    34. Should the requirements provide instructions or should we
provide additional guidance about how to apply the definition of total
compensation under Item 402(c)(2)(x) (or any particular elements of
total compensation under Item 402(c)(2)) to employees that are not
executive officers? If so, what specific instructions or guidance would
be useful to registrants? Please also address whether specific
instructions or guidance would limit flexibility and thereby raise
costs for registrants.
    35. Do registrants need further guidance on the permitted use of
reasonable estimates in determining total compensation (or specific
elements of total compensation) for employees other than the PEO in
accordance with Item 402(c)(2)(x)? If so, what should that guidance
entail? Would the use of reasonable estimates ever be inappropriate?
Please also address whether specific instructions or guidance would
limit flexibility and thereby raise costs for registrants.
    36. Instead of allowing the use of reasonable estimates in
determining total compensation (or any elements of total compensation)
as described in this proposal, should the rules prohibit the use of
reasonable estimates for that purpose? If so, why? Please include an
explanation of how the potential usefulness of the pay ratio disclosure
would be affected by a registrant's use of reasonable estimates in this
context. Are there alternative ways to address this impact, such as
requiring an explanation describing the use of estimates, rather than
prohibiting the use of estimates?
    37. Is it likely that the proposed requirements would affect the
types of compensation that registrants provide to employees, and if so,
what would that impact be? For example, one commenter suggested that
registrants could decide to discontinue pension and incentive plans for
employees or eliminate 401(k) plan matching contributions in order to
facilitate their calculation of the pay ratio.\117\ If so, how should
the proposed requirements address that impact?
---------------------------------------------------------------------------

    \117\ See letter from RILA.
---------------------------------------------------------------------------

5. Disclosure of Methodology, Assumptions and Estimates
    We are proposing instructions for the disclosure of the methodology
and material assumptions, adjustments and estimates used in the
calculation of the median or the annual total compensation of
employees.\118\ The proposed instruction provides that registrants must
briefly disclose and consistently apply any methodology used to
identify the median and any material assumptions, adjustments or
estimates used to identify the median or to determine total
compensation or any elements of total compensation, and registrants
must clearly identify any estimated amount as such. Registrants'
disclosure of the methodology and material assumptions, adjustments and
estimates used should provide sufficient information for a reader to be
able to evaluate the appropriateness of the estimates. For example,
when statistical sampling is used, registrants should

disclose the size of both the sample and the estimated whole
population, any material assumptions used in determining the sample
size, which sampling method (or methods) is used, and, if applicable,
how the sampling method deals with separate payrolls such as
geographically separated employee populations or other issues arising
from multiple business or geographic segments. In order to promote
comparability from year to year, the instruction also provides that, if
a registrant changes methodology or material assumptions, adjustments
or estimates from those used in the previous period, and if the effects
of any such change are material, the registrant must briefly describe
the change, the reasons for the change, and must provide an estimate of
the impact of the change on the median and the ratio.
---------------------------------------------------------------------------

    \118\ We note that other Commission rules require such
disclosures, particularly where registrants are given the
flexibility to choose a methodology. See, e.g., Instructions to Item
402(h)(2), requiring registrants to disclose the valuation method
and all material assumptions applied in quantifying the present
value of accrued pension benefits for purposes of the Pension
Benefit Table.
---------------------------------------------------------------------------

    Because we are concerned that disclosure about methodology,
assumptions, adjustments and estimates could become dense and overly
technical, the instruction asks for a brief overview and makes clear
that it is not necessary to provide technical analyses or formulas. In
addition, we do not believe that a detailed, technical discussion (such
as statistical formulas, confidence levels or the steps used in data
analysis) would enhance the potential usefulness, as suggested by some
commenters,\119\ of the ratio as a metric to evaluate the level of PEO
compensation. We expect that a succinct description of the methodology
and material assumptions, adjustments or estimates would not be overly
burdensome for registrants and would be more informative for investors.
We expect that the costs of the additional disclosure on registrants
would be marginal, as these additional disclosures are intended to
simply describe what has already been done or assumed in the
calculations and, therefore, will not require additional actions for
registrants. It is likely that some costs may be incurred in developing
and reviewing the appropriate language to describe the approach taken.
---------------------------------------------------------------------------

    \119\ See, e.g., Senate Letter; House Letter; and AFL-CIO I; and
letters from CtW Investment Group and UAW Retiree Medical Benefits
Trust.
---------------------------------------------------------------------------

    The instruction also provides that the methodology and any material
assumptions, adjustments and estimates should be consistently applied
by the registrant in identifying the median. Likewise, where a
registrant uses estimates in calculating the annual total compensation
(or elements thereof) of employees, the methodology and any material
assumptions, adjustments and estimates used in the calculation (such as
currency translations \120\ or annualizing newly hired, non-temporary
employees) should be used consistently by a registrant. Similarly, when
using a compensation measure to identify the median employee, that
compensation measure should be consistently applied to each employee
included in the calculation. We believe that requiring consistent use
of methodology, and particularly material assumptions, adjustments and
estimates, could reduce incentives for registrants to use methodology
to affect the outcome of the identification of the median or the ratio.
---------------------------------------------------------------------------

    \120\ Some commenters requested guidance on converting wages to
U.S. dollars for purposes of pay ratio disclosure. Instruction 2 to
Item 402(c) requires registrants to identify by footnote the
currency, exchange rate and conversion methodology used in
connection with compensation that is paid to or received by an
executive officer in a different currency than U.S. dollars. In
connection with the proposed requirements, registrants generally
would not be required to disclose the currencies, exchange rates and
conversion methodologies used in determining the annual total
compensation of employees, but, where applicable, the rates and
conversion methodologies used should be consistent with those used
for the named executive officers in the summary compensation table.
---------------------------------------------------------------------------

    Several commenters recommended that registrants be required to
describe the methodology, assumptions and estimates used in identifying
the median.\121\ Some commenters further suggested that a narrative
discussion of the ratio and its components (including methodology and
assumptions used), together with supplemental information about
employee compensation structures and policies, be required, in order to
provide additional context for the ratio.\122\ Other than the brief
description of methodology described above, the proposed requirements
do not include a specific requirement for narrative discussion of the
ratio, the median or any supplemental information. Section 953(b)
requires disclosure of the pay ratio, but it does not require any
additional information to provide context for or to explain the ratio
or its components, therefore, we are not proposing to require
additional information. We are sensitive to the costs of the mandated
disclosure, and we believe that additional narrative disclosure about
the ratio would not, for many registrants, provide useful information
for investors that would justify the costs associated with providing
that additional disclosure. The types of additional information that
may be relevant to further understanding the ratio in a particular
period would necessarily vary from company to company and could also
vary from time to time as a registrant's business evolves or due to
external factors, such as changes in the global economic environment or
the labor marketplace. While some investors and other market
participants could find supplemental information about a registrant's
employment practices, the composition of its workforce and similar
topics (such as employment policies, use of part-time workers, use of
seasonal workers, outsourcing and off-shoring strategies) useful or
informative, we do not believe that the cost of prescribing additional
disclosure would be justified. Therefore, we are not proposing
requirements for a narrative discussion beyond the proposed brief
description of the calculation methodology where estimation techniques
have been used.
---------------------------------------------------------------------------

    \121\ See AFL-CIO II and COEC I; and letters from ABA; Group of
Exec. Comp. Lawyers; Meridian Compensation Partners, LLC; and SCSGP.
    \122\ See AFL-CIO I (recommending a required discussion and
analysis ``including their use of outsourcing and off-shoring
strategies, use of part-time and temporary employees, and use of
efficiency wages to boost productivity'') and letter from Americans
for Financial Reform.
---------------------------------------------------------------------------

    Finally, one commenter suggested that the rule expressly permit
additional disclosure to accompany the pay ratio.\123\ Although we do
not believe that it is necessary to include instructions in the
proposed requirements for this purpose, we emphasize that, as with
other mandated disclosure under our rules, registrants would be
permitted to supplement the required disclosure with a narrative
discussion if they choose to do so. Likewise, we note that registrants
may, at their discretion, present additional ratios to supplement the
required ratio. As with other disclosure under our rules, however, any
additional ratios should be clearly identified and not misleading, and
should not be presented with greater prominence than the required
ratio.\124\
---------------------------------------------------------------------------

    \123\ See letter from Towers Watson.
    \124\ See, e.g., Exchange Act Rule 12b-20; and Commission's
Guidance Regarding Management's Discussion and Analysis or Financial
Condition and Results of Operations, Release No. 33-8350 (Dec. 19,
2003) [68 FR 75056], at 75060.
---------------------------------------------------------------------------

Request for Comment
    38. Should we require registrants to disclose information about the
methodology and material assumptions, adjustments or estimates used in
identifying the median or calculating annual total compensation for
employees, as proposed? Why or why not? Would this information assist
investors in understanding the pay ratio? Are there changes we could
make to the requirement to avoid boilerplate disclosure? Should we
require a more technical discussion, such as requiring the disclosure
of statistical formulas,

confidence levels or the steps used in the data analysis?
    39. Should we require disclosure when a registrant changes its
methodology (or material assumptions, adjustments or estimates) from
previous periods, where such change has a material effect, as proposed?
Should registrants be required to describe the reasons for the change,
as proposed? Should registrants be required to provide an estimate of
the impact of the change on the median and the ratio, as proposed? Is
the proposed information useful? Is there other information that should
be required?
    40. Should we require registrants to disclose additional narrative
information about the pay ratio or its components, or factors that give
context for the median, such as employment policies, use of part-time
workers, use of seasonal workers, outsourcing and off-shoring
strategies? If so, what additional information should be required?
Please be specific as to how this information would assist investors in
understanding the pay ratio or in using the pay ratio disclosure.
Please also be specific about the costs of providing such disclosure.
How could such a requirement be designed to avoid boilerplate
disclosure? Would such a requirement raise competition concerns?
    41. Should we require registrants to disclose additional metrics
about the total compensation of all employees (or of the statistical
sample if one is used), such as the mean and the standard deviation, as
a supplement to the required disclosure? Would additional metrics be
useful to investors? We assume that these metrics could be provided
without additional cost or at a low cost once the median has been
identified. Is this assumption correct? If not, please identify the
costs and benefits of such additional disclosure. Would such a
requirement raise competition concerns?
6. Clarification of the Meaning of ``Annual''
    In order to provide clarity, the proposed requirement defines
``annual total compensation'' to mean total compensation for the last
completed fiscal year, consistent with the time period used for the
other Item 402 disclosure requirements. This clarification is intended
to address questions from commenters about the need to update the pay
ratio disclosure throughout the year and make clear that the disclosure
does not need to be updated more than once a year.\125\ One commenter
expressly supported this approach.\126\
---------------------------------------------------------------------------

