[Federal Register Volume 80, Number 159 (Tuesday, August 18, 2015)]
[Rules and Regulations]
[Pages 50103-50187]
[FR Doc No: 2015-19600]

Vol. 80

Tuesday,

No. 159

August 18, 2015

Part III

Securities and Exchange Commission

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17 CFR Parts 229, 240, and 249

Pay Ratio Disclosure; Final Rule

Federal Register / Vol. 80 , No. 159 / Tuesday, August 18, 2015 /
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229, 240, and 249

[Release Nos. 33-9877; 34-75610; File No. S7-07-13]
RIN 3235-AL47

Pay Ratio Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

DATES: Effective Date: October 19, 2015.
    Compliance Date: Registrants must comply with the final rule for
the first fiscal year beginning on or after January 1, 2017.

FOR FURTHER INFORMATION CONTACT: John Fieldsend, Special Counsel in the
Office of Rulemaking, at<PHONE_NUMBER>, in the Division of Corporation
Finance; 100 F Street NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Item 402 \1\
of Regulation S-K \2\ and a conforming amendment to Form 8-K \3\ under
the Securities Exchange Act of 1934 (the ``Exchange Act'').\4\
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    \1\ 17 CFR 229.402.
    \2\ 17 CFR 229.10 et seq.
    \3\ 17 CFR 249.308.
    \4\ 15 U.S.C. 78a et seq.
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Table of Contents

I. Background
    A. Section 953(b) of the Dodd-Frank Act
    B. Summary of the Proposed Rule
    C. Summary of the General Comments on the Proposed Rule
    D. Summary of Changes in the Final Rule
    1. Non-U.S. Employee Exemptions and Additional Permitted
Disclosure
    2. Employees of Consolidated Subsidiaries
    3. Employed on Any Date Within Three Months of the Last
Completed Fiscal Year
    4. Identifying the Median Employee Once Every Three Years
    5. Initial Compliance Date
    6. Transition Period for New Registrants
    7. Additional Transition Periods
II. Discussion
    A. Scope of Final Rule
    1. Pay Ratio Disclosure Requirements Under New Paragraph (u) to
    Item 402 of Regulation S-K
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    2. Pay Ratio Disclosure in Filings That Require Item 402 of
    Regulation S-K Information
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    3. Excluded Registrants--Smaller Reporting Companies, Foreign
Private Issuers, MJDS Filers, and Emerging Growth Companies
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    B. Requirements of Final Rule
    1. ``All Employees'' Covered Under the Rule
    a. Types of Employees
    i. Proposed Rule
    ii. Comments on the Proposed Rule
    iii. Final Rule
    b. Employed on Any Date Within Three Months of the Last
Completed Fiscal Year
    i. Proposed Rule
    ii. Comments on the Proposed Rule
    iii. Final Rule
    c. Employees Located Outside the United States
    i. Proposed Rule
    ii. Comments on the Proposed Rule
    iii. Final Rule
    (a) Non-U.S. Employees Generally
    (b) Foreign Data Privacy Law Exemption
    (c) De Minimis Exemption
    (d) Cost-of-Living Adjustment
    d. Employees of Consolidated Subsidiaries
    i. Proposed Rule
    ii. Comments on the Proposed Rule
    iii. Final Rule
    e. Any PEO Compensation in the Last Full Fiscal Year
    i. Proposed Rule
    ii. Comments on the Proposed Rule
    iii. Final Rule
    f. Additional Information is Permissible
    i. Proposed Rule
    ii. Comments on the Proposed Rule
    iii. Final Rule
    g. Annualizing Permanent Employees is Permissible, but Other
Compensation Adjustments are Prohibited
    i. Proposed Rule
    ii. Comments on the Proposed Rule
    iii. Final Rule
    2. Identifying the Median Employee and Calculating Annual Total
Compensation
    a. Identifying the Median Employee
    i. Once Every Three Years
    (a) Proposed Rule
    (b) Comments on the Proposed Rule
    (c) Final Rule
    ii. Using Annual Total Compensation, Another Consistently
Applied Compensation Measure, Statistical Sampling, Reasonable
Estimates, or Other Reasonable Methods
    (a) Proposed Rule
    (b) Comments on the Proposed Rule
    (i) Flexibility
    (ii) Statistical Sampling
    (iii) Consistently Applied Compensation Measures
    (iv) The ``Median'' Employee
    (c) Final Rule
    (i) Flexibility
    (ii) Statistical Sampling
    (iii) Consistently Applied Compensation Measures
    (iv) The ``Median'' Employee
    b. Calculating Annual Total Compensation
    i. Proposed Rule
    ii. Comments on the Proposed Rule
    iii. Final Rule
    3. Disclosure of Methodology, Assumptions, and Estimates
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    4. Meaning of ``Annual''
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    5. ``Filed'' Not ``Furnished''
    a. Proposed Rule
    b. Comments on the Proposed Rule
    c. Final Rule
    6. Timing of Disclosure
    a. Updating Pay Ratio Disclosure for the Last Completed Fiscal
Year
    i. Proposed Rule
    ii. Comments on the Proposed Rule
    iii. Final Rule
    b. Omitting Salary or Bonus Information for the PEO in Reliance
on
    Instruction 1 to Item 402(c)(2)(iii) and (iv), and Technical
Amendment to Item 5.02(f) of Form 8-K
    i. Proposed Rule
    ii. Comments on the Proposed Rule
    iii. Final Rule
    c. Initial Compliance Date
    i. Proposed Rule
    ii. Comments on the Proposed Rule
    iii. Final Rule
    d. Transition Period for New Registrants
    i. Proposed Rule
    ii. Comments on the Proposed Rule
    iii. Final Rule
    e. Additional Transition Periods
    i. Proposed Rule
    ii. Comments on the Proposed Rule
    iii. Final Rule
III. Economic Analysis
    A. Background
    B. Baseline
    C. Economic Effects From Mandated Disclosure Requirements
    1. Benefits
    2. Costs
    a. General
    b. Compliance Cost Estimates in Comment Letters
    i. Center on Executive Compensation Survey
    ii. Chamber of Commerce Survey

    iii. Other Specific Comments
    c. Quantification of Compliance Costs
    d. Indirect Costs
    3. Other Economic Effects
    D. Economic Effects From Exercise of Discretion
    1. General
    2. Implementation Choices and Alternatives
    a. Filings Subject to Pay Ratio Disclosure Requirements
    b. Registrants Subject to the Pay Ratio Disclosure Requirements
    c. Employees Included in the Determination of the Median
    i. Types of Employees
    ii. Workers Not Employed by the Registrant
    (i.e., ``Leased'' Workers'')
    iii. Employees of Consolidated Subsidiaries
    iv. Employees Located Outside of the United States
    v. Foreign Data Privacy Law Exemption
    vi. De Minimis Exemption
    vii. Calculation Date
    d. Adjustments to the Compensation of Employees
    e. Frequency of Identifying the Median Employee
    f. Method of Identifying the Median Employee
    i. Consistently Applied Compensation Measure
    ii. Statistical Sampling
    g. Disclosure of Methodology, Assumptions, and Estimates
    h. Determination of Total Compensation
    i. Defining ``Annual''
    j. Updating the Pay Ratio Disclosure for the Last Completed
    Fiscal Year
    k. Status of Disclosure as ``Filed''
    l. Compliance Date
    m. Transition Periods
IV. Paperwork Reduction Act
    A. Background
    B. Summary of Information Collections
    C. Summary of Comment Letters and Revisions to Proposal
    D. Revisions to PRA Reporting and Cost Burden Estimates
    1. Estimated Internal Burden Hours
    2. Estimated Cost Burdens
    3. Estimated Cost and Hour Burdens for Each Collection of
Information
    a. Regulation S-K
    b. Form 10-K
    c. Form 8-K
    d. Proxy Statements on Schedule 14A
    e. Information Statements on Schedule 14C
    f. Form S-1
    g. Form S-4
    h. Form S-11
    i. Form N-2
    j. Form 10
    E. Summary to Changes to Annual Compliance Burden in Collection
of Information
V. Final Regulatory Flexibility Act Certification
VI. Statutory Authority

I. Background

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

    Section 953(b)(1) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ``Dodd-Frank Act'') \5\ directs us to amend Item
402 of Regulation S-K (``Item 402'') \6\ to require each registrant,
other than an emerging growth company, as that term is defined in
Section 3(a) of the Exchange Act, to disclose in any filing of the
registrant described in Item 10(a) of Regulation S-K (or any successor
thereto): \7\ (A) The median of the annual total compensation of all
employees of the registrant, except the chief executive officer
(``CEO'') (or any equivalent position) of the registrant; (B) the
annual total compensation of the CEO (or any equivalent position) of
the registrant; and (C) the ratio of the median of the total
compensation of all employees of the registrant to the annual total
compensation of the CEO of the registrant. Section 953(b)(2) specifies
that, for purposes of Section 953(b), ``total compensation'' of an
employee of a registrant shall be determined in accordance with Item
402(c)(2)(x) of Regulation S-K as in effect on the day before the date
of enactment of the Dodd-Frank Act. As discussed in detail below, we
are adopting amendments to Item 402 to implement Section 953(b).\8\ We
refer to this disclosure of the median of the annual total compensation
of all employees of the registrant, the annual total compensation of
the principal executive officer (``PEO'') of the registrant,\9\ and the
ratio of the two amounts as ``pay ratio'' disclosure.
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    \5\ Public Law 111-203, sec. 953(b), 124 Stat. 1376, 1904
(2010), as amended by Public Law 112-106, sec. 102(a)(3), 126 Stat.
306, 309 (2012). Section 102(a)(3) of the JOBS Act amended Section
953(b) of the Dodd-Frank Act to provide an exemption for registrants
that are emerging growth companies as that term is defined in
Section 3(a) of the Exchange Act.
    \6\ 17 CFR 229.402. As discussed in greater detail below,
consistent with Section 953(b), the final rule requires a registrant
to provide the pay ratio disclosure in any filing described in Item
10(a) of Regulation S-K that calls for executive compensation
disclosure under Item 402, including annual reports on Form 10-K,
registration statements under the Securities Act and Exchange Act,
and proxy and information statements, to the same extent that these
forms require compliance with Item 402. Therefore, any company that
provides such a filing is subject to the final rule. Section 953(b)
refers to any such company as an ``issuer.'' In this release, to be
consistent with other releases, we generally refer to such a company
as a ``registrant.'' For the purposes of this release, unless
otherwise expressly specified, these terms are used interchangeably.
    \7\ 17 CFR 229.10(a).
    \8\ On September 18, 2013, we proposed amendments to implement
Section 953(b). See Pay Ratio Disclosure, Release No. 33-9452 (Sept.
18, 2013) [78 FR 60560] (``Proposing Release'').
    \9\ The term ``CEO'' in the executive compensation rules was
replaced by the term ``PEO'' as part of the 2006 amendments to Item
402 in order to maintain consistency with the nomenclature used in
Item 5.02 of Form 8-K. See Executive Compensation and Related Person
Disclosure, Release No. 33-8732A, n. 326 (Aug. 29, 2006) [71 FR
53158] (``2006 Adopting Release''). Consistent with the language of
current Item 402, both the proposed rule and the final rule use the
term ``PEO'' in lieu of ``CEO.''
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    Congress did not expressly state the specific objectives or
intended benefits of Section 953(b), and the legislative history of the
Dodd-Frank Act also does not expressly state the Congressional purpose
underlying Section 953(b).\10\ As discussed below, based on our
analysis of the statute and comments received, we believe Section
953(b) was intended to provide shareholders with a company-specific
metric that can assist in their evaluation of a registrant's executive
compensation practices. Accordingly, we have sought to tailor the final
rule to meet that purpose while avoiding unnecessary costs.
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    \10\ See letters from National Association of Manufacturers
(Jul. 6, 2015) (``NAM II'') (stating that it concurs with our
conclusion in the Proposing Release that neither the statute nor the
related legislative history directly states the objectives or
intended benefits of the provision) and WorldatWork (Jul. 6, 2015)
(``WorldatWork II'').
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    In informing our understanding of the Congressional purpose of
Section 953(b), we have considered the surrounding provisions of the
Dodd-Frank Act \11\ as well as the comments that we received during
this rulemaking. Subtitle E of Title IX of the Dodd-Frank Act, headed
--``Accountability and Executive Compensation'' is, as explained in the
Conference Report for the legislation, ``designed to address
shareholder rights and executive compensation practices.'' \12\ Its
provisions, including Section 953(b), address various aspects of
executive compensation with a focus on encouraging shareholder
engagement in executive compensation matters by, among other things,
increasing the transparency of compensation. In Section 951, for
example, Congress required companies to provide for periodic
shareholder votes on executive compensation. In implementing Congress's
directive, we noted that a key function of the disclosures required
incident to the new voting requirement was to ``provide shareholders
and investors with timely information'' that was potentially useful to
them ``as they

consider voting and investment decisions.'' \13\ Section 952 requires,
in turn, that both compensation committee members of registrants and
their advisors be independent. We noted that the rules implementing
Section 952 could serve an informational purpose that benefits
``investors to the extent they enable compensation committees to make
better informed decisions regarding the amount or form of executive
compensation.'' \14\ Further, as we noted in the release proposing
implementation of Section 953(a), that section is intended to provide
shareholders with metrics that will help them assess executive
compensation relative to the registrant's performance.\15\ The Section
953(a) information is intended, among other things, to assist
shareholders when exercising their say-on-pay voting rights under
Section 951.
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    \11\ See, e.g., Medtronic, Inc. v. Lohr, 518 U.S. 470, 496
(1996) (``Congress' intent, of course, primarily is discerned from
the language of the . . . statute and the `statutory framework'
surrounding it. Also relevant, however, is the `structure and
purpose of the statute as a whole,' as revealed not only in the
text, but through . . . reasoned understanding of the way in which
congress intended the statute and its surrounding regulatory scheme
to affect business, consumers, and law.'') and Maine Public
Utilities Comm'n v. FERC, 545 F.3d 278, 282 (D.C. Cir. 2006) (``This
court applies the traditional tools of statutory interpretation in
determining congressional intent, looking to the text, structure,
purpose, and legislative history of a statute.'').
    \12\ Dodd-Frank Act, H.R. Rep. 111-517, at 872 (2010) (Conf.
Rep.).
    \13\ Shareholder Approval of Executive Compensation and Golden
Parachute Compensation, Release No. 33-9178 (Jan. 25, 2011) [76 FR
6010, 6037 (Feb. 2, 2011)].
    \14\ Listing Standards for Compensation Committees, Release No.
33-9330 (June 20, 2012) [77 FR 38422, 38447 (Jun. 27, 2012)].
    \15\ Pay Versus Performance, Release No. 34-74835 (Apr. 29,
2015) [80 FR 26329 (May 7, 2015)].
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    We believe that Section 953(b) should be interpreted consonant with
Subtitle E's general purpose of further facilitating shareholder
engagement with executive compensation. Thus, we believe that Congress
intended Section 953(b) to supplement the executive compensation
information available to shareholders. Particularly, Section 953(b)
provides new data points that shareholders may find relevant and useful
when exercising their voting rights under Section 951.\16\ Several
commenters stated affirmatively that they would find the new data
points, including pay ratio disclosure, relevant and useful when making
voting decisions.\17\ Some commenters in the pre-proposing period \18\
suggested specifically that shareholders of public companies could use
the pay ratio information, together with pay-versus-performance
disclosure, to help inform their say-on-pay votes, which could also be
a tool for shareholders to hold companies accountable for their CEO
compensation.\19\ A significant consideration for us in fashioning a
final rule implementing Section 953(b), then, is the extent to which
elements of the final rule further Congress's apparent goal of giving
shareholders additional executive compensation information to enhance
the shareholder engagement envisioned by Section 951.\20\
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    \16\ We note that the say-on-pay votes extend to certain other
senior officers at the registrant beyond the PEO while the pay ratio
disclosure is solely focused on a comparison of the PEO's
compensation to the median employee's compensation. However, we do
not think that this diminishes the overall utility of the pay ratio
disclosures to say-on-pay votes. The PEO will typically be the
highest compensated officer at a registrant and, to the extent
shareholders rely on the pay ratio disclosure to determine whether
the PEO's compensation is appropriate or not, it also may inform
shareholders' relative assessment of the compensation of the other
senior officers whose compensation is subject to say-on-pay votes.
    \17\ See, e.g., letters from AFL-CIO (Dec. 2, 2013) (``AFL-CIO
I''); American Federation of State County and Municipal Employees
(Nov. 27, 2013) (``AFSCME''); Amalgamated Bank (Nov. 25, 2013)
(``Amalgamated''); Bricklayers & Trowel Trades International Pension
Fund (Nov. 27, 2013) (``Bricklayers International''); California
State Teachers' Retirement System (Dec. 2, 2013) (``CalSTRS'');
Calvert Investments (Dec. 5, 2013) (``Calvert''); Chevy Chase Trust
(Nov. 25, 2013) (``Chevy Chase Trust''); Corporate Governance (Nov.
25, 2013) (``CorpGov.net''); Form Letter C; Form Letter D; Form
Letter E; Form Letter F; Laborers' International Union of North
America (Oct. 10, 2013) (``LIUNA''); Local Authority Pension Fund
Forum (Nov. 10, 2013) (``LAPFF''); New York State Comptroller (Nov.
27, 2013) (``NY State Comptroller''); Pax World Management LLC (Oct.
10, 2013) (``Pax World Funds''); Public Citizen (Nov. 26, 2013)
(``Public Citizen I''); The Forum for Sustainable and Responsible
Investment (Dec. 2, 2013) (``US SIF''); Trillium Asset Management,
LLC (Dec. 2, 2013) (``Trillium I''); Trillium Asset Management, LLC
(Jul. 31, 2014) (``Trillium II''); and UAW Retirement Medical
Benefits Trust (Nov. 21, 2013) (``UAW Trust'').
    \18\ To facilitate public input on rulemaking required by the
Dodd-Frank Act, we provided a series of email links, organized by
topic, on our Web site at http://www.sec.gov/spotlight/regreformcomments.shtml, so that the public could provide comments
before we proposed a rule. The comments relating to Section 953(b)
are located at http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml (``Pre-Proposing Release
Web site''). Comments that we received after we published the
Proposing Release are located at http://www.sec.gov/comments/s7-07-13/s70713.shtml. Our references to comment letters refer to the
comments on the proposal unless otherwise specified.
    \19\ See, e.g., letters from CtW Investment Group (Jun. 20,
2011) (``CtW Investment Group pre-proposal letter) and Steven Towns
(Feb. 6, 2012) (``S. Towns pre-proposal letter).
    \20\ We note that some commenters contended that the pay ratio
disclosure is intended to publicly ``shame'' registrants concerning
the size of the disparity between their CEO's compensation and their
typical worker's compensation. See, e.g., letters from The Honorable
Carolos Cardozo Campbell, Former Assistant Secretary of Commerce for
Economic Development (Nov. 27, 2013) (``Former Assistant Secretary
Campbell''); Center on Executive Compensation (Jul. 6, 2015) (``COEC
III''); Hyster-Yale Materials Handling, Inc. (Dec. 2, 2013)
(``Hyster-Yale''); NACCO Industries, Inc. (Dec. 2, 2013)
(``NACCO''); and U.S. Chamber of Commerce (Dec. 2, 2013) (``Chamber
I''). As discussed above, we have reached a different conclusion
based on principles of statutory construction and have taken no such
objective into account in framing the rule. In crafting the final
rule, we have sought to carefully tailor the pay ratio disclosure
requirement so that it provides shareholders with a company-specific
metric that is relevant and useful to their say-on-pay voting.
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    Consistent with this understanding of the Congressional purpose of
Section 953(b), we believe the final pay ratio rule should be designed
to allow shareholders to better understand and assess a particular
registrant's compensation practices and pay ratio disclosures rather
than to facilitate a comparison of this information from one registrant
to another.\21\ As we noted in the Proposing Release, we do not believe
that precise conformity or comparability of the pay ratio across
companies is necessarily achievable given the variety of factors that
could cause the ratio to differ. Consequently, we believe the primary
benefit of the pay ratio disclosure is to provide shareholders with a
company-specific metric that they can use to evaluate the PEO's
compensation within the context of their company.
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    \21\ See, e.g., letters from CalSTRS, LAPFF, RPMI Railpen
Investments (Dec. 2, 2013) (``RPMI''), Rep. Keith Ellison et al.
(Dec. 2, 2013) (``Rep. Ellison et al. I''), Rep. Keith Ellison et
al. (Mar. 17, 2015) (``Rep. Ellison et al. II''), and Sen. Robert
Menendez et al. (Dec. 16, 2014) (``Sen. Menendez et al. II'').
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    On the other hand, some commenters asserted that the pay ratio
disclosure would not provide meaningful or material information to
shareholders in making voting or investment decisions.\22\ In support
of this contention, some of these commenters cited studies
demonstrating that shareholders are not interested in this
information,\23\ some commenters cited shareholder votes indicating a
high level of support for executive pay and little support for
shareholder proposals advocating for pay ratio disclosure,\24\