    \125\ See, e.g., letters from American Benefits Council and ABA.
    \126\ See letter from RILA (noting ``we recommend that the
Compensation Ratio be based on the issuer's last completed fiscal
year, which would make it consistent with the executive compensation
disclosure under Item 402 and reduce the compliance costs and
burdens at least in so far as the information required for the
Summary Compensation Table could be used for purposes of the
Compensation Ratio as well.'').
---------------------------------------------------------------------------

    Two commenters suggested other possible alternatives for the
calculation of ``annual'' total compensation. One of these commenters
recommended that registrants should have flexibility to select a time
period for calculating the annual total compensation of employees,
noting that registrants without a calendar year fiscal year-end might
benefit from the flexibility to use the calendar year period since that
would be consistent with the registrant's tax reporting
obligations.\127\ Another commenter suggested two timing rules that
would grant registrants further flexibility to use the 12-month time
periods that their payroll systems use.\128\ We understand that these
suggestions are intended to reduce compliance costs for registrants by
giving registrants the ability to use information in the form that it
is currently compiled for other purposes, such as tax and payroll
recordkeeping. We believe, however, that it is appropriate for the time
period for the pay ratio disclosure to be the same as the time period
used for the registrant's other executive compensation disclosures,
and, therefore, a registrant would be required to calculate the total
compensation for the median employee for the last completed fiscal
year. As discussed above, for purposes of estimating the median
employee, we propose to allow a registrant to use compensation amounts
derived from its payroll or tax records for the same annual period that
is used in the payroll or tax records. We believe that permitting
companies to identify the median employee using compensation
information in the form that it is maintained in their own books and
records would reduce compliance costs and that the proposed flexibility
in estimating the median employee could address the concerns raised by
these commenters. Registrants using payroll or tax records to identify
the median employee would be required to calculate the Item
402(c)(2)(x) total compensation for that median employee for the last
completed fiscal year, rather than the annual period used in the
payroll or tax records.
---------------------------------------------------------------------------

    \127\ See letter from American Benefits Council.
    \128\ See letter from Group of Exec. Comp. Lawyers
(recommending: ``Rule One--the registrant can select any date as of
which to calculate median compensation, provided the date is within
12 months of the proxy filing, and is the most recent practicable
date, and Rule Two--if different payroll systems are involved, the
12-month period for computing compensation data for each payroll
system's data will be acceptable so long as the period ends within
12 months of the date chosen under Rule One.'').
---------------------------------------------------------------------------

Request for Comment
    42. For purposes of the disclosure of the median of the annual
total compensation of employees and the pay ratio, should we, as
proposed, require total compensation to be calculated for the last
completed fiscal year, rather than some other annual period? Why or why
not? How does this impact the ability of a registrant to compile the
disclosure in time to include it in a proxy or information statement
relating to an annual meeting of shareholders (or written consents in
lieu of such meeting)?
7. Timing of Disclosure
a. Updating Pay Ratio Disclosure for the Last Completed Fiscal Year
    We are proposing instructions to clarify the timing for updating
pay ratio disclosure after the end of a registrant's fiscal year.\129\
As discussed above, proposed Item 402(u) would require annual total
compensation amounts used in the ratio to be calculated for the
registrant's last completed fiscal year. In addition, pay ratio
disclosure would be required in any filing by the registrant that
requires Item 402 disclosure. Accordingly, without the proposed
instructions, a registrant could be required to include pay ratio
disclosure in an annual report or registration statement filed after
the end of the fiscal year, but before it has compiled the executive
compensation information for that fiscal year for inclusion in its
proxy statement relating to its annual meeting of shareholders,\130\
which could raise additional incremental costs for registrants that
elect to provide executive compensation disclosure in their annual
proxy statement rather than their annual report and for registrants
that are conducting registered offerings at the beginning of their
fiscal year.
---------------------------------------------------------------------------

    \129\ See letter from ABA (noting ``the Commission should
clarify when information for the most recently completed fiscal year
is required to first be disclosed'').
    \130\ Many registrants typically satisfy their disclosure
obligations under Part III of Form 10-K (which includes Item 402
requirements) by incorporating the required information by reference
from their proxy or information statement that is filed after their
annual report on Form 10-K. See General Instruction G(3). We discuss
the mechanics of General Instruction G(3) in more detail below.
---------------------------------------------------------------------------

    To address this issue, some commenters recommended that pay ratio
disclosure not be required to be

updated for the most recently completed fiscal year until the
registrant files its proxy statement for its annual meeting of
shareholders.\131\ We agree with this suggested approach, and we
believe that such an approach would not diminish the potential
usefulness of the disclosure. At least one commenter who supported
Section 953(b) disclosure also recommended a similar approach.\132\ We
also believe that this approach could hold down additional costs for
registrants in connection with filings made or required to be made
before the filing of the proxy or information statement for the annual
meeting of shareholders (or written consents in lieu of such a meeting)
that would typically contain the registrant's other Item 402 disclosure
covering the most recently completed fiscal year. For example, under
the proposed approach, updating the pay ratio disclosure would not be
an additional hurdle for a registrant that requests effectiveness of a
registration statement after the end of its fiscal year and before the
filing of the proxy statement for its annual meeting of shareholders.
We believe that the proposed instruction would provide certainty to
registrants as to when the updated information is required and would
allow sufficient time after the end of the fiscal year to identify the
median.
---------------------------------------------------------------------------

    \131\ See letters from ABA and Compensia, Inc.
    \132\ See AFL-CIO II (asserting that pay ratio disclosure will
be useful to investors and recommending that the disclosure be
limited to annual proxy statements).
---------------------------------------------------------------------------

    Although we agree with the recommendation of commenters to not
require updated annual pay ratio disclosure until a registrant files
its annual proxy or information statement, we note that not all
registrants that would be subject to the proposed pay ratio disclosure
file proxy or information statements in connection with annual meetings
of shareholders. For example, reporting companies that do not have
securities registered under Section 12 of the Exchange Act are not
required to file proxy or information statements for their annual
meeting of shareholders and therefore typically provide Item 402
information updated for the most recently completed fiscal year in
their annual report on Form 10-K. In addition, some registrants are not
required to file annual proxy or information statements because they
are not required to hold annual meetings (such as registrants that are
organized as master limited partnerships) or because the securities
that are registered under Section 12 of the Exchange Act have limited
voting rights (such as common units representing limited liability
company interests). Accordingly, we are proposing a modified version of
the recommendation of commenters in order to provide a similar
accommodation for registrants that do not file annual proxy statements
and to align the proposed requirement to the timing rules for providing
Item 402 disclosure in annual reports and proxy and information
statements.
    As noted above, registrants typically disclose Item 402 information
for the most recently completed fiscal year in their proxy or
information statement relating to their annual meeting of shareholders,
in reliance on General Instruction G(3) of Form 10-K. This instruction
allows the information required by Part III of Form 10-K (including
Item 402 information) to be incorporated by reference from the
registrant's definitive proxy statement (filed or required to be filed
pursuant to Regulation 14A) or definitive information statement (filed
or required to be filed pursuant to Regulation 14C) if that statement
involves the election of directors and is filed not later than 120 days
after the end of the fiscal year covered by the annual report. If a
definitive proxy statement or information statement is not filed in the
120-day period (or is not required to be filed by virtue of Rule 3a12-
3(b) under the Exchange Act), the Part III information must be filed as
part of the Form 10-K, or as an amendment to the Form 10-K, not later
than the end of the 120-day period.
    In order to align with this timeframe, the proposed instruction
would state that a registrant is not required to include pay ratio
disclosure with respect to its last completed fiscal year until the
filing of its annual report for that last completed fiscal year or the
filing of a definitive proxy or information statement relating to an
annual meeting of shareholders (or written consents in lieu of such a
meeting), provided that updated pay ratio information must, in any
event, be filed as provided in General Instruction G(3) of Form 10-K
not later than 120 days after the end of such fiscal year. As an
example, a registrant would not be required to disclose pay ratio
information relating to compensation for fiscal year 2014 until its
definitive proxy or information statement for its 2015 annual meeting
of shareholders.\133\ Consistent with the treatment of other
information required by Part III of Form 10-K, if that registrant does
not file its definitive proxy or information statement within 120 days
of the end of 2014 (i.e., April 30, 2015), it would need to file
updated pay ratio disclosure in its Form 10-K for 2014 or an amendment
to that Form 10-K. In contrast, a registrant that is not subject to the
proxy rules or does not file a proxy or information statement in
connection with an annual meeting of shareholders would be required to
update its pay ratio disclosure for fiscal year 2014 in its annual
report on Form 10-K for that year.
---------------------------------------------------------------------------

    \133\ Consistent with the proposed instructions, we note that a
registration statement that incorporates by reference a Form 10-K
(or amended Form 10-K) containing all Part III information other
than updated pay ratio information could be declared effective
before the registrant's definitive proxy or information statement
containing updated pay ratio information is filed in accordance with
General Instruction G(3).
---------------------------------------------------------------------------

    In order to provide guidance to registrants in connection with
filings made before the annual update is triggered, the proposed
instruction would also state that, in any filing made by a registrant
after the end of its last completed fiscal year and before the filing
of such Form 10-K or proxy or information statement, as applicable, a
registrant must include or incorporate by reference its pay ratio
disclosure (if such disclosure had been required) for the fiscal year
prior to the last completed fiscal year.
    Although the annual update is not required to be disclosed until
the filing of an annual report for the last completed fiscal year, or
if later, the filing of a definitive proxy statement or information
statement relating to the registrant's annual meeting of shareholders,
this updating provision does not alter the requirements for Item 402
disclosure under Item 8 of Schedule 14A in other proxy or information
statement filings. For example, if a registrant files a proxy statement
(other than the definitive proxy statement for its annual meeting) that
requires Item 402 information pursuant to Item 8 of Schedule 14A, the
registrant would be required to include or incorporate by reference pay
ratio disclosure for the most recent period that had been filed in its
Form 10-K or definitive proxy statement for its annual meeting.
Request for Comment
    43. Should we, as proposed, require the pay ratio disclosure to be
updated no earlier than the filing of a registrant's annual report on
Form 10-K or, if later, the filing of a proxy or information statement
for the registrant's annual meeting of shareholders (or written
consents in lieu of such a meeting), and in any event not later than
120 days after the end of its fiscal year? Are we correct that the
proposed timing rule

would not affect the potential usefulness of the pay ratio disclosure
for investors? If not, how should the requirements be changed to
address that impact? Are we correct that the proposed timing rule would
help to keep costs down for registrants by providing certainty as to
the timing for annual updates and by allowing registrants to compile
the disclosure at the same time as other executive compensation
disclosure under Item 402? Are we correct that the proposed timing rule
would help keep down costs for registrants that request effectiveness
of registration statements after the end of the last fiscal year but
before the filing of their annual proxy statement?
    44. Is the proposed timing workable for registrants? Does it
provide enough time after the end of the fiscal year for companies to
identify the median of the total compensation of all employees for that
year? We note that one commenter asserted that it could take
registrants three months or more each year to calculate pay ratio
disclosure, and, accordingly, that the disclosure would not be
available in time to be included in the annual proxy statement or
annual report.\134\ Would the ability to use reasonable estimates,
consistently applied compensation measures, or statistical sampling be
sufficient to alleviate this issue? For example, if a registrant is
unable to calculate its employees' incentive compensation before such
time, would it be able to reasonably estimate such compensation?
Instead, should the proposed rules provide an accommodation for a
company that cannot compile compensation information in time to be
included in its proxy statement for the annual meeting of shareholders
or Form 10-K, as applicable? For example, should registrants be
permitted to delay the pay ratio disclosure until it is calculable and
then file the disclosure under Item 5.02(f) of Form 8-K? \135\ If so,
under what circumstances should registrants be permitted to do so? Or,
if we were to allow for such a delay, should we specify when the
disclosure should be required to be made? If so, what deadline should
we impose? Would such a delay impact the usefulness to investors of the
disclosure, particularly if the disclosure would not be available in
time for inclusion in proxy or information statements for the annual
meeting of shareholders?
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    \134\ See COEC II.
    \135\ Item 5.02(f) of Form 8-K sets forth the requirements for
the filing of information that was omitted from Item 402 disclosure
in accordance with Instruction 1 to Items 402(c)(2)(iii) and (iv).
These are described in more detail in the next subsection of this
release.
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b. Proposed Instruction for Pay Ratio Disclosure When the Registrant
Omits Salary or Bonus Information for the PEO in Reliance on
Instruction 1 to Item 402(c)(2)(iii) and (iv), and Proposed Technical
Amendment to Item 5.02(f) of Form 8-K
    In accordance with Instruction 1 to Items 402(c)(2)(iii) and (iv)
of Regulation S-K, a registrant is permitted to omit disclosure in the
summary compensation table of the salary or bonus of a named executive
officer if it is not calculable as of the latest practicable date. In
that circumstance, a registrant must include a footnote disclosing that
fact and providing the date that the amount is expected to be
determined, and the amount must be disclosed at that time by filing a
Form 8-K. Item 5.02(f) of Form 8-K sets forth the requirements for the
filing of information that was omitted from Item 402 disclosure in
accordance with Instruction 1 to Items 402(c)(2)(iii) and (iv),
including the requirement to include a new total compensation figure
for the named executive officer.
    In cases where a registrant is relying on this instruction because
the salary or bonus of the PEO is not calculable until a later date, we
believe that it is also appropriate for a registrant to omit pay ratio
disclosure until those elements of the PEO's total compensation are
determined and provide its pay ratio disclosure in the same filing
under Item 5.02(f) of Form 8-K in which the PEO's salary or bonus is
disclosed. Accordingly, the proposed rule would include an instruction
that provides that a registrant relying on Instruction 1 to Items
402(c)(2)(iii) and (iv) with respect to the salary or bonus of the PEO
would be required to disclose that the pay ratio disclosure is being
omitted because the PEO's total compensation is not available and to
disclose the expected date that the total compensation for the PEO will
be determined.\136\ The instruction would then require the registrant
to include its pay ratio disclosure in the filing on Form 8-K that
includes the omitted salary or bonus information as contemplated by
Instruction 1 to Items 402(c)(2)(iii) and (iv). We are also proposing a
conforming amendment to Item 5.02(f) of Form 8-K to reflect the
addition of this pay ratio disclosure requirement. In addition,
although a filing is triggered under Item 5.02(f) when the omitted
salary or bonus becomes calculable in whole or in part, under the
proposed amendments to Form 8-K, the pay ratio information would be
required only when the salary or bonus becomes calculable in whole,
which would avoid the need for multiple updates to the pay ratio
disclosure until the final total compensation amount for the PEO is
known.
---------------------------------------------------------------------------

    \136\ See Proposed Instruction 4 to Item 402(u).
---------------------------------------------------------------------------

    In proposing this instruction, we have assumed that the potential
benefits of the disclosure could be diminished if the pay ratio were to
be calculated using less than the entire amount of the PEO's total
compensation for the period and that these potential benefits could
justify the potential costs to investors of a delay in the timing of
the disclosure. For example, in some cases, the amount of compensation
that is omitted under Instruction 1 to Items 402(c)(2)(iii) and (iv)
could be significant, and, therefore, the pay ratio would be lower if
it were presented using that incomplete compensation amount. Based on
the number of registrants that have historically relied on Instruction
1 to Items 402(c)(2)(iii) and (iv),\137\ we do not expect that the
proposed instruction would impact a significant number of registrants
each year.
---------------------------------------------------------------------------

    \137\ For example, based on a review of EDGAR filings in 2012,
only 22 registrants relied on Instruction 1 to Items 402(c)(2)(iii)
and (iv) in connection with the total compensation of their PEO.
---------------------------------------------------------------------------

Request for Comment
    45. Is the proposed instruction appropriate in instances where
registrants are relying on Instruction 1 to Items 402(c)(2)(iii) and
(iv) with respect to the salary or bonus of the PEO?
    46. Instead of the proposed approach, should these registrants be
required to calculate pay ratio disclosure using only the amounts of
total compensation of the PEO that are available at the time of the
filing, or in the alternative, make a reasonable estimate of the
omitted total compensation amounts? Would such disclosure be useful or
meaningful? In that case, should the registrant be required to update
(by Form 8-K or otherwise) its pay ratio disclosure to reflect the
PEO's recalculated total compensation?
    47. Is the proposed instruction clear? If not, what changes should
be made to clarify it?
    48. Should we require any additional or supplemental disclosure
when a registrant relies on the proposed instruction? If so, what would
that disclosure entail? For example, should the proposed instruction
require registrants to report the median annual total compensation of
employees, even if the PEO total compensation and pay

ratio are not available? Should registrants relying on the proposed
instruction be required to disclose the pay ratio for the prior year in
the Form 10-K or proxy or information statement?
    49. Would the proposed instruction cause registrants to change
their compensation practices? Alternatively, would the proposed
instruction have an adverse impact on the usefulness to investors of
the proposed pay ratio disclosure? How should we change the proposed
requirements to address such impacts?
8. Status as ``Filed'' Not ``Furnished''
    Some commenters suggested that pay ratio information be deemed
``furnished'' and not ``filed'' for purposes of the Securities Act and
Exchange Act.\138\ We note that Section 953(b) refers to the pay ratio
information being disclosed in the registrant's ``filings'' with the
Commission. We believe that the use of the word ``filing'' in Section
953(b) is consistent with the disclosure being filed and not furnished.
Accordingly, we are not proposing to permit the pay ratio information
to be deemed ``furnished.'' Like other Item 402 information, the pay
ratio disclosure would be considered ``filed'' for purposes of the
Securities Act and Exchange Act and, accordingly, would be subject to
potential liabilities thereunder.
---------------------------------------------------------------------------

    \138\ See COEC I and letters from ABA; Protective Life
Corporation; and RILA. In contrast, no commenters have asserted that
the disclosure should be filed.
---------------------------------------------------------------------------

    We note that one of the reasons that commenters recommended
treating the information as furnished and not filed is because of the
difficulty that some companies may have in determining and verifying
the information, which must be covered by the certifications required
for Exchange Act filings under the Sarbanes-Oxley Act of 2002.\139\ We
also recognize that some registrants could have more difficulty in
gathering and verifying the information than others. Nevertheless, we
believe that the flexibility afforded to registrants in connection with
identifying the median could reduce some of the difficulties of
compiling the required information, because registrants would be able
to tailor the methodology to reflect their own facts and circumstances.
The ability to use reasonable estimates in connection with the
calculation of annual total compensation for employees other than the
PEO could also alleviate some of these concerns. In addition, we
believe that the proposed transition periods discussed below, which are
designed to give registrants sufficient time to develop and implement
compliance procedures, could mitigate some concerns about compiling and
verifying the information.
---------------------------------------------------------------------------

    \139\ See, e.g., COEC I.
---------------------------------------------------------------------------

Request for Comment
    50. Should the Section 953(b) information be filed rather than
furnished? What weight should we give to the use of the word ``filing''
in the statute?
    51. Are there other ways to address commenters' concerns about the
ability to compile and verify the pay ratio information that still
fulfills the statutory mandate?

D. Transition Matters

1. Proposed Compliance Date
    Section 953(b) does not specify a date when registrants must begin
to comply with the requirements that we implement. We are proposing to
require that a registrant must begin to comply with proposed Item
402(u) with respect to compensation for the registrant's first fiscal
year commencing on or after the effective date of the rule, and, as
proposed, a registrant would be permitted to omit this initial pay
ratio disclosure from its filings until the filing of its annual report
on Form 10-K for that fiscal year or, if later, the filing of a proxy
or information statement for its next annual meeting of shareholders
(or written consents in lieu of a meeting) following the end of such
year. Similar to the proposed instructions for updating pay ratio
disclosure, this initial pay ratio disclosure would be required, in any
event, to be filed as provided in connection with General Instruction
G(3) of Form 10-K not later than 120 days after the end of such fiscal
year. Thus, if the final requirements were to become effective in 2014,
a registrant with a fiscal year ending on December 31 would be first
required to include pay ratio information relating to compensation for
fiscal year 2015 in its proxy or information statement for its 2016
annual meeting of shareholders (or written consents in lieu of such a
meeting). Consistent with the treatment of other information required
by Part III of Form 10-K, if that registrant does not file its proxy or
information statement within 120 days of the end of 2015 (i.e., April
30, 2016), it would need to file its initial pay ratio disclosure in
its Form 10-K for 2015 or an amendment to that Form 10-K. Similarly, a
registrant with a fiscal year ending on December 31 that is not subject
to the proxy rules or does not file a proxy or information statement in
connection with an annual meeting of shareholders would be required to
include pay ratio information relating to compensation for fiscal year
2015 in its Form 10-K covering fiscal year 2015, which would be due in
the first quarter of 2016. Registrants would be permitted to begin
compliance earlier on a voluntary basis.
    Several commenters noted that companies will need a long transition
period before they can implement systems to compile the disclosure and
verify its accuracy.\140\ We understand that this time would likely be
needed by large, multinational registrants and any registrants that
currently do not have a centralized, consolidated payroll, benefits and
pension system that captures the information necessary to identify the
median.\141\ We expect that it will take registrants one full reporting
cycle to implement and test any necessary systems,\142\ and we believe
that the proposal provides that time for transition and implementation.
---------------------------------------------------------------------------