and some commenters contended that pay ratio disclosure would confuse
shareholders because they would rely on it without fully considering a
company's detailed narrative disclosures.\25\ Notwithstanding the
disagreement among commenters on the value of the pay ratio disclosure,
in adopting the final rule we have sought to implement Congress's
apparent determination that the pay ratio disclosure would be useful to
shareholders.
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    \22\ See, e.g., letters from James J. Angel, Ph.D., CFA,
Visiting Associate Professor, The Wharton School, University of
Pennsylvania (Nov. 22, 2013) (``Prof. Angel''); Avery Dennison
Corporation (Nov. 26, 2013) (``Avery Dennison''); Bill Barrett
Corporation (Dec. 2, 2013) (``Bill Barrett Corp.''); Business
Roundtable (Dec. 2, 2013) (``Business Roundtable I''); Center on
Executive Compensation (Dec. 2, 2013) (``COEC I''); Center on
Executive Compensation (Sep. 26, 2014) (``COEC II''); COEC III;
Hyster-Yale; Mercer, Inc. (Dec. 2, 2013) (``Mercer I''); NACCO; and
Pearl Meyer and Partners (Dec. 2, 2013) (``PM&P'').
    \23\ See, e.g., letters from Chamber I (citing the Center for
Audit Quality's 7th annual Main Street Investor Survey, which ranked
CEO compensation last on the list of factors used by shareholders to
make investment decisions, with only 16% saying it was essential to
their decision); COEC I (acknowledging that, while some literature
focuses on pay disparities among employees with comparable jobs, the
study frequently cited for the impact of disparities on
collaboration, ``Pay Disparities Within Top Management Groups:
Evidence of Harmful Effects on Performance of High-Technology
Firms'' by Phyllis Siegel and Donald C. Hambrick, concerns executive
pay and pay disparities among top executives, it does not discuss
pay disparities between the CEO and median employee), and
International Bancshares Corporation (Nov. 25, 2013) (``IBC'')
(citing a Wall Street Journal article that says only 10% of
individuals polled believed pay ratio would have value to
shareholders) .
    \24\ See, e.g., letters from Chamber I (indicating that the
average support for management compensation in public companies was
90.1%, and 97.6% of companies received majority shareholder support
for executive compensation) and COEC I (noting that, since 2010,
there have been 14 shareholder proposals advocating that companies
provide pay ratio disclosure, and those proposals averaged 93%
opposition from shareholders, with none receiving at least 10%
support from shareholders).
    \25\ See, e.g., letters from Bill Barrett Corp., COEC I,
National Investor Relations Institute (Oct. 17, 2013) (``NIRI''),
and Semtech Corporation (Nov. 27, 2013) (``Semtech''). Two of these
commenters suggested specifically that we should undertake an
education effort to help shareholders understand the limits of pay
ratio disclosure and remind them that they can find other
information, such as an executive summary of the Compensation
Discussion and Analysis section of a company's proxy statement,
which can provide a more complete understanding of corporate pay
practices. See letters from NIRI and Semtech.
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    We also recognize that many commenters raised significant concerns
about the costs of providing the required pay ratio disclosure. In
implementing the statutory requirements, we have exercised our
exemptive authority and provided flexibility in a manner that we expect
will reduce costs and burdens for registrants, while preserving what we
perceive to be the purpose and intended benefits of the disclosure
required by Section 953(b).\26\ The significant cost estimates of the
pay ratio disclosure submitted by some commenters support our view that
some accommodations are appropriate.\27\ The final rule, therefore,
both maintains the flexibility and accommodations from the proposal
(such as permitting the use of statistical sampling and a consistent
compensation measure to identify the median employee and reasonable
estimates to calculate total compensation) and provides additional
flexibility as follows: The final rule takes a flexible approach to the
methodology a registrant can use to identify its median employee and
calculate the median employee's annual total compensation; provides a
de minimis exemption for non-U.S. employees and an exemption for
registrants where, despite reasonable efforts to obtain or process the
information necessary for compliance with the final rule, they are
unable to do so without violating a foreign jurisdiction's laws or
regulations governing data privacy; permits cost-of-living adjustments
for the compensation of employees in jurisdictions other than the
jurisdiction in which the PEO resides so that the compensation is
adjusted to the cost of living in the jurisdiction in which the PEO
resides; gives registrants the ability to make the median employee
determination only once every three years and to choose as a
determination date any date within the last three months of a
registrant's fiscal year; and provides transition periods for new
registrants, registrants engaging in business combinations or
acquisitions, and registrants that cease to be smaller reporting
companies or emerging growth companies.
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    \26\ We are mindful of the principle that ``no legislation
pursues its purposes at all costs,'' Rodriguez v. United States, 480
U.S. 522, 525-26 (1987), and we believe that the accommodations that
we have included within the final rule reflect an appropriate
balance.
    \27\ The potential costs arising from the requirements of
Section 953(b), as well as the potential costs relating to the final
rule, are discussed in detail below in Section III of this release
under the heading ``Economic Analysis''.
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    Overall, we think the final rule will provide investors with
information Congress intended them to have to assess the compensation
and accountability of a company's PEO while seeking to limit the costs
and practical difficulties of providing the disclosure.
    Finally, we recognize the possibility that, based on the specific
facts and circumstances of a registrant's work force and corporate
operations, the pay ratio disclosure may warrant additional disclosures
from a registrant to ensure that, in the registrant's view, the pay
ratio disclosure is a meaningful data point for investors when making
their say-on-pay votes. While Congress appears to have believed that
the pay ratio disclosure would be a useful data point, we recognize
that its relative usefulness--taken alone without accompanying
disclosures to provide potentially important context--may vary
considerably. Rather than prescribe a one-size-fits-all catalogue of
additional disclosures that registrants should provide to put the pay
ratio disclosure in context, we believe it is the better course to
provide registrants the flexibility to provide additional disclosures
that they believe will assist investors' understanding of the meaning
of pay ratio disclosure when making say-on-pay votes. In this way, we
believe we can best fulfill Congress's directive in Section 953(b)
while avoiding unnecessary costs and complexities that might result
from mandating additional disclosures.

B. Summary of the Proposed Rule

    In September 2013, we proposed a new rule to implement Section
953(b) of the Dodd-Frank Act.\28\ The proposal's goal was to implement
the statutory directive, while minimizing costs. In response to public
comments we received prior to the proposal about the significant
potential costs of complying with this requirement, the proposed rule
would allow registrants flexibility in developing the disclosure
required by the statute. We recognized that a one-size-fits-all
approach would not be appropriate, given the wide range of affected
registrants and the disparate burdens that would be imposed on them
based on such factors as their business types and the complexity of
their payroll systems. We therefore proposed to implement Section
953(b) in a manner that we believed would lower the cost of compliance
while remaining consistent with the requirements of Section 953(b).
---------------------------------------------------------------------------

    \28\ See Proposing Release.
---------------------------------------------------------------------------