    \140\ See letters from ABA; American Benefits Council; Brian
Foley & Co.; Group of Exec. Comp. Lawyers; Davis Polk; NACD; SCSGP;
RILA; and Towers Watson.
    \141\ See letters from ABA; American Benefits Council; Brian
Foley & Co.; Group of Exec. Comp. Lawyers; Davis Polk; NACD; SCSGP;
RILA; and Towers Watson.
    \142\ See, e.g., letters from American Benefits Council and
Group of Exec. Comp. Lawyers.
---------------------------------------------------------------------------

    We believe it is appropriate to allow a registrant to omit its
initial pay ratio disclosure from filings that would otherwise require
Item 402 information for its first fiscal year commencing on or after
the effective date of the final rule until the filing of its annual
report on Form 10-K or, if later, a proxy or information statement
relating to its next annual meeting of shareholders (and in any event
not later than 120 days after the end of such fiscal year), for the
same reasons described in Section II.C.7.a. above.
Request for Comment
    52. Should the proposed requirements have a transition period, as
proposed? Is the period too long? Too short? If so, how long should the
transition period be and why? Please be specific (for example, instead
of the proposed period, should compliance be delayed until the first
fiscal year beginning on or after six months following the effective
date of the final rules?).
    53. In the alternative, should the transition periods be different
for different types of registrants? If so, what transition periods
should apply to which registrants? For example, should registrants with
a workforce below a certain size (e.g., fewer than 1,000 employees)
have a shorter phase-in

period than others? Should there be a longer phase-in for multinational
registrants? Please provide specific information about how to define
the categories of registrants that should be subject to any recommended
phase-in.
    54. Are there any other accommodations that we should consider for
particular types of companies or circumstances (other than the proposed
transition period for new registrants described below in this release)?
     Should we provide a transition period for business
combinations? If so, what should the transition be? For example, should
a registrant be permitted to omit the employees of a newly acquired
entity until a period of time (e.g., six months, 12 months) has passed
following the closing of the business combination transaction? Instead
of a specific transition period, would guidance about when the
employees of a newly acquired entity need to be covered in the pay
ratio provide sufficient direction for registrants? What should that
guidance entail?
     Should we permit a registrant that is not subject to the
proxy rules to amend its Form 10-K no later than 120 days after the end
of the fiscal year covered by the report to provide the pay ratio
disclosure? Should we permit such a registrant to provide the
disclosure by filing a Form 8-K instead of an amendment to Form 10-K?
     Should we provide a transition period for registrants that
cease to be smaller reporting companies? If so, what should the
transition be?
     Does the fact that Title I of the JOBS Act provides
transition periods for provisions other than Section 953(b) for
registrants that cease to be emerging growth companies suggest that we
should not provide a transition period for such registrants? Should we
provide a transition for registrants that cease to be emerging growth
companies? If so, what should the transition be? If not, would these
registrants have the information available to compile the disclosure in
time for their first proxy statement or annual report, as applicable,
following the date they exit emerging growth company status? Should a
transition period depend on the disqualifying event that occurs, on the
basis that the registrant may have more advance notice of the
occurrence for some types of events? \143\ For example, should a
company that exits emerging growth company status because it reaches
the fifth anniversary of its first sale of common equity be required to
first disclose pay ratio information relating to the fiscal year in
which its fifth anniversary occurred? Alternatively, should the amount
of transition time provided depend on how long a company has enjoyed
emerging growth company status, such as a longer transition for
registrants that lose that status after one year or less?
---------------------------------------------------------------------------

    \143\ The definition of emerging growth company provides that an
issuer continues to be deemed an emerging growth company until the
earliest of: (1) The last day of the fiscal year during which it had
total annual gross revenues of $1 billion; (2) the last day of the
fiscal year following the fifth anniversary of the first sale of its
common equity securities; (3) the date on which it has issued more
than $1 billion in non-convertible date during the previous three
years; or (4) the date on which it is deemed a large accelerated
filer. See Exchange Act Section 3(a)(80) [15 U.S.C. 78c(a)(80)] and
Securities Act Section 2(a)(19)[15 U.S.C. 77b(a)(19)].
---------------------------------------------------------------------------

2. Proposed Transition for New Registrants
    New registrants that do not qualify as emerging growth companies
are not exempted from the application of Section 953(b). The proposed
requirements include instructions that would permit new registrants to
delay compliance, so that pay ratio disclosure would not be required in
a registration statement on Form S-1 or S-11 for an initial public
offering or a registration statement on Form 10.\144\ Instead, such a
registrant would be required to first comply with proposed Item 402(u)
with respect to compensation for the first fiscal year commencing on or
after the date the registrant becomes subject to the requirements of
Section 13(a) or Section 15(d) of the Exchange Act, and, as proposed,
the registrant would be permitted to omit this initial pay ratio
disclosure from its filings until the filing of its Form 10-K for such
fiscal year or, if later, the filing of a proxy or information
statement for its next annual meeting of shareholders (or written
consents in lieu of a meeting) following the end of such fiscal year.
Similar to the proposed instructions for updating pay ratio disclosure,
these proposed instructions also require that this initial pay ratio
disclosure must, in any event, be filed as provided in connection with
General Instruction G(3) of Form 10-K not later than 120 days after the
end of such fiscal year.
---------------------------------------------------------------------------

    \144\ See proposed Instruction 5 to paragraph (u).
---------------------------------------------------------------------------

    For example, assuming the proposed requirements become effective in
2014, a company with a fiscal year ending on December 31 that completes
its initial public offering in October 2016 would not be required to
include any pay ratio information in its registration statement on Form
S-1. The company would then not be required to include pay ratio
disclosure in any filing until it files its definitive proxy or
information statement for its 2018 annual meeting of shareholders (or
written consents in lieu of such a meeting), which would include pay
ratio disclosure relating to 2017 compensation amounts. Consistent with
the treatment of other information required by Part III of Form 10-K,
if the company does not file its definitive proxy or information
statement within 120 days of the end of its fiscal year (i.e., April
30, 2018), it would need to file its initial pay ratio disclosure in
its Form 10-K for 2017 or an amendment to that Form 10-K. If that
company were not required to file a proxy statement relating to its
annual meeting of shareholders, the first filing that would be required
to include pay ratio disclosure would be its Form 10-K covering fiscal
year 2017, which would include pay ratio disclosure relating to 2017
compensation amounts.
    Commenters did not address the impact of pay ratio disclosure
requirements on newly public companies. Although investors might
benefit from pay ratio information in connection with an initial public
offering or Exchange Act registration, we believe it is appropriate to
give companies time to develop any needed systems to compile the
disclosure and verify its accuracy. The transition period for new
registrants is similar to the proposed time frame provided for other
registrants to comply with pay ratio disclosure requirements following
the effective date of the final rules. The proposed approach is also
similar to the current phase-in for newly public companies in
connection with Item 308 of Regulation S-K, for management's report on
the registrant's internal control over financial reporting.\145\
---------------------------------------------------------------------------

    \145\ See Instruction 1 to Item 308 of Regulation S-K.
---------------------------------------------------------------------------

    We are sensitive to the impact that the proposed rules could have
on capital formation. We note that the requirements of Section 953(b),
as amended by the JOBS Act, distinguish between certain newly public
companies and all other issuers by providing an exemption for emerging
growth companies. We note that the incremental time needed to compile
pay ratio disclosure could cause companies that are not emerging growth
companies to delay an initial public offering, which could have a
negative impact on capital formation. In this regard, we assume that,
in order to be disqualified for emerging growth company status, these
companies are likely to be businesses with more extensive operations or
a greater number of employees than many emerging growth companies,
which

could increase the initial efforts needed to comply with the proposed
requirements. We believe that providing a transition period for these
newly public companies could mitigate this potential impact on capital
formation.
Request for Comment
    55. Instead of the proposed transition period, should we require
new registrants that are not emerging growth companies to comply with
pay ratio disclosure requirements in registration statements on Form S-
1, Form S-11 or Form 10? Are we correct that the incremental time
needed to compile pay ratio disclosure could cause companies that are
not emerging growth companies to delay an initial public offering? What
costs would be imposed on these companies if we did not provide the
transition? Does the potential importance of the information to
investors justify the burden on these companies of complying with the
requirements in their Form S-1, Form S-11 or Form 10?
    56. Does the proposed transition period for compliance by new
registrants provide sufficient time (or, alternatively, too much time)
for these companies to be able to comply? Why or why not?
    57. Are there any alternatives to the proposed transition period
that we should consider? For example, should we permit new registrants
to omit pay ratio disclosure from Form S-1 and Form 10 (as proposed),
but require them to comply with the proposed pay ratio disclosure
requirements in their first proxy statement or annual report, as
applicable?
    58. Are there other accommodations we should consider for new
registrants?

III. General Request for Comment

    We request and encourage any interested person to submit comments
on any aspect of the proposals, other matters that might have an impact
on the amendments and any suggestions for additional changes. With
respect to any comments, we note that they are of greatest assistance
to our rulemaking initiative if accompanied by supporting data and
analysis of the issues addressed in those comments, particularly
quantitative information as to the costs and benefits, and by
alternatives to the proposals where appropriate. Where alternatives to
the proposals are suggested, please include information as to the costs
and benefits of those alternatives.
    59. Have we struck the appropriate balance between prescribing
rules to satisfy the mandate of Section 953(b) and allowing a
registrant flexibility to identify the median in a manner that is
appropriate to its own facts and circumstances?
    60. Are there alternatives to the proposals we should consider that
would satisfy the requirements of Section 953(b) of the Dodd-Frank Act?

IV. Economic Analysis

A. Background

    As discussed in detail above, Section 953(b) directs the Commission
to amend Item 402 of Regulation S-K to add the pay ratio disclosure
requirements prescribed by the Dodd-Frank Act. Section 953(b) imposes a
new requirement on registrants to disclose the median of the annual
total compensation of all employees and the ratio of that median to the
annual total compensation of the chief executive officer. In doing so,
Section 953(b) requires registrants to determine total compensation in
accordance with Item 402(c)(2)(x). The Commission's rules for
compensation disclosure have traditionally focused on compensation
matters that relate to executive officers and directors. Although
registrants subject to Item 402 are required to provide extensive
information about the compensation of the principal executive officer
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. In addition, the Commission's executive
compensation disclosure rules differ from tax accounting and reporting
standards.\146\ 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. We do not expect that many registrants, if any, currently
disclose or track total compensation as determined pursuant to Item 402
for their workforce.\147\
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    \146\ ``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. The elements of compensation that
are required to be calculated and reported for U.S. tax purposes 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.
    \147\ See supra note 17.
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    We are proposing these amendments to Item 402 in order to satisfy
the statutory mandate of Section 953(b). We note that neither the
statute nor the related legislative history directly states the
objectives or intended benefits of the provision or a specific market
failure, if any, that is intended to be remedied; \148\ however,
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.\149\
---------------------------------------------------------------------------

    \148\ See supra note 23.
    \149\ See supra note 24.
---------------------------------------------------------------------------

    As discussed throughout this release, in proposing amendments to
implement Section 953(b), we have considered the statutory language and
exercised our discretion to develop rules designed to lower the cost of
compliance while remaining consistent with Section 953(b). In doing so,
we have considered a variety of issues, including, among others, the
specificity of the statute, whether the rules should specify a
methodology for determining the median, the use of estimates and
assumptions, whether and how to define certain terminology used in the
statute, the form of the disclosure, how often the disclosure should be
updated in the required filings, and compliance and transition matters.
    We are sensitive to the costs and benefits imposed by the statutory
requirements and the proposed pay ratio disclosure requirements, and
our analysis of these costs and benefits is discussed below. Some of
the costs and benefits stem directly from the statutory mandate in
Section 953(b), while others are affected by the discretion we exercise
in implementing that mandate. Our economic analysis of the proposed pay
ratio disclosure requirements addresses both the costs and benefits
that stem directly from Section 953(b) and those arising from the
policy choices under the Commission's discretion, recognizing that it
may be difficult to separate the discretionary aspects of the rules
from those elements required by statute. The economic analysis that
follows focuses first on the benefits and costs arising from the new
mandatory disclosure requirements prescribed by the Dodd-Frank Act and
then focuses on those that arise from the choices we have made in
exercising our discretion.
    We request comment throughout this release on alternative means of
meeting the statutory mandate of Section 953(b) and on all aspects of
the costs and benefits of the proposals and possible alternatives. We
also request comment on any effect the proposed pay ratio disclosure
requirements may have on efficiency, competition and capital
formation.\150\ We particularly appreciate

comments that distinguish between costs and benefits that are
attributed to the statute and costs and benefits that are a result of
policy choices made by the Commission in implementing the statutory
requirements, as well as comments that include both qualitative
information and data quantifying the costs and the benefits identified.
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    \150\ Section 2(b) of the Securities Act [15 U.S.C. 77b(b)] and
Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)] require us, when
engaging in rulemaking under those Acts where we are required to
consider or determine whether an action is necessary or appropriate
in the public interest, to consider, in addition to the protection
of investors, whether the action will promote efficiency,
competition and capital formation.
    Section 23(a)(2) of the Exchange Act [15 U.S.C. 78w(a)(2)]
requires us, when adopting rules under the Exchange Act, to consider
the impact that any new rule would have on competition. In addition,
Section 23(a)(2) prohibits us from adopting any rule that would
impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

B. Baseline

    To assess the economic impact of the proposed rules, we are using
as our baseline the current state of the market without a requirement
for registrants to disclose pay ratio information. At present, the
registrants subject to Item 402(c)(2)(x) already provide disclosure of
their executive officer compensation as Section 953(b) requires. Other
registrants, such as emerging growth companies, smaller reporting
companies and foreign private issuers, are not required to comply with
to Item 402(c)(2)(x) and provide disclosure of executive compensation
different from Item 402(c)(2)(x). We do not expect that many
registrants, if any, currently maintain payroll and information systems
that track total compensation as determined pursuant to Item 402 for
their employees, or make that information publicly available.
Therefore, investors cannot calculate registrant-specific median
employee compensation because there are no existing or publicly
available sources for this data. Correspondingly, they cannot currently
calculate the annual pay ratio in accordance with Section 953(b).
Statistics on the earnings of U.S. workers in various ``industries''
are publicly available from the Bureau of Labor Statistics. Therefore,
investors may be able to approximate the ratio using the industry
median employee compensation and the information about PEO compensation
for the registrants subject to Item 402(c). For example, the
distribution of the ratios of PEO to industry median employee
compensation for a sample of large reporting companies is reported by
North American Industry Classification System (``NAICS'') industry
sectors in the figure below for fiscal year 2011.\151\
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    \151\ The ratios in the figure are calculated for each
registrant with executive total compensation data from the Standard
and Poor's Compustat Executive Compensation database which tracks
compensation for the companies currently or previously in the S&P
1500 index and industry median employee wage information at each 3-
digit NAICS level from the U.S. Department of Labor's Bureau of
Labor Statistics (available at http://www.bls.gov/bls/wages.htm).
The distribution of the registrant-level ratios within each NAICS
industry sector (2-digit) is represented using horizontal box plots
that show the minimum and maximum, and 25th, 50th (median) and 75th
percentiles.
[GRAPHIC] [TIFF OMITTED] TP01OC13.001

    The pay ratio compiled with currently available information as in
the above example is different from the ratio that Section 953(b)
requires issuers to disclose; the above example uses the median wage
information of U.S. workers within the same 3-digit NAICS industries,
while Section 953(b) mandates registrants to use company-specific
information about median employee compensation for ``all employees''
which would include employees in workplaces outside the United States.
Also, the example is based on only wages and does not consider other
forms of compensation for employees other than PEOs because the Bureau
of Labor Statistics does not report those components. In contrast,
Section 953(b) requires registrants to present the ratio using total
compensation including all forms of compensation in Item 402(c)(2)(x).

    Although the ratio described in the above example does not
represent the ratio mandated by Section 953(b), it shows that there is
considerable disparity in the compensation differentials between
industries. It is not clear how the distribution of ratios by industry
would change if company-specific median employee wage and other
compensation components for employees were used. In the example above,
the variation in ratios within the same industry group at the 3-digit
NAICS level is determined only by the variation in PEO pay between
companies. The Section 953(b) disclosure of median pay at the company
level would introduce an additional factor for the variation, which is
the company-specific median employee compensation. This could widen or
narrow the distribution of ratios depending on how median pay
corresponds to PEO pay at each company.
    To assess the effects of the proposed rule, we consider the impact
of the rule on investors, registrants subject to the pay ratio
disclosure and all their employees including executive officers. The
proposed disclosure requirement would apply to all registrants that are
not emerging growth companies, smaller reporting companies and foreign
private issuers, which we estimate to be approximately 3,830
registrants.\152\ We estimate that there are approximately 900 emerging
growth companies, approximately 3,750 smaller reporting companies,
approximately 750 foreign private issuers filing on Form 20-F and
approximately 144 MJDS filers.\153\
---------------------------------------------------------------------------

    \152\ Based on a review of EDGAR filings in 2011, we estimate
that of the approximately 8,870 annual reports on Form 10-K filed in
that year, approximately 3,750 annual reports were filed by smaller
reporting companies, approximately 290 were filed by ABS issuers and
approximately 100 were filed by wholly-owned subsidiaries of other
registrants. We have also reduced the total number affected
registrants by 900 to reflect the approximate number of emerging
growth companies that have identified themselves as such in their
EDGAR filings as of May 2013.
    \153\ We estimate that approximately 900 SEC registrants have
identified themselves as emerging growth companies in their EDGAR
filings as of May 2013. The estimates for smaller reporting
companies and foreign private issuers including MJDS filers are
based on a review of EDGAR filings for calendar year 2011. Based on
a review of EDGAR filings in 2012, there approximately 8,154
registrants filing on Form 10-K, approximately 3,640 smaller
reporting companies, approximately 715 foreign private issuers
filing on Form 20-F and approximately 152 MJDS filers. Registrants
can fall into multiple categories among emerging growth companies,
smaller reporting companies and foreign private issuers.
---------------------------------------------------------------------------

    An important factor to consider when analyzing the competitive
effects of the proposed pay ratio disclosure requirements on the
affected registrants is the difference in size and nature of the
workforce, complexity of the organization and the degree of integration
of payroll systems that are likely to exist among these registrants.
The average number of business and geographical segments and employees
of each segment disclosed by some of the potentially affected
registrants in the calendar year 2011 are reported in the table
below.\154\
---------------------------------------------------------------------------

    \154\ The corporate segments data used in the table come from
the Standard and Poor's Compustat Segment database and the
information is self-reported by the companies. As such, it is not
based on standardized definitions of lines-of-business and
geographic areas. Segment information of approximately 65% of the
potentially affected registrants is available from the database.

                      Table 1--Registrants With Multiple Business or Geographical Segments
----------------------------------------------------------------------------------------------------------------
                                                                                Number of
                                      Average           Min           Median            Max         registrants
----------------------------------------------------------------------------------------------------------------
No. of Geographic Segments......            2.92               1               2              28           2,691
No. of Business Segments........            2.36               1               1              11           2,947
Total Assets ($ millions).......          10,472               0           1,287       3,211,484           2,691
Geographic Segment Assets ($               8,833               0             905       3,211,484           1,411
 millions)......................
No. of Employees per Registrant.          12,681               0           2,300       2,100,000           2,652
No. of Employees per Geographic            7,096               0           1,155         338,000           1,433
 Segment........................
----------------------------------------------------------------------------------------------------------------

    The above table shows that the average number of segments among
potentially affected registrants was about three in 2011. Also, the
approximate number of average employees per registrant and per
geographic segment was 13,000 and 7,000 respectively. Although we do
not have information on how the registrants maintained their payroll
systems across the multiple segments, the number of segments for the
registrants serves as one indication of the potential complexity of
trying to comply with the proposed rules (whether by sampling at each
segment and aggregating the samples across the segments, or aggregating
the payroll observations and sampling from the aggregated pool).
    Another important factor in analyzing the competitive effects of
the proposed disclosure requirement is the current level of competition
in the labor market for PEOs. Unfortunately, we do not have data that
would allow us to assess the degree of competitiveness of the current
market for PEOs.