    The proposed rule would require companies to disclose the median of
the annual total compensation of all its employees except the PEO, the
annual total compensation of its PEO, and the ratio of the two amounts.
The proposed rule would not have specified a single calculation
methodology for identifying the median employee. Instead, it would
permit registrants to select a methodology for identifying the median
employee that was appropriate to the size and structure of their
business and the way they compensate employees. Under the proposal,
registrants could have chosen to identify the median employee by
analyzing their full employee population or by using statistical
sampling or another reasonable method. Also, to identify the median,
registrants could have used ``total compensation,'' as defined in our
existing rules, namely Item 402(c)(2)(x), or any consistently applied
compensation measure, such as information derived from tax and/or
payroll records. The proposed rule would not prescribe a particular
methodology or specific computation parameters.
    Once the median employee was identified, the proposed rule would
require the registrant to calculate the annual total compensation for
that median employee in accordance with the definition of ``total
compensation'' set forth in Item 402(c)(2)(x), which requires companies
to provide extensive compensation information for the PEO and other
named executive officers. ``Total compensation'' under Item
402(c)(2)(x) is not ordinarily calculated for all employees. The
proposed rule, therefore, would permit registrants to use reasonable
estimates in calculating

any element of total compensation and in calculating the annual total
compensation of the median employee. Also, the proposed rule would
define ``annual total compensation'' to mean total compensation for the
last completed fiscal year, which would be consistent with our existing
executive compensation disclosure requirements.
    Under the proposal, if a registrant used a compensation measure
other than annual total compensation to identify the median employee,
it would be required to disclose the compensation measure it used.
Also, the registrant would be required to briefly describe and
consistently apply any methodology it used to identify the median and
any material assumptions, adjustments, or estimates used to identify
the median employee or determine total compensation or any elements of
total compensation for that employee or the PEO, and the registrant
would need to clearly identify any amounts it estimated. Finally,
registrants would be permitted, but not required, to supplement their
disclosure with a narrative discussion or additional ratios if they
chose to do so.
    Section 953(b) does not define the term ``employee.'' The proposed
rule would define that term, for purposes of pay ratio disclosure, to
include any individual employed by the registrant or any of its
subsidiaries as of the last day of the registrant's last completed
fiscal year. The proposed definition would encompass any full-time,
part-time, seasonal, or temporary employees of the registrant or any of
its subsidiaries, including any non-U.S. employee. Also, a registrant
would be permitted, but not required, to annualize the total
compensation for a permanent employee who was employed at year-end but
did not work for the entire year. In contrast, full-time equivalent
adjustments for part-time employees, annualizing adjustments for
temporary and seasonal employees, and cost-of-living adjustments for
non-U.S. employees would not be permitted.
    Also, under the proposal, registrants would be required to provide
the proposed pay ratio disclosure in registration statements, proxy and
information statements, and annual reports required to include
executive compensation information as set forth under Item 402.
Registrants, however, would not be required to provide their pay ratio
information in reports that did not include Item 402 executive
compensation information, such as current and quarterly reports.
Additionally, registrants would not be required to update their annual
pay ratio disclosure until they filed their annual report on Form 10-K
for their last completed fiscal year or, if later, their definitive
proxy or information statement for their next annual meeting of
shareholders (or written consents in lieu of such a meeting).
Registrants, however, would still be required to file their pay ratio
information no later than 120 days after the end of the last fiscal
year as provided in General Instruction G(3) of Form 10-K.\29\
---------------------------------------------------------------------------

    \29\ 17 CFR 249.310.
---------------------------------------------------------------------------

    The proposal would provide a transition period for newly public
companies. For these companies, initial compliance would be required
with respect to compensation for the first fiscal year commencing on or
after the date the company became subject to the reporting
requirements. Also, as provided by the Jumpstart Our Business Startups
Act (``JOBS Act''),\30\ the proposed rule would not apply to emerging
growth companies. Finally, the proposed rule would not apply to smaller
reporting companies or foreign private issuers.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78c(a).
---------------------------------------------------------------------------

C. Summary of the General Comments on the Proposed Rule

    In the Proposing Release, we requested comment on many aspects of
the proposed rule, including whether the proposed rule would address
sufficiently the practical difficulties of data collection, whether
other alternative approaches consistent with Section 953(b) could
provide the potential benefits of pay ratio information at a lower
cost, and whether the proposed flexible approach would appropriately
implement Section 953(b). We received a large volume of comment letters
from a variety of stakeholders. We received more than 287,400 comment
letters, including over 1,540 individual letters that reflected a wide
range of views concerning the proposed rule and the potential costs and
benefits associated with its requirements. We received comments that
addressed the proposed rule as a whole (including commenters that
supported or opposed the rule in its entirety) as well as comments
directed toward particular requirements of the rule, such as its
application to foreign, part-time, temporary, and seasonal employees.
In this section, we summarize the general comments on the proposal as a
whole. Comments on particular provisions of the proposed rule are
addressed as part of the discussion of each specific provision of the
rule in Section II below.
    Of the over 287,400 total comment letters we received, over 285,900
were form letters regarding the proposed rule. There were 12 types of
form letters,\31\ and these letters either supported our proposed rule
or supported the idea of adopting a rule based on Section 953(b)
without specifically referencing the proposal.
---------------------------------------------------------------------------

    \31\ We have received 285,936 form letters. Form Letter A
(19,965 letters) supporting a strong rule generally; Form Letter B
(12,942 letters) supporting a strong rule generally; Form Letter C
(20 letters) supporting the Proposed Rule; Form Letter D (5,428
letters) supporting the Proposed Rule; Form Letter E (1,688 letters)
supporting the Proposed Rule; Form Letter F (1,167 letters)
supporting the Proposed Rule; Form Letter G (15,304 letters)
supporting the Proposed Rule; Form Letter H (70,338 letters)
supporting a rule generally; Form Letter I (36,299 letters)
supporting the adoption of a rule; Form Letter J (75,333 letters)
supporting a strong rule; Form Letter K (15,247 letters) supporting
a strong rule generally; and Form Letter L (32,275 letters)
supporting a rule.
---------------------------------------------------------------------------

    For example, one form letter asserted that the pay ratio disclosure
is material to investors because high pay disparities can impair
employee morale and productivity and have negative consequences on a
company's overall performance and because investors will have a
``valuable additional'' measure for evaluating executive compensation,
including when making say-on-pay voting decisions.\32\ Also, the letter
supported the proposed rule's inclusion of all employees, including
non-U.S. and part-time employees, and its flexibility in identifying
the median employee. Other form letters also indicated that the pay
ratio disclosure is material to investors,\33\ including some that
noted that the disclosure would aid them in making voting
decisions.\34\
---------------------------------------------------------------------------

    \32\ See Form Letter C.
    \33\ See letters from Form Letter A, Form Letter B, Form Letter
D, Form Letter E, Form Letter F, and Form Letter G.
    \34\ See letters from Form Letter D (``Pay ratio disclosure will
help investors evaluate CEO pay levels when voting on executive
compensation matters. The ratio of the CEO-to-worker pay is a
valuable metric for investors, because it places CEO pay levels into
a broader perspective.''), Form Letter E (``Pay ratio disclosure
will help investors evaluate CEO pay levels when voting on executive
compensation matters. The ratio of the CEO-to-worker pay is a
valuable tool for investors in evaluating and voting on CEO pay;
scrutinizing the performance of Boards of Directors; and,
identifying possible investment risks.''), Form Letter F (``A pay
ratio disclosure will help investors better evaluate CEO pay levels
when voting on executive compensation matters. Compensation experts
have found that there is a correlation between high CEO pay and poor
performance. By mandating disclosure of the ratio of CEO to worker
pay, inequities will be become more transparent.'').
---------------------------------------------------------------------------

    Additionally, the vast majority of the over 1,500 unique comment
letters were from individual commenters who, like those submitting the
form letters, supported the proposed rule or supported the idea of
adopting a rule based on Section 953(b) without specifically
referencing the proposal. Most of these individuals supported the

proposed rule or the pay ratio disclosure because they believed it
would:
     Inform shareholders about executive compensation matters,
especially with regard to say-on-pay voting; \35\
---------------------------------------------------------------------------

    \35\ See, e.g., letters from D.A. Alexander (Nov. 22, 2013)
(``Alexander''), Jean M. Blair (Sep. 25, 2013) (``J. Blair''), Cathy
Clemens (Sep. 25, 2013) (``Clemens''), Beth Finchler (Sep. 27, 2013)
(``Finchler''), Amy Hevron (``Sep. 28, 2013) (``Hevron''), Emanuel
Jacobowitz (Sep. 24, 2013) (``Jacobowitz''), Rachel LaBruyere (Oct.
17, 2013) (``LaBruyere''), Gabrielle Loperfido (Sep. 25, 2013)
(``Loperfido''), Carol Nix (Sep. 24, 2013) (``Nix''), Bonnie
Overcott (Jan. 4, 2014) (``Overcott''), Lynn Reilly (Sep. 22, 2013)
(``Reilly''), Kendall Simmons (Sep. 24, 2013) (``Simmons''), Dory
Storms (Sep. 24, 2013) (``Storms''), Amy Sullivan-Greiner (Sep. 24,
2013) (``Sullivan-Greiner''), Jackie Tortora (Oct. 21, 2013)
(``Tortora''), and Bryan Taylor (Nov. 21, 2013) (``Taylor'').
---------------------------------------------------------------------------

     demonstrate a company's focus on its long-term health as
opposed to short-term gains that benefit its executives at the expense
of its shareholders; \36\
---------------------------------------------------------------------------

    \36\ See, e.g., letters from Anonymous (Dec. 1, 2013)
(``Anonymous''), Eric C. Gade (Sep. 18, 2013) (``Gade''), Linda
Kranen (Oct. 20, 2013) (``Kranen''), Alyce Lomax (Dec. 2, 2013)
(``Lomax''), Holly Schroeder (Nov. 5, 2013) (``Schroeder''), Erika
Skornia-Olsen (Nov. 5, 2013) (``Skornia-Olsen''), and Calvin Vu
(Oct. 26, 2013) (``Vu'').
---------------------------------------------------------------------------

     discourage the pay practices that led to the 2008
financial crisis; \37\
---------------------------------------------------------------------------

    \37\ See, e.g., letters from Lisbeth Caccese (Sep. 25, 2013)
(``Caccese''), Hope Carr (Sep. 24, 2013) (``Carr''), Sarah McKee
(Sep. 24, 2013) (``McKee''), Thomas Motes (Sep. 24, 2013)
(``Motes''), Karl David Reinhardt (Sep. 24, 2013) (``Reinhardt''),
Cynthia Sommer (Sep. 24, 2013) (``Sommer''), Cody Spann (Sep. 24,
2013) (``Spann''), Kathy Van Dame (Sep. 24, 2013) (``Van Dame''),
Marietta Whittlesey (Sep. 24, 2013) (``Whittlesey''), Susan Williams
(Sep. 24, 2013) (``S. Williams''), Mary M. Williamson (Sep. 24,
2013) (``M. Williamson''), and Robin Wittrock (Sep. 24, 2013)
(``Wittrock'').
---------------------------------------------------------------------------

     reduce the inequitable wealth distribution in the U.S.;
\38\ and
---------------------------------------------------------------------------

    \38\ See, e.g., letters from Paul Cohen (Oct. 3, 2013)
(``Cohen''), Alan Harris (Sep. 19, 2013) (``Harris''), Liz A. King
(Sep. 23, 2013) (``L. King''), Ben Leet (Oct. 27, 2013) (``Leet''),
Laurie H. Norton (Sep. 18, 2013) (``Norton''), Debbie Notkin (Sep.
24, 2013) (``Notkin''), and Desmonde Printz (Sep. 19, 2013)
(``Printz'').
---------------------------------------------------------------------------

     highlight potential problems in a company due to the
negative impact of a high pay ratio on employee morale and
productivity.\39\
---------------------------------------------------------------------------

    \39\ See, e.g., letters from Daniel Grossman (Nov. 8, 2013)
(``Grossman''), Peter Linton (Nov. 17, 2013) (``Linton''), Michael
R.K. Mudd (Nov. 3, 2013) (``Mudd''), Vivian Rosati (Nov. 6, 2013)
(``Rosati''), and Walden Asset Management (Nov. 15, 2013)
(``Walden'').
---------------------------------------------------------------------------

    As discussed in greater detail below, many commenters supported the
proposed rule's overall flexibility.\40\ Some commenters asserted that
the permitted flexibility would lessen the costs and burdens of the
proposed rule without reducing the rule's benefits,\41\ be consistent
with the directives of Section 953(b),\42\ and have minimal effect on
the pay ratio disclosure.\43\ Other commenters, however, opposed the
proposed rule because they believed it provided too much flexibility,
which they asserted would allow registrants to manipulate the ratio in
their favor,\44\ decrease the ratio's utility (especially for comparing
the ratios of different companies),\45\ and still lead to high
costs.\46\ One commenter suggested that the final rule consist of
little more than ``a simple restatement'' of Section 953(b), doing
``little more than rearranging a few commas and adding a word or two to
the statutory language.'' \47\
---------------------------------------------------------------------------

    \40\ See, e.g., letters from Prof. Angel; Aon Hewitt (Dec. 3,
2013) (``Aon Hewitt''); B[acirc]tirente, Canada et al. (Nov. 28,
2013) (``B[acirc]tirente et al.''); Best Buy Co., Inc., et al. (Dec.
17, 2013) (``Best Buy et al.''), CalSTRS; Marcia K. Campbell,
Trustee, Illinois Teachers Retirement System (Nov. 21, 2013)
(``Trustee Campbell''); Capital Strategies Consulting, Inc. (Dec. 2,
2013) (``Capital Strategies''); Center for Effective Government
(Nov. 26, 2013) (``CEG''); Cummins Inc. (Dec. 2, 2013) (``Cummins
Inc.''); CUPE Employees' Pension Plan (Nov. 21, 2013) (``CUPE'');
Davis Polk & Wardwell LLP (Dec. 4, 2013) (``Davis Polk,''); Ernst &
Young LLP (Dec. 2, 2013) (``E&Y''); First Affirmative Financial
Network (Nov. 12, 2013) (``First Affirmative''); Fonds de
solidarit[eacute] FTQ (Nov. 27, 2013) (``FS FTQ''); Freeport-McMoRan
Copper & Gold Inc. (Dec. 2, 2013) (``Freeport-McMoRan''); Interfaith
Center on Corporate Responsibility (Oct. 17, 2013) (``ICCR'');
International Brotherhood of Teamsters (Oct. 9, 2013)
(``Teamsters''); International Union of Bricklayers and Allied
Craftworkers, Administrative District Council 1 of Illinois (Nov.
15, 2013) (``IL Bricklayers and Craftworkers Union''); International
Union of Bricklayers and Allied Craftworkers, Local 5 New York (Nov.
15, 2013) (``NY Bricklayers and Craftworkers Union''); Intel
Corporation (Nov. 27, 2013) (``Intel''); Johnson and Johnson (Dec.
4, 2013) (``Johnson & Johnson''); Marco Consulting Group (Nov. 15,
2013) (``Marco Consulting''); McMorgan & Company LLC (Dec. 2, 2013)
(``McMorgan & Co.''); Mercer, Inc. (Dec. 2, 2013) (``Mercer I'');
Meridian Compensation Partners, LLC (Dec. 2, 2013) (``Meridian'');
Microsoft Corporation (Dec. 4, 2013) (``Microsoft''); Nathan
Cummings Foundation (Nov. 21, 2013) (``Cummings Foundation'');
Network for Sustainable Financial Markets (Dec. 2, 2013) (``NSFM'');
New York City Bar Association (Dec. 5, 2013) (``NYC Bar''); Novara
Tesija, PLLC (Nov. 6, 2013) (``Novara Tesija''); Organizational
Capital Partners (Nov. 24, 2013) (``OCP''); Oxfam America (Oct. 16,
2013) (``Oxfam''); PGGM (Dec. 2, 2013) (``PGGM''); Public Citizen I;
Public School Teachers' Pension and Retirement Fund of Chicago (Nov.
25, 2013) (``Chicago Teachers Fund''); Quintave (Dec. 1, 2013)
(``Quintave''); Rep. Ellison et al. II, SEIU Master Trust (Dec. 2,
2013) (``SEIU''); Sen. Menendez et al. II, Socially Responsive
Financial Advisors/First Affirmative Financial Network (Oct. 11,
2013) (``Socially Responsive Financial Advisors''); Society of
Corporate Secretaries and Governance Professionals (Dec. 16, 2013)
(``Corporate Secretaries''); Trillium I, UAW Trust; Vectren
Corporation (Dec. 2, 2013) (``Vectren Corp.''); Washington State
Investment Board (Nov. 26, 2013) (``WA State Investment Board'');
and WorldatWork (Dec. 2, 2013) (``WorldatWork I'').
    \41\ See, e.g., letters from American Bar Association (Mar. 7,
2014 (``ABA''), AFSCME, Chris Barnard (Nov. 6, 2013) (``Barnard''),
Bricklayers International, Council of Institutional Investors (Nov.
6, 2013) (``CII''), Kenneth Fowler (Nov. 3, 2013) (``Fowler''),
LIUNA, Walter Mirczak (Oct. 21, 2013) (``Mirczak''), PNC Financial
Services Group, Inc. (Dec. 2, 2013) (``PNC Financial Services''),
Sen. Menendez et al. II, US SIF, Vivient Consulting LLC (Dec. 2,
2013) (``Vivient''), and Walden.
    \42\ See, e.g., letters from Domini Social Investments LLC (Nov.
27, 2013) (``Domini'') and PM&P.
    \43\ See, e.g., letters from Capital Strategies and WorldatWork
I.
    \44\ See, e.g., letters from Sherry Bupp (Oct. 4, 2013)
(``Bupp''), Chris Corayer (Oct. 8, 2013) (``Corayer''), Russell J.
Fedewa (Oct. 4, 2013) (``Fedewa''), Eleanor J. Fox (Oct. 3, 2013)
(``Fox''), Gary G. Friend II (Oct. 3, 2013) (``Friend''), Charles
Grotzke (Oct. 3, 2013) (``Grotzke''), Bruce Hlodnicki (Sep. 19,
2013) (``Hlodnicki''), Karla Kizzort (Oct. 4, 2013) (``Kizzort''),
Christine Maly (Sep. 25, 2013) (``Maly''), B. A. Petricoin (Oct. 3,
2013) (``Petricoin''), and Jasmine Van Pelt (Oct. 4, 2013) (``Van
Pelt'').
    \45\ See, e.g., letters from Amundi Asset Management (Nov. 28,
2013) (``Amundi''); British Columbia Investment Management
Corporation (Dec. 2, 2013) (``BCIMC''); Paul Ciatto (Sep. 26, 2013)
(``Ciatto''); Paul Glenn (Oct. 3, 2013) (``Glenn''); IBC; Karl T.
Muth, Lecturer in Economics and Public Policy, Northwestern
University (Sep. 24, 2013) (``Prof. Muth''); and NIRI.
    \46\ See, e.g., letters from ABA (stating that registrants will
still incur significant costs even with the ability to select a
methodology) and Financial Services Roundtable (Dec. 2, 2013)
(``FSR'').
    \47\ See letter from Public Citizen (Jul. 6, 2015) (``Public
Citizen II'').
---------------------------------------------------------------------------

    A number of commenters were critical of the proposed rule or
particular aspects of it, as discussed in greater detail below. Some
commenters stated specifically that they opposed the proposed rule or
Section 953(b)'s requirement that we adopt any pay ratio rule. Some of
these commenters asserted that the rule would not provide shareholders
with material information.\48\ Other commenters noted that the pay
ratio disclosure would not allow for meaningful comparisons among
registrants.\49\ One commenter asserted that Section 953(b) and the
proposed rule violate the First Amendment.\50\
---------------------------------------------------------------------------