C. Discussion of Benefits and Costs Arising From the Mandated
Disclosure Requirements

1. Benefits
    We have considered the impact that the requirements prescribed by
Section 953(b) could have on the efficiency of the U.S. capital
markets, particularly the informational efficiency. The following
discussions of potential informational benefits are mainly intended to
address benefits of the mandated disclosure to investors and
shareholders and the employees (other than executive officers) of the
registrants that are subject to Section 953(b).
    As noted above, there is limited legislative history to inform our
understanding of the legislative intent behind Section 953(b) or the
specific benefits the provision is intended to secure. In particular,
the lack of a specific market failure identified as motivating the
enactment of this provision poses significant challenges in quantifying
potential economic benefits, if any, from the pay ratio disclosure.
Some commenters have noted that there is an information gap between
registrants and investors with regard to internal pay parity at
companies.\155\ Although investors are able to compare compensation
arrangements for the PEO across companies, registrants are not required
to provide, and investors may not have access to, information that
would allow them to assess the level of a PEO's compensation as it
compares to

that of employees at the same company.\156\ Some investors have
suggested that this type of comparison would assist in their ability to
evaluate the PEO's compensation in the context of the company's overall
business,\157\ and could provide insight into the effectiveness of
board oversight.\158\ Other commenters have suggested that a comparison
of PEO compensation to employee compensation could be used by investors
to approximate employee morale and productivity,\159\ or analyzed as a
measure of a particular company's investment in human capital.\160\
---------------------------------------------------------------------------

    \155\ See letter from Social Investment Forum (noting ``a number
of investors, including several of our members, have been active in
submitting shareholder resolutions in recent years supporting
corporate disclosure of similar pay disparity data.''). See
generally House Letter and Senate Letter; and letters from Americans
for Financial Reform; Group of International Investors; Calvert
Investment Management; K. Burgoyne; Institute for Policy Studies;
and Trillium Asset Management. See also Form Letter A.
    \156\ See, e.g., Senate Letter; House Letter; and AFL-CIO I
(noting ``few companies provide meaningful disclosure of how
employee compensation is allocated over their workforce'').
    \157\ See, e.g., letter from UAW Retiree Medical Benefits Trust
(``Disclosure of internal pay equity, whether the ratio between
median employee wages and those of the CEO or the ratio between
compensation awarded to the CEO and to other top executives, will
ultimately help investors evaluate executive pay practices by better
contextualizing the information provided to the shareholders through
the proxy statement and other corporate filings.'') and letter from
CtW Investment Group (``The new [pay ratio] 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.'').
    \158\ See letter from CtW Investment Group (noting that
``compensation disclosure is important, not only in its own right,
but the ability it offers shareholders to evaluate and hold
accountable board members''); and letter from UAW Retiree Medical
Benefits Trust (noting ``we view Section 953(b) as an essential tool
that will increase corporate board accountability to investors'').
    \159\ See AFL-CIO I and letters from Americans for Financial
Reform; Calvert Investment Management; Drucker Institute; and
Institute for Policy Studies. See also Form Letter A.
    \160\ See AFL-CIO I and letter from CtW Investment Group.
---------------------------------------------------------------------------

    These commenters did not quantify the magnitude or value of these
potential benefits. Statistics on the average earnings of U.S. workers
in various industries are already publicly available to investors.\161\
Company-specific information about median employee pay would be new
information generated pursuant to the Section 953(b) requirements, and
thus the potential incremental benefits identified by commenters
primarily derive from this company-specific information. Commenters
have not specified whether this type of company-specific information
would be equally useful in connection with all types of companies or
whether the potential benefits are more relevant to certain types of
businesses, industries, business structure or size of registrant. One
commenter asserted that the impact of pay disparity on employee
performance and morale is ``particularly strong in industries based on
technology, creativity and innovation,'' \162\ which suggests that a
measure of employee morale could be more potentially useful in
evaluating those businesses or that this pay ratio may be a more
sensitive indicator of that effect in those industries.
---------------------------------------------------------------------------

    \161\ See U.S. Department of Labor's Bureau of Labor Statistics,
available at http://www.bls.gov/bls/wages.htm.
    \162\ See AFL-CIO II (``These sectors . . . depend significantly
on the ability of employees to collaborate, share ideas, and
function effectively as teams, all of which are damaged by extreme
differentials in compensation amongst employees.'').
---------------------------------------------------------------------------

    Furthermore, commenters have not specified what an optimal pay
ratio is or what a proper benchmark should be. They also have not
specified what effect a pay ratio has on employee morale and
productivity relative to other environment-specific and company-
specific factors. To the extent that factors exist that could cause the
ratios to differ, precise comparability across companies may not be
relevant and could generate potentially misleading interpretations or
conclusions. In particular, the ratio may significantly depend on how a
company structures its business. For example, one company might
outsource the labor-related (manufacturing) aspects of its business to
a third-party to focus on product innovation, while another company
competing in the same industry might choose to retain the labor aspect
of its business. To the extent that product innovation requires higher
pay than manufacturing, the outsourcing company will have a lower pay
ratio for the same PEO pay. If pay ratio parity between these two
companies were pursued, and a lower ratio sought, this could create
incentive for the manufacturing company to outsource jobs. Therefore,
the potential value of this disclosure for assessing issues related to
employee morale, productivity and investment in human capital may be
diminished by the indirect costs of creating incentives for registrants
to change their business structure.
    Some commenters have asserted that the intended purpose of the
provision is to address a broader public policy concern relating to
income inequality, which they suggest is exacerbated by increasingly
high levels of PEO compensation relative to other workers.\163\ More
specifically, some of these commenters have suggested that the mandated
disclosure requirement will encourage the boards of public companies to
consider the relationship between the PEO's compensation and the
compensation of other employees, which, these commenters suggest could,
in turn, curb excessive PEO compensation.\164\ It has also been
suggested that shareholders of public companies could use pay ratio
information, together with pay-for-performance disclosure, to help
inform their say-on-pay votes, which could also serve to limit PEO
compensation.\165\
---------------------------------------------------------------------------

    \163\ See Letter from Americans for Financial Reform (``[T]his
information clearly bears directly on the important public policy
issues of pay equity and income inequality''). See also House Letter
and Senate Letter (each stating ``income inequality is a growing
concern among many Americans . . . by 2010 large company CEO pay had
skyrocketed to $10.8 million, or 319 times the median worker's pay.
Section 953(b) was intended to shine a light on figures like this at
every company.'').
    \164\ See, e.g., AFL-CIO I and letters from Americans for
Financial Reform; Group of International Investors; Institute for
Policy Studies. In contrast, the National Association of Corporate
Directors asserted that pay ratio information would not be useful
for this purpose. See letter from NACD.
    \165\ See letters from CtW Investment Group and S. Towns.
---------------------------------------------------------------------------

    Commenters have also suggested \166\ that comparing PEO pay to the
compensation of the median worker may help offset an upward bias in
executive pay resulting from the practice of benchmarking PEO
compensation solely against the compensation of other PEOs.\167\ To the
extent that pay ratio disclosure diminishes the focus of benchmarking
executive compensation exclusively to the level of peer-PEO pay, the
mandate of Section 953(b) may provide indirect economic benefits to
registrants and their shareholders by reducing the frequency of pay
increases that are tied to a benchmarking process that is not based on
performance. It is also possible, however, that pay ratio disclosure
could exacerbate any upward bias in executive pay by providing another
benchmark that could be used in certain situations to increase PEO
compensation (i.e., for a PEO whose company's pay ratio is lower than
its peers' pay ratios). In addition to these possibilities, there is
also evidence that setting executive compensation through benchmarking
practices is practical and efficient,\168\ particularly when the

market can observe the method used.\169\ To the extent that current
benchmarking practices and disclosure requirements are efficient,
additional pay ratio disclosure would not provide additional benefits.
---------------------------------------------------------------------------

    \166\ See AFL-CIO II and letter from Americans for Financial
Reform.
    \167\ See, e.g., M. Faulkender and J. Yang, Inside the Black
box: the Role and Composition of Compensation Peer Groups, J. of
Financial Economics. 96, 257-270 (2010); C. Elson and C. Ferrere,
Executive Superstars, Peer Groups and Overcompensation: Cause,
Effect and Solution, J. of Corporation Law. Forthcoming (2013) for
one view that benchmarking is inefficient because it can lead to
increases in executive compensation not tied to firm performance.
    \168\ See, e.g. J. Bizjak, M. Lemmon, and L. Naveen, Does the
use of peer groups contribute to higher pay and less efficient
compensation? J. of Financial Economics. 90, 152-168 (2008). This
study shows that benchmarking is a practical and efficient mechanism
used to gauge the market wage necessary to retain valuable human
capital.
    \169\ See, e.g., J. Bizjak, M. Lemmon, and T. Nguyen, Are all
CEOs Above Average? An Empirical analysis of compensation Peer
Groups and Pay Design. J. of Financial Economics. 100, 538-555
(2011). This study finds that disclosure of peer groups mandated in
the 2006 Adopting Release has reduced the bias in peer group choice.
---------------------------------------------------------------------------

    Similar benefits to the potential benefits cited by commenters may
be achieved using the currently available information on PEO
compensation and the industry median or average wages of U.S. workers,
although currently available data do not provide company-specific
information. Also, these commenters did not provide details about the
causes of compensation disparity within particular companies or
industries and did not address whether there are alternative means to
effect an overall reduction in PEO compensation, or, alternatively, an
overall improvement in the wages and benefits for workers. The evidence
that the current PEO compensation practice is not efficient or that the
benchmarking process causes the upward bias in executive compensation
is not sufficiently clear to establish that the purpose of the
provision is a remedy for a specific market failure in the current
compensation practice.\170\
---------------------------------------------------------------------------

    \170\ See, e.g., J. Core, W. Guay, and R. Thomas, Is U.S. CEO
Compensation Broken? J. of Applied Corporate Finance. 12, 97-104
(2005); C. Fryman and D. Jenter, CEO Compensation, Annual Review of
Financial Economics. 2, 75-102 (2010).
---------------------------------------------------------------------------

    In contrast, other commenters believe that the disclosure mandated
by Section 953(b) would not have any benefit, or, at most, would not
have benefits sufficient to justify the compliance costs, which many of
such commentators anticipate would be substantial.\171\ Some of these
commenters questioned the materiality of pay ratio information to an
investment decision and specifically questioned the meaningfulness of
the information in the form expressly required by Section 953(b).\172\
This view was also asserted by the minority in the Senate Report
accompanying the legislation.\173\ In light of these comments, we are
particularly interested in receiving information relating to material,
direct economic benefits to investors or shareholders of the affected
registrants derived from the pay ratio disclosure.
---------------------------------------------------------------------------