    \48\ See, e.g., letters from American Benefits Council (Jan. 9,
2014) (``American Benefits Council''); Mark Appleby (Oct. 10, 2013)
(``Appleby''); Avery Dennison; Sean Bearly (Nov. 7, 2013)
(``Bearly''); Joe Beltran (Nov. 21, 2013) (``Beltran''); Renato
Berzolla (Nov. 21, 2013) (``Berzolla''); Former Assistant Secretary
Campbell; Jonnie Dodge (Nov. 7, 2013) (``Dodge''); FSR; Hyster-Yale;
IBC (supporting Congressional efforts to repeal of Section 953(b));
Jim Meyer (Oct. 18, 2013) (``Meyer''); NACCO; National Association
of Manufacturers (Dec. 2, 2013) (``NAM I'') (supporting
Congressional efforts to repeal of Section 953(b)); NAM II (same);
National Retail Federation (Nov. 26, 2013) (``NRF'') (expressing
``concern'' with the Proposed Rule); Elaine St. Miller (Nov. 21,
2013) (``St. Miller''); Towers Watson (Dec. 2, 2013) (``Towers
Watson'') (discussing ``reservations'' about a pay ratio rule); and
WorldatWork I.
    \49\ See, e.g., letters from ABA (stating that ``the required
disclosure will have little utility to investors other than to
enable them to see the ratio of principal executive to employee
compensation for a specific registrant from year to year'') and COEC
I.
    \50\ See letter from COEC I. We do not believe that the pay
ratio disclosure that Congress has mandated is inconsistent with the
First Amendment. We believe that, in passing Section 953(b),
Congress determined that the disclosure advances an important
government interest, and we have carefully tailored the disclosure
through this rulemaking to further that interest. Moreover,
consistent with Congress's apparent purpose, commenters have stated
that the pay ratio disclosure would be useful to shareholders in
making say-on-pay votes. Accordingly, we believe the disclosure fits
comfortably within the class of securities law disclosures that have
been deemed to be consistent with the First Amendment. See Dun &
Bradstreet, Inc. v. Greenmoss Builders, Inc., 472 U.S. 749, 758, n.5
(1985) (citing Ohralik v. Ohio State Bar Ass'n, 436 U.S. 447, 456
(1978)). See also SEC v. Wall Street Publ'g Inst., 851 F.2d 365, 373
(D.C. Cir. 1988).

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

    A few commenters stated that we should not adopt a final rule until
we demonstrate that the rule is consistent with our mission and fully
explain the benefits and costs of the rule.\51\ In this regard, one of
these commenters criticized us for not making a statement about our
precise goals or objectives for the rule, especially when Congress
failed to hold hearings on Section 953(b).\52\ The commenter also
stated that, without this statement and further explanations as to why
we rejected less costly options, commenters cannot be fully informed
and provide constructive comments. Several commenters argued that the
proposed rule would be very costly to implement though many of these
did not provide specific cost estimates.\53\ A majority of these
commenters indicated that navigating their payroll systems and creating
a single database of all their employees' compensation would be the
most costly aspect of the proposed rule--especially with respect to
non-U.S. employees.\54\ Commenters also mentioned other activities that
would contribute to the costs, including data privacy compliance,
foreign exchange calculations, data testing, establishing corporate
guidelines, obtaining legal services, auditing results, public
relations tasks, and litigation risk.\55\ As discussed below, some
commenters provided specific cost and burden estimates about the
proposed rule to demonstrate generally that it would impose high costs
and burdens on registrants.\56\ In addition, some commenters argued
that the pay ratio disclosure would impose a burden on competition or
would cause competitive disadvantages for particular types of
companies.\57\ Our analysis of the costs of the final rule, as well as
an assessment of its impact on competition, is contained in the
Economic Analysis section below.
---------------------------------------------------------------------------

    \51\ See, e.g., letters from Chamber I and Technical
Compensation Advisors (Dec. 2, 2013) (``TCA.'').
    \52\ See letter from Chamber I.
    \53\ See, e.g., letters from Aon Hewitt; Business Roundtable I;
Chesapeake Utilities Corporation (Dec. 17, 2013) (``Chesapeake
Utilities''); Garmin, Ltd. (Nov. 11, 2013) (``Garmin''); IBC; KBR,
Inc. (Nov. 26, 2013) (``KBR''); McGuireWoods LLP (Nov. 7, 2013)
(``McGuireWoods''); National Association of Corporate Dealers (Dec.
1, 2013) (``NACD''); NAM I; NAM II; NIRI; PNC Financial Services;
and Semtech.
    \54\ See, e.g., letters from Aon Hewitt: Avery Dennison;
Business Roundtable I; Chamber I; COEC I; Corporate Secretaries;
Eaton (Dec. 2, 2013) (``Eaton''); FEI Company (Oct. 16, 2013)
(``FEI''); FuelCell Energy, Inc. (Nov. 8, 2013) (``FuelCell
Energy''); IBC; KBR; NACCO; NAM I; NAM II; and NIRI.
    \55\ See, e.g., letters from Aon Hewitt, Corporate Secretaries,
and McGuireWoods.
    \56\ See, e.g., letters from ASA; Avery Dennison; COEC I; COEC
II; Corporate Secretaries; Dover Corporation (Nov. 26, 2013)
(``Dover Corp.''); Eaton; Exxon Mobil Corporation (Dec. 2, 2013)
(``ExxonMobil''); FEI; FuelCell Energy; General Mills, Inc. (Dec. 2,
2013) (``General Mills''); Hyster-Yale; Intel; NACCO; NRF; and U.S.
Chamber of Commerce (May 22, 2014) (``Chamber II'').
    \57\ See, e.g., letters from ABA; Prof. Angel; Former Assistant
Secretary Campbell; Chamber I; COEC I; Corporate Secretaries; IBC;
NAM I; NAM II; and Korok Ray, Assistant Professor of Accounting, The
George Washington University (Dec. 2, 2013) (``Prof. Ray'').
---------------------------------------------------------------------------

    A number of commenters recommended that we take additional
preliminary steps before adopting a final rule. Some commenters
requested that we extend the proposed rule's comment period.\58\
Another commenter suggested that we re-solicit comments after
publishing the concerns it expressed.\59\ A few commenters advocated
that we involve stakeholders in the rulemaking process by holding a
roundtable, engaging in negotiated rulemaking, and/or conducting pilot
programs.\60\ One of these commenters also recommended submitting the
proposed rule to the Office of Information and Regulatory Affairs for
an enhanced regulatory review.\61\ A few commenters suggested that we
defer adopting a final rule under Section 953(b) until we adopt other
rules required under the Dodd-Frank Act, particularly the pay-versus-
performance rule mandated by Section 953(a).\62\
---------------------------------------------------------------------------

    \58\ See, e.g., letters from American Insurance Association, et
al. (Oct. 9, 2013) (``AIA et al.''); Bill Barrett Corp.; COEC I;
IBC; NIRI; and WorldatWork I.
    \59\ See letter from Chamber I.
    \60\ See, e.g., letters from Chamber I, Chamber II, IBC, and
NIRI.
    \61\ See letter from Chamber II.
    \62\ See, e.g., letters from Chamber I and WorldatWork I.
---------------------------------------------------------------------------

    As discussed above, members of the public interested in making
their views known were invited to submit comment letters in advance of
the official comment period for the proposed rule. In addition, we have
continued to review and consider all comment letters submitted during
and after the end of the comment period. Also, as discussed further in
the Economic Analysis section below, we have considered and analyzed
the numerous comments received regarding the costs and complexities of
the mandated disclosure and have taken them into account in the final
rule. Finally, we added to this rulemaking's public comment file
additional analyses by the Commission's Division of Economic and Risk
Analysis staff on the potential effects of excluding different
percentages of employees from the pay ratio calculation, and commenters
were expressly invited to comment on the analyses.
    This robust and public debate has informed us in developing our
final rule. Overall, we believe interested parties have had sufficient
opportunity to review the proposed rule, as well as the comment letters
submitted, and to provide views on the proposal and on the other
comment letters and data to inform our consideration of the final rule.
Accordingly, we do not believe it is necessary to solicit additional
public input before adopting the final rule.

D. Summary of Changes in the Final Rule

    The final rule we are adopting generally is consistent with the
proposed rule. After considering all of the comments received on the
proposal, however, and in particular, after considering specific
suggestions from commenters on alternatives that could help to mitigate
compliance costs and practical difficulties associated with the
proposed rule, we are adopting a number of revisions in the final rule.
We believe these revisions generally will preserve Congress's intent to
require the disclosure of information that reflects the ratio of the
PEO's compensation to the median employee's compensation while helping
to minimize the expected costs and unintended consequences of the
required disclosure. We summarize some of these changes here and
discuss them in greater detail in Section II, below.
1. Non-U.S. Employee Exemptions and Additional Permitted Disclosure
    We proposed that an ``employee'' would include any U.S. and non-
U.S. employee of a registrant. We acknowledged in the Proposing Release
that the inclusion of non-U.S. employees would raise compliance costs
for multinational companies, would introduce cross-border compliance
issues, could raise additional comparability concerns, and could have
an adverse impact on competition. We indicated, however, that the
inclusion of non-U.S. employees in the calculation of the median is
consistent with the ``all employees'' language of the statute.

    The final rule defines the term ``employee'' to include U.S.
employees and employees located in a jurisdiction outside the United
States (``non-U.S. employees'') of a registrant, as proposed. We
continue to believe that this is most consistent with the statutory
language of Section 953(b) and with the purpose of providing a company-
specific metric that shareholders can use to evaluate a registrant's
executive compensation. Including both U.S. and non-U.S. employees will
result in pay ratio disclosure that reflects the actual composition of
the registrant's workforce. Even assuming the statutory language could
be viewed as ambiguous on this issue, we also believe that this
approach is most consistent with the general nature of our disclosure
regime, which does not limit registrants' disclosure obligations only
to factors, events, or circumstances that exist in or take place within
the United States. For example, a registrant must disclose the PEO's
compensation whether or not the PEO actually works within the United
States.
    To help address concerns about compliance costs, and consistent
with the commenters' suggestions, the final rule provides two tailored
exemptions from the definition of ``employee,'' which otherwise
includes all of a registrant's U.S. and non-U.S. employees in the
median employee determination. First, the final rule provides an
exemption for circumstances in which foreign data privacy laws or
regulations make registrants unable to comply with the final rule.
Second, the final rule permits registrants to exempt non-U.S. employees
where these employees account for 5% or less of the registrant's total
U.S. and non-U.S. employees, with certain limitations.
    The Proposing Release acknowledged that data privacy laws or
regulations in various foreign jurisdictions could affect a
registrant's ability to gather the necessary data to identify its
median employee. We did not propose any accommodation to address this
concern, however, because we believed the flexibility of the proposed
rule would permit registrants to manage any potential costs arising
from these laws. In response to significant concerns expressed by a
number of commenters over cross-border compliance issues that may arise
from the pay ratio disclosure requirement, and consistent with
commenters' suggestions, the final rule permits registrants to exclude
from their determination of the median employee an employee who is
employed in a foreign jurisdiction in which the laws or regulations
governing data privacy are such that, despite its reasonable efforts to
obtain or process the information necessary for compliance with the
final rule, the registrant is unable to do so without violating such
data privacy laws or regulations.
    The registrant's reasonable efforts must include using or seeking
an exemption or other relief under any governing data privacy laws or
regulations. If a registrant excludes any non-U.S. employees in a
particular jurisdiction under this exemption, it must exclude all non-
U.S. employees in that jurisdiction, list the excluded jurisdictions,
identify the specific data privacy law or regulation, explain how
complying with the final rule violates such data privacy law or
regulation (including the efforts made by the registrant to use or seek
an exemption or other relief under such law or regulation), and provide
the approximate number of employees exempted from each jurisdiction
based on this exemption. In addition, the registrant must obtain a
legal opinion from counsel that opines on the inability of the
registrant to obtain or process the information necessary for
compliance with the final rule without violating that jurisdiction's
data privacy laws or regulations, including the registrant's inability
to obtain an exemption or other relief under any governing laws or
provisions.
    In addition to the data privacy exemption for non-U.S. employees,
the final rule includes a de minimis exemption for non-U.S. employees.
Under the final rule, if a registrant's non-U.S. employees account for
5% or less of its total employees, it may exclude all of those
employees when making its pay ratio calculations. In this circumstance,
however, if the registrant chooses to exclude any non-U.S. employees,
it must exclude all of them. If a registrant's non-U.S. employees
exceed 5% of the registrant's total U.S. and non-U.S. employees, it may
exclude up to 5% of its total employees who are non-U.S. employees. If
a registrant excludes any non-U.S. employees in a particular
jurisdiction, it must exclude all non-U.S. employees in that
jurisdiction. The registrant must also disclose the jurisdictions from
which its non-U.S. employees are being excluded, the approximate number
of employees excluded from each jurisdiction under the de minimis
exemption, the total number of its U.S. and non-U.S. employees
irrespective of any exemption (de minimis or data privacy), and the
total number of its U.S. and non-U.S. employees used for its de minimis
calculation.
    In calculating the number of non-U.S. employees that may be
excluded under the de minimis exemption, a registrant must count any
non-U.S. employee exempted under the data privacy exemption against the
availability. A registrant may exclude any non-U.S. employee that meets
the data privacy exemption, even if the number of excluded employees
exceeds 5% of the registrant's total employees. If, however, the number
of employees excluded under the data privacy exemption equals or
exceeds 5% of the registrant's total employees, the de minimis
exemption will not be available. Additionally, if the number of
employees excluded under the data privacy exemption is less than 5% of
the registrant's total employees, the registrant may use the de minimis
exemption to exclude no more than the number of non-U.S. employees
that, combined with the data privacy exemption, equals 5% of the
registrant's total employees.
    Finally, the final rule permits registrants to make cost-of-living
adjustments for the compensation of employees in jurisdictions other
than the jurisdiction in which the PEO resides to identify the median
and calculate annual total compensation. In identifying the median
employee, whether using annual total compensation or any other
compensation measure that is consistently applied to all employees
included in the calculation, the registrant may, but is not required
to, make cost-of-living adjustments for the compensation of employees
in jurisdictions other than the jurisdiction in which the PEO resides
so that the compensation is adjusted to the cost of living in the
jurisdiction in which the PEO resides. If the registrant uses a cost-
of-living adjustment to identify the median employee, and the median
employee identified is an employee who does not reside in the same
jurisdiction as the PEO, the registrant must use the same cost-of-
living adjustment in calculating the median employee's annual total
compensation and disclose the country in which the median employee is
located. The registrant is also required to briefly describe the cost-
of-living adjustments it used to identify the median employee and
briefly describe the cost-of-living adjustments it used to calculate
the median employee's annual total compensation, including the measure
used as the basis for the cost-of-living

adjustment.\63\ To provide context for the Item 402(u)(1)(iii)
disclosure, a registrant electing to present the pay ratio in this
manner must also disclose the median employee's annual total
compensation and pay ratio without the cost-of-living adjustments. To
calculate this pay ratio, the registrant will need to identify the
median employee without using any cost-of-living adjustments.
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    \63\ For example, registrants may use cost-of-living adjustments
based on purchasing power parity (``PPP'') conversion factors. A PPP
conversion factor is the ratio of PPP exchange rate to the nominal
exchange rate. For example, conversion factors for the US dollar are
available at http://data.worldbank.org/indicator/PA.NUS.PPPC.RF.
This ratio provides the number of units of a country's currency
required to buy the same amount of goods and services in the
domestic market as a U.S. dollar would buy in the United States.
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    In the Proposing Release, we noted that some comments received
prior to the proposal requested that the rule allow registrants to
present separate pay ratios covering U.S. and non-U.S. employees to
mitigate concerns that the comparison of the PEO to non-U.S. employees
could substantially affect the pay ratio disclosure. The proposal did
not prohibit such disclosure but did not expressly state it was
permitted. For clarification, therefore, the final rule states that
registrants are permitted, but not required, to provide additional pay
ratios as long as any additional pay ratios are not misleading and are
not presented with greater prominence than the required ratio.
 2. Employees of Consolidated Subsidiaries
    We proposed requiring a registrant's pay ratio disclosure to
include the employees of any of its subsidiaries (including officers
other than the PEO), in addition to its direct employees, in its pay
ratio disclosure. Unlike the proposed rule, however, the final rule
defines ``employee'' to include only the employees of the registrant's
consolidated subsidiaries. As discussed in greater detail below,
defining a ``subsidiary'' based on whether a registrant consolidates a
company in its financial statements will likely decrease the costs and
burdens on a registrant without significantly affecting the pay ratio
because most registrants consolidate based on their ownership of over
50% of the outstanding voting shares of their subsidiaries and guidance
is readily available on when consolidation is appropriate.
3. Employed on Any Date Within Three Months of the Last Completed
Fiscal Year
    The proposed rule would define ``employee'' as an individual
employed as of the last day of the registrant's last completed fiscal
year because this calculation date would be consistent with the one
used for the determination of the three most highly compensated
executive officers under existing Item 402(a)(3)(iii). In the Proposing
Release, we also noted our preliminary view that a bright line
calculation date for determining who is an employee would ease
compliance for registrants by eliminating the need to monitor changes
in workforce composition during the year. Further, we assumed the
potential benefits of the pay ratio disclosure would not be
significantly diminished by covering only individuals employed at year-
end, although we acknowledged that this approach could be costlier to
registrants with seasonal or temporary employees who are employed at
year end as opposed to other times during the year.
    Taking into consideration concerns raised by commenters about the
desire for flexibility in choosing the calculation date, the final rule
permits registrants to use any date within three months prior to the
last day of their last completed fiscal year to identify the median
employee. If in subsequent years the registrant changes the date it
uses to identify the median employee, it must disclose this change and
provide a brief explanation about the reason or reasons for the change.
This provision provides consistency for individual registrants from
year to year while also providing registrants with flexibility to
choose the determination date. To provide additional transparency about
how the pay ratio disclosure has been calculated, the final rule
requires registrants to disclose the date used to identify the median
employee.
4. Identifying the Median Employee Once Every Three Years
    The proposed rule would require registrants to identify the median
employee every year. To help minimize compliance costs, we are revising
the rule, as suggested by commenters, to allow registrants to identify
the median employee every three years unless there has been a change in
its employee population or employee compensation arrangements that the
registrant reasonably believes would result in a significant change in
the pay ratio disclosure. However, the registrant must still calculate
the identified median employee's annual total compensation and use that
figure in calculating its pay ratio every year. If there have been no
changes that the registrant reasonably believes would significantly
affect its pay ratio disclosure, the registrant must disclose that it
is using the same median employee in its pay ratio calculation and
describe briefly the basis for its reasonable belief. For example, the
registrant could disclose that there has been no change in its employee
population or employee compensation arrangements that it believes would
significantly impact the pay ratio disclosure. If there has been such a
change, the registrant must re-identify the median employee for that
fiscal year.
    Under the final rule's approach, the registrant will identify its
median employee for year one and then be permitted to use that employee
or one who is similarly compensated (if, for example, the median
employee is no longer in the same position or is no longer employed by
the registrant) in the following two years for calculating the median
employee's annual total compensation and the registrant's pay ratio.
The registrant must calculate the median employee's annual total
compensation in year one and then re-calculate the annual total
compensation for that employee in year two and again in year three. If
the median employee identified in year one is no longer in the same
position or no longer employed by the registrant on the median employee
determination date in year two or three, the final rule permits the
registrant to replace its median employee with an employee in a
similarly compensated position.
5. Initial Compliance Date
    We proposed that a registrant's first reporting period would begin
in its first fiscal year commencing on or after the effective date of
the final rule. Therefore, under the proposed rule, the registrant's
initial pay ratio disclosure would be included in its first annual
report on Form 10-K or proxy or information statement for its annual
meeting of shareholders following the end of such year. Unlike the
proposal, the compliance date set forth in this adopting release
provides that the registrant's first reporting period for the pay ratio
disclosure is its first full fiscal year beginning on or after January
1, 2017 (instead of on or after the effective date of the final rule).
6. Transition Period for New Registrants
    The proposed rule would not have required pay ratio disclosure by
new registrants subject to the rule in a registration statement on Form
S-1 or