    \171\ See, e.g., letter from Meridian Compensation Partners LLC
(stating that ``disclosure of the CEO pay ratio will provide
investors with little or no meaningful information about an issuer's
executive or employee pay practices. We further believe that what
value this information may have to investors is far outweighed by
the administrative burden and associated costs borne by issuers in
accumulating the compensation data necessary to make the CEO pay
ratio disclosure.''); COEC I (opposing Section 953(b) because it
``does not believe that [the ratio] will provide any meaningful or
material information that will be used by investors.''); Brian Foley
& Co. (asserting that Section 953(b) disclosure ``realistically
provides little serious added analytical value, and presents, in its
current form, a variety of practical issues and potentially
significant calculation costs.''); letter from NACD (stating that
``it would take global companies months and thousands of hours to
come up with a completely useless number'').
    \172\ See, e.g., letters from Group of Exec. Comp. Lawyers (``We
are unaware of any evidence correlating corporate performance to the
ratio of CEO pay to median employee pay.'') and Group of Trade
Associations (``While it may be of general interest to some
investors for different purposes, it is unclear how the pay ratio
disclosure will be material for the reasonable investor when making
investment decisions.''). See also, letter from RILA (noting
``current Item 402 requirements if applied to the overall employee
population of an issuer will only serve to distort the already
questionable meaning of the Compensation Ratio'').
    \173\ See Senate Report, supra note 23 (``Although provisions
like this appeal to popular notions that chief executive officer
salaries are too high, they do not provide material information to
investors who are trying to make a reasoned assessment of how
executive compensation levels are set. Existing SEC disclosures
already do this.'').
---------------------------------------------------------------------------

    We note that some commenters asserted that certain investors
incorporate social and governance issues, like pay equity, as part of
their investment decisions.\174\ These investors may realize non-
economic benefits associated with their investment decisions based on
this type of information. These commenters, however, did not quantify
the extent to which investors would value pay ratio information or
would incorporate the disclosure required by Section 953(b) into their
investment or voting decision, if at all.\175\ We also note that many
commenters disagreed with the assertion that this type of disclosure is
material to investors or would be useful to an investment or voting
decision, particularly in the form required by the Dodd-Frank Act.\176\
As mentioned above, currently it is not possible to quantify the
usefulness to investors of company-specific pay ratio information as
required by Section 953(b) as compared to the usefulness of publicly
available statistics on average salaries, or the usefulness of any
other company-specific metric of employee compensation or satisfaction.
We understand from some commenters that the proposed pay ratio
disclosure could be used by some investors in allocating capital and
from that perspective would be perceived by such investors as a
benefit, although not necessarily an economic benefit measured by a
financial return. It is uncertain whether the investment decisions by
these investors would impact the overall efficiency of U.S. capital
markets, or if there would be an impact, whether the impact would be
net positive or negative.
---------------------------------------------------------------------------

    \174\ See letters from Americans for Financial Reform; Group of
International Investors; and Social Investment Forum.
    \175\ We are not aware of any empirical studies that address the
value of pay disparity disclosure specifically. We are aware of
research that has studied whether there is a correlation between
information about employee satisfaction and long-term equity returns
in an effort to understand how the market values a public company's
intangible assets. This research was based on the equity prices of
companies that were identified on Fortune Magazine's list of the
``100 Best Companies to Work For in America.'' See A. Edmans, Does
the stock market fully value intangibles? Employee satisfaction and
equity prices, J. of Financial Economics 101, 621-640 (2011)
(finding evidence implying that the market fails to incorporate
intangible assets, like employee satisfaction, fully into stock
valuations until the intangible subsequently manifests in tangibles,
such as earnings, that are valued by the market; and finding
evidence suggesting that the non-incorporation of intangibles into
stock prices is not simply due to the lack of salient information
about them).
    \176\ See, e.g., COEC I and letters from Brian Foley & Co.;
Group of Trade Associations; Meridian Compensation Partners, LLC;
NACD; and RILA.
---------------------------------------------------------------------------

    Nevertheless, as discussed above, in designing the proposed
requirements, we have sought to preserve what we believe to be the
potential benefits, as articulated by commenters, of the mandated
requirement. To the extent that some investors and other stakeholders
may seek the disclosure of pay ratio information, both those investors
and the registrants who have already disclosed similar information
voluntarily may benefit from mandated, rather than voluntary,
disclosure of pay ratio information. Given that some registrants have
already disclosed information similar to the pay ratio
voluntarily,\177\ those registrants may benefit from the mandated
disclosure requirement to the extent that standardized pay ratio
information may decrease uncertainty around, or increase the relevance
of, the voluntarily disclosed information.\178\ To the extent that the
voluntarily disclosed information and the manner in which it

is calculated differs from the disclosure that would be required under
the proposed rules, those companies may incur costs. We request comment
throughout this release about the potential benefits of the disclosure
mandated by the Dodd-Frank Act and the proposed rules and any
alternative ways of achieving these benefits in a manner consistent
with the Dodd-Frank Act. We seek further comment on the impact of the
proposed requirements on the efficiency of the U.S. capital markets.
---------------------------------------------------------------------------

    \177\ We are not aware of any registrants that currently provide
pay ratio disclosure in the form contemplated by the proposed rules
in their filings with the Commission. However, several registrants
provide (or in the past have provided) voluntary disclosures that
provide a comparison of CEO compensation with worker pay.
    \178\ See, e.g., B. Bushee and C. Leuz, Economic consequences of
SEC disclosure regulation: evidence from the OTC bulletin board, J.
of Accounting and Economics. 39, 233-264 (2005); R. Lambert, C.
Leuz, and R Verrecchia, Accounting Information, Disclosure, and the
Cost of Capital, J. of Accounting Research. 45, 385-420 (2007).
---------------------------------------------------------------------------

2. Costs
    The following discussions are mainly intended to address costs to
registrants that are subject to the pay ratio disclosure, investors who
invest their capital in those registrants and employees of the
registrants who invest their human capital in those registrants. As
noted above, the provision does not identify a specific objective and
therefore, the appropriateness of the costs in relation to the
statutory objective is not readily assessable. Therefore, the following
analysis on costs focuses on direct compliance costs on registrants and
possible second-order effects on efficiencies and competition. We
expect that the effects of the pay ratio disclosure requirement on
capital formation would be minimal.
    Many commenters raised concerns about the significant compliance
costs that would arise 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.\179\
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, these commenters have stated would be highly costly and time
consuming.\180\
---------------------------------------------------------------------------

    \179\ 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 and compensation and pension
administration firms to perform these calculations, the costs of
disclosure will increase accordingly.'') See also COEC I and letters
from ABA; Group of Exec. Comp. Lawyers; Group of Trade Associations;
Meridian Compensation Partners, LLC; NACD; and R. Morrison.
    \180\ See, e.g., COEC II and letters from Meridian Compensation
Partners, LLC; R. Morrison; and Group of Trade Associations (``There
is a widespread misconception that this information is readily
available at the touch of a button.'').
    For example, one commenter submitted a survey demonstrating
that, of the 95 companies surveyed, 10.9% maintained a centralized
payroll computer system that could be used to calculate cash
compensation of each employee (or a sample of employees); 28.3% had
payroll systems in each location or regionally that could be used to
aggregate the data; 47.8% expected to compile the data manually and
13% expected to be able to use some combination of information
technology and manual data gathering. See COEC II.
---------------------------------------------------------------------------

    In addition, several commenters raised concerns about expected
compliance costs arising from the complexity of the ``total
compensation'' calculation under Item 402(c)(2)(x).\181\ These
commenters made various recommendations to simplify the total
compensation definition, such as including only cash compensation,
including only cash compensation and equity-based compensation,
including only compensation that is reported to the U.S. Internal
Revenue Service on Form W-2 or other relevant tax authority, or
including only compensation that is required to be recorded in the
payroll system of a particular jurisdiction and its overseas
equivalents.\182\
---------------------------------------------------------------------------

    \181\ 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.
    \182\ See COEC I 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.
---------------------------------------------------------------------------

    As discussed elsewhere in this release, registrants would be able
to choose from several options in order to identify the median and
provide the required disclosure. Registrants may choose to calculate
the annual total compensation for each employee and the PEO using Item
402(c)(2)(x) and to identify the median using this method. In addition,
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. The proposed rules also would
permit registrants to use a consistently applied compensation measure
to identify the median employee and calculate and disclose that median
employee's total compensation 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. Also, allowing these specific alternatives could reduce
the potential uncertainty for registrants as to how to comply with the
proposed rules.
    Although some commenters have estimated the cost of compliance for
certain registrants,\183\ the estimates we have received vary
significantly. The estimates provided by commenters are also based on
the commenters' initial reading and interpretation of the statute and
not the proposed means of implementation. One commenter reported that a
registrant estimated that compliance would cost approximately $7.6
million and take approximately 26 weeks,\184\ while another registrant
estimated approximately $2.0 million annually solely for computing the
actuarial change in accrued pension benefit.\185\ We have also received
cost information from discussions with registrants and industry groups,
including the following estimates:
---------------------------------------------------------------------------

    \183\ See COEC II and letter from Group of Trade Associations.
    \184\ See letter from Group of Trade Associations (the commenter
does not clarify whether these estimates reflect a one-time or
ongoing annual burden).
    \185\ See letter from Group of Trade Associations.
---------------------------------------------------------------------------

     Approximately 201 to 500 hours per year, plus significant
costs;
     $3 to $6.5 million for a multinational manufacturing
company with 90 separate payrolls;
     $4.725 million for a multinational consumer products
company (including an estimated 50 hours per country for employees
located in 80 countries);
     $100 million dollars for a multinational company; and

     $350,000 to implement plus $100,000 a year for ongoing
compliance for a global technology company.

We are, however, unable to quantify with any precision the compliance
costs at this time.\186\ Although these estimates are a useful starting
point for our analysis, we do not believe the aggregate of these
estimates necessarily represents an accurate indication of the expected
compliance costs because they do not take into account the flexibility
allowed under the proposed requirements.\187\ Also, these estimates,
although providing potentially useful data points, do not reflect costs
incurred across the breadth of the registrant population subject to the
requirement. Commenters did not provide sufficient information on the
factors used to produce these estimates to enable us to evaluate these
cost estimates, such as, among others, how separate payrolls are
maintained within a company across divisions or subsidiaries, how the
compensation components that the current payroll systems record compare
to the ``total compensation'' as defined in Item 402(c)(2)(x), whether
the estimated costs reflect internal personnel costs, technology costs
or the costs of third-party service providers and outside
professionals, and any assumptions used in deriving the estimates.
Accordingly, we could not quantify differential costs from these
estimates when the flexibility allowed under the proposed requirements
is applied to each of those inputs. Also, these estimates do not
precisely distinguish between initial and ongoing costs, while we
expect that, for many registrants, the overall compliance burden will
diminish after systems are in place to gather and verify the underlying
data. We request comment throughout this release for additional
information about the costs of compliance, including, where applicable,
estimates or data that differentiate between categories of registrants
facing relatively harder or easier burdens that could better inform our
understanding of the direct and indirect costs of the proposed rules.
---------------------------------------------------------------------------

    \186\ In light of the limitations of these estimates, we were
not able to use these estimates to inform the hour and cost burden
estimates that are required by the Paperwork Reduction Act of 1995
(the ``PRA''). See Section V of this release. Our discussion and
analysis in that section describes the assumptions we made for
purposes of deriving our PRA estimates. We request comment on our
PRA estimates in Section V. We expect to review and revise those PRA
estimates in light of any further information we receive on
estimated costs.
    \187\ We expect that the flexibility allowed under the proposed
requirements could, at least for some registrants, substantially
reduce the overall compliance burden, and we request estimates or
data that quantifies this impact.
---------------------------------------------------------------------------

    We are particularly sensitive to the competitive effects that could
impact registrants subject to the requirements of Section 953(b). In
this regard, we have assumed that these registrants would incur direct
costs to compile the information and may incur indirect costs arising
from revealing information about the cost structure of their workforce
that registrants not covered by Section 953(b) would not have to
reveal. Such costs are potentially significant, although as described
elsewhere in this release we have sought to exercise our discretion to
reduce such costs. Any material costs resulting from Section 953(b),
however, could result in differential pressures from and treatment by
market participants for companies competing in the same industry that
are similar except for whether they are covered by Section 953(b).
Accordingly, registrants covered by Section 953(b) could be at a
competitive disadvantage to registrants (including private companies,
foreign private issuers, smaller reporting companies and emerging
growth companies) that are outside the scope of Section 953(b). This
disadvantage could be greater for registrants that have already
completed an initial public offering but that would otherwise have
qualified for emerging growth company status.\188\ In addition, we
understand from commenters that some registrants covered by Section
953(b) would likely incur higher costs of compliance based on size,
business type and level of integration of payroll and benefits
systems--such as large, multinational companies that do not maintain
integrated employee compensation information on a global basis.
Therefore, the competitive impact of compliance with the disclosure
requirements prescribed by Section 953(b) could disproportionately fall
on U.S. companies with large workforces and global operations, although
the incremental impact of the fixed cost components of compliance will
be proportionally smaller for large, multinational companies compared
to smaller companies.
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    \188\ Registrants that completed their first sale of common
equity in a registered offering before December 8, 2011 do not
qualify as emerging growth companies, regardless of the level of
their annual total revenues or public float. See Section 101(d) of
the JOBS Act. These registrants could be at a competitive
disadvantage to companies with similar levels of revenue and public
float that do qualify as emerging growth companies.
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    We also acknowledge that there could be competitive impacts that
result from indirect costs of disclosure. Registrants subject to
Section 953(b) could be subject to competitive harm if their
competitors are able to infer proprietary or sensitive information from
the disclosure of the median of the annual total compensation of all
employees. For example, it could be possible for a competitor to infer
sensitive information about a registrant's cost structure based on
information about median levels of employee compensation. This could
also have an impact on labor markets if competitors use the disclosure
to target and hire away a registrant's employees. We have sought to use
our discretion to reduce the potential for such indirect costs, by
permitting flexibility in the manner in which issuers may determine
median compensation. We request comment on whether the flexibility
provided by the proposed rule would make it more difficult for
competitors to infer a registrant's cost structure from such
disclosure. Alternatively, a registrant subject to Section 953(b) could
be at a competitive disadvantage when hiring or retaining a PEO if
there is pressure to limit PEO wages based on the pay ratio disclosure
while non-covered registrants are not subject to the same pressure.
    Finally, a registrant subject to Section 953(b) could face pressure
from its PEO or from employees to increase compensation in light of the
pay ratio disclosure of the registrant's competitors. Alternatively,
there could be incentives to alter the median employee compensation
either by increasing all employee compensation or by reducing the
number of lowest wage employees or groups of employees, such as a
specific office or division of a company. One method of doing this, as
previously mentioned, is through outsourcing operations to third
parties, including through the use of independent contractors,
``leased'' workers or other temporary employees. In some instances this
might not harm and could even improve the profit margin of the
registrant, but it could also result in changes to the business
structure that are inefficient. Pressure for a registrant to maintain a
low pay ratio could also curtail the expansion of business operations
into lower cost geographies. This could adversely affect states and
municipalities in lower wage geographies seeking to generate jobs for
their communities. We do not have data that can be used to analyze the
likelihood or potential magnitude of these impacts. We request comment
on these and any other potential uses of the disclosure that could
result in costs for registrants or that could impact competition.

D. Discussion of Benefits and Costs Arising From the Exercise of Our
Discretion

1. General
    In addition to the statutory benefits and costs described above, we
believe that the use of our discretion in implementing the statutory
requirements could result in benefits and costs to registrants and
users of the pay ratio disclosure. We discuss below the choices we made
in implementing the statute and the associated benefits and costs. We
are unable, in most cases, to provide quantified estimates of these
benefits and costs because we lack particularized data on the potential
effects of these policy choices. Specifically, we expect that most
registrants do not currently track total compensation as determined
pursuant to Item 402 for their employees, thus we would not be able to
acquire sufficiently analogous data.
    In general, the proposed rules implementing Section 953(b) are
designed to comply with the statutory mandate. Because commenters
supporting Section 953(b) have emphasized the potential benefits that
could arise from adding pay ratio information to the total mix of
executive compensation information,\189\ we have sought to make the
mandated disclosure of Section 953(b) work with the existing executive
compensation disclosure regime. In light of the significant potential
costs that commenters attribute to the requirements of Section
953(b),\190\ we believe that it is appropriate for the proposed rules
to allow registrants flexibility, which we believe should help lower
the costs of compliance generally. The proposal seeks to implement
Section 953(b) without imposing additional requirements that are not
mandated by the Dodd-Frank Act. In this respect, the proposed
requirements reflect our consideration of the relative costs and
benefits of a more flexible approach as opposed to a more prescriptive
approach.
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    \189\ See, e.g., letters from Americans for Financial Reform;
Group of International Investors; Calvert Investment Management; CtW
Investment Group; K. Burgoyne; House Letter; Institute for Policy
Studies; Senate Letter; Social Investment Forum; Trillium Asset
Management; UAW Retiree Medical Benefits Trust; and S. Towns.
    \190\ See, e.g., letter from Group of Trade Associations.
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    In weighing alternatives, we considered the potential costs and
benefits of comparability of disclosure across registrants. Although a
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 necessarily achievable, due to the
variety of factors that could influence the ratio,\191\ or justifiable,
in light of the substantial additional costs that such an approach
would impose on registrants. In addition, we believe that a flexible
approach would not significantly diminish the potential benefits of the
mandated disclosure. In this respect, we note that some commenters
suggest that the expected benefits of pay ratio disclosure derive from
its ability to offer an internal comparison, by providing a metric by
which a PEO's compensation can be evaluated within the context of his
or her own company.\192\ We also acknowledge that some commenters that
support Section 953(b) disclosures suggest that the mandated disclosure
could be used to compare compensation practices between companies and
registrants,\193\ and our flexible approach could impose costs on
investors seeking to use the pay ratio disclosure to compare
registrants. We note, however, that using the ratios to compare
compensation practices between registrants without taking into account
inherent differences in business models, which may not be readily
available information, could possibly lead to potentially misleading
conclusions and to unintended consequences.
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    \191\ We note that some commenters raised the issue of
comparability in their letters. For example, Towers Watson noted,
``Among other issues, there's no way (without significantly more
information) to reliably compare ratios between companies. For
example, companies in different industries will pay their employees
at different levels. And even within the same industry, companies
located in different geographical areas will pay their employees at
different levels. As a result, this disclosure does not provide much
meaningful information regarding differences in executive to
employee pay ratios from company to company.'' See letter from
Towers Watson. See also letter from RILA (noting that pay ratio
disclosure ``is more likely to result in confusion and erroneous
comparisons between companies because of inherent differences in
business models, staffing and compensation practices . . . these
disparate results are only magnified if the ratio is used to compare
publicly traded companies across industry sectors.'').
    \192\ See letters from CtW Investment Group; and letter from
Senator Menendez.
    \193\ See, e.g., AFL-CIO I and letter from Americans for
Financial Reform.
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2. Implementation Choices and Alternatives
a. Filings Subject to the Proposed Disclosure Requirements
    Although some commenters raised questions as to whether Section
953(b)(1) could be read to require pay ratio disclosure in every
Commission filing,\194\ other commenters suggested that the statute, by
referring to filings described in Item 10(a) of Regulation S-K, is
better read as applying only to those filings for which the applicable
form requires Item 402 disclosure.\195\ The proposed requirements
follow the latter approach. We believe that requiring 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,\196\ we believe that the proposed pay ratio disclosure
would be less useful for this purpose if it were provided on a stand-
alone basis, unaccompanied by other Item 402 information, such as the
summary compensation table required by Item 402(c) and the compensation
discussion and analysis required by Item 402(b). 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. We seek information from commenters regarding how
to quantify the costs or the benefits of this approach.
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    \194\ See, e.g., COEC I and letters from American Benefits
Council; Davis Polk; Compensia, Inc.; SCSGP; and Towers Watson.
    \195\ See, e.g., letters from ABA and RILA.
    \196\ See, e.g., Senate Letter; House Letter; and AFL-CIO I; and
letters from CtW Investment Group and UAW Retiree Medical Benefits
Trust.
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b. Registrants Subject to the Proposed Pay Ratio Disclosure
Requirements
    The proposed 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 Congressional
direction to apply this requirement to companies not previously subject
to Item 402(c) requirements, the proposals would not apply to
registrants that are not subject to Item 402(c) requirements.
    As discussed in detail above in Section II.B.2.a., we considered
whether a broader reading of the statute was warranted in the context
of smaller reporting companies. 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. Although quantifying the costs to
smaller reporting companies of calculating PEO compensation under Item
402(c)(2)(x) instead of under Item 402(n)(2)(x), or of complying with
the requirements prescribed by Section 953(b), is not currently
feasible, we assume that such costs could be significant. Based on a
review of EDGAR filings for calendar year 2011, we estimate that there
are approximately 3,750 smaller reporting companies that would benefit