Form S-11 for an initial public offering or registration statement on
Form 10. Consistent with the revised transition period for existing
registrants, the final rule provides that the first pay ratio reporting
period begins for new registrants with their first fiscal year
commencing on or after January 1, 2017 that is after the date they
first become subject to the requirements of Section 13(a) or 15(d) of
the Exchange Act. In this way, new registrants will not become subject
to the final rule sooner than existing registrants. Such registrants
are also permitted to omit their initial pay ratio disclosure from
their registration statements (or any other filing) made before their
first annual report or proxy or information statement following the end
of that reporting period, but not later than 120 days after the end of
the fiscal year.
7. Additional Transition Periods
    We did not propose a transition period for registrants that cease
to be smaller reporting companies or emerging growth companies, nor did
we provide any special rules for registrants that engage in business
combinations and/or acquisitions. We did, however, request comment on
whether there should be transition periods in these situations and, if
so, the appropriate length of time for any such transition period. One
commenter requested that we include such a transition period.\64\
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    \64\ See letter from ABA (recommending a transition period for
issuers that cease to be smaller reporting companies in which such
registrants would not be required to provide their pay ratio
disclosure until the first full fiscal year commencing on or after
the first anniversary of the end of the fiscal year in which the
issuer is no longer a smaller reporting company).
---------------------------------------------------------------------------

    The final rule provides that registrants that cease to be smaller
reporting companies or emerging growth companies are not required to
provide pay ratio disclosure until they file a report for the first
fiscal year commencing on or after they cease to be a smaller reporting
company or emerging growth company. The final rule also permits
registrants that engage in business combinations and/or acquisitions to
omit the employees of a newly-acquired entity from their pay ratio
calculation for the fiscal year in which the business combination or
acquisition occurs. In these cases, a registrant does not have to
include these individual employees in its median employee calculation
until the first full fiscal year following the acquisition. Registrants
that exclude employees as a result of a business combination must
disclose the relevant acquired business and the approximate number of
employees that are excluded from the pay ratio calculation.

II. Discussion

A. Scope of Final Rule

1. Pay Ratio Disclosure Requirements Under New Paragraph (u) to Item
402 of Regulation S-K
a. Proposed Rule
    We proposed new paragraph (u) of Item 402 to require disclosure of:
(A) the median of the annual total compensation of all employees of the
registrant, (except the registrant's PEO); (B) the annual total
compensation of the registrant's PEO; and (C) the ratio of the amount
in (A) to the amount in (B), presented as a ratio in which the amount
in (A) equaled one, or, alternatively, expressed narratively in terms
of the multiple that the amount in (B) bears to the amount in (A).
    Although Section 953(b) calls for a ratio showing the median of the
annual total compensation of all employees to the PEO's annual total
compensation, it does not specify how the ratio should be expressed. To
promote consistent presentation and address the potential for
confusion, therefore, the proposed rule specified that registrants must
express the ratio as one in which the median of the annual total
compensation of all employees is equal to one.
b. Comments on the Proposed Rule
    No commenters objected to use of the term PEO or including the pay
ratio disclosure requirements in new paragraph (u) to Item 402, and
commenters discussing other aspects of the proposal did so on the
assumption that we would include the pay ratio disclosure requirements
in Item 402(u). Several commenters agreed that the pay ratio should
show the PEO's compensation divided by the median employee's
compensation because it would be easier to understand.\65\
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    \65\ See, e.g., letters from FEI and Dr. Sue Ravenscroft,
Professor of Accounting, Iowa State University (Sep. 20, 2013)
(``Prof. Ravenscroft I'').
---------------------------------------------------------------------------

c. Final Rule
    After considering the comments, we are adopting the final rule as
proposed. The final rule adds new paragraph (u) to Item 402 and
requires disclosure of: (A) The median of the annual total compensation
of all employees of the registrant (except the registrant's PEO); (B)
the annual total compensation of the registrant's PEO; and (C) the
ratio of the amount in (B) to the amount in (A), presented as a ratio
in which the amount in (A) equals one, or, alternatively, expressed
narratively in terms of the multiple that the amount in (B) bears to
the amount in (A).\66\
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    \66\ We did not propose to require that the pay ratio disclosure
be provided in interactive data format, and are not adopting such a
requirement for this disclosure. To the extent that we consider more
generally the tagging of disclosures in XBRL format in our rules, we
may consider revisiting the format in which the pay ratio disclosure
is provided.
---------------------------------------------------------------------------

    Consistent with the proposal, the final rule also requires
registrants to disclose the ratio such that the PEO's annual total
compensation is always compared to the median employee's annual total
compensation. Registrants may not present the median employee's annual
total compensation as a percentage of the PEO's compensation. We
believe expressing the ratio as ``a factor rather than a fraction''
makes the ratio easier to understand because allowing the inverse may
be confusing.\67\ In other words, the ratio must always show how much
larger or smaller the PEO's annual total compensation is as compared to
the median employee's annual total compensation. We believe that
requiring registrants to present the ratio in this manner will make it
easier for shareholders to comprehend and allow them to use it in
making voting decisions on executive compensation.\68\
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    \67\ See letter from FEI. See also letter from Prof. Ravenscroft
I (stating that ``the ratio of CEO compensation to median worker
would be easier for most people to grasp than the ratio of median
worker compensation to CEO compensation, a switch that I would see
as not changing the intent of the law'').
    \68\ In the rare cases in which the PEO's yearly compensation is
nominal (or is otherwise less than the median employee's
compensation), the resulting ratio will be a number smaller than
one. Despite this anomalous result, we believe that in the vast
majority of cases setting the median compensation equal to one will
result in a ratio that is easier to understand than the inverse. See
generally Illinois Commerce Comm'n v. I.C.C., 776 F.2d 355, 359
(D.C. Cir. 1985) (``General rules need not work perfectly in all
their applications''). We also note that registrants are permitted
to provide additional narrative discussion in cases where they feel
the disclosed pay ratio may be confusing or incomplete without
further explanation.
---------------------------------------------------------------------------

    The final rule permits registrants to choose one of two options to
express the ratio. Registrants may disclose the pay ratio with the
median of the annual total compensation of all employees equal to one
and the PEO's compensation as the number compared to one.\69\ For

example, if a registrant's median annual total compensation for
employees is $50,000 and the annual total compensation of the PEO is
$2,500,000, the PEO's compensation is 50 times larger than the median
employee's compensation. The registrant may describe the pay ratio as
50 to 1 or 50:1. Alternatively, registrants may disclose the pay ratio
narratively by stating how many times higher (or lower) the PEO's
annual total compensation is than that of the median employee. For
example, the registrant may state that ``the PEO's annual total
compensation is 50 times that of the median of the annual total
compensation of all employees.''
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    \69\ We note that some commenters recommended that the final
rule include a safe harbor or simplified reporting method such that
a registrant may stipulate that its pay ratio exceeds 300-to-1. See
letters from Hyster-Yale and NACCO. Under this suggestion,
registrants would be permitted to forgo calculating and disclosing
their company-specific pay ratio and would instead be permitted to
simply disclose that the ratio exceeds the stipulated 300-to-1
statistic. We have not adopted the suggestion to allow a registrant
to disclose that its pay ratio exceeds a stipulated statistic, such
as 300-to-1, because we do not believe that it would be consistent
with Congress's apparent intent to provide a useful, relevant,
company-specific pay ratio disclosure for investors to utilize when
undertaking their say-on-pay votes.
---------------------------------------------------------------------------

2. Pay Ratio Disclosure in Filings That Require Item 402 of Regulation
S-K Information
a. Proposed Rule
    The proposed rule required registrants to include their pay ratio
disclosure in any filing described in Item 10(a) that requires
executive compensation disclosure under Item 402, including annual
reports on Form 10-K,\70\ Securities Act and Exchange Act registration
statements, and proxy and information statements, to the same extent
that these forms require compliance with Item 402. Section 953(b) does
not direct us to amend any of our forms to add the pay ratio disclosure
requirements to filings that do not already require disclosure of Item
402 information, and we did not propose to do so. Additionally, we
proposed not to require registrants to update their pay ratio
disclosure for the most recently completed fiscal year until they file
their annual reports on Form 10-K, or, if later, their proxy or
information statements for their next annual meeting of shareholders
(or written consents in lieu of such a meeting) but, in any event, not
later than 120 days after the end of such fiscal year.
---------------------------------------------------------------------------

    \70\ 17 CFR 249.310.
---------------------------------------------------------------------------

b. Comments on the Proposed Rule
    All of the commenters discussing the issue agreed that we should
limit pay ratio disclosure to the filings described in Item 10(a) that
require executive compensation disclosure under Item 402, as
proposed.\71\ One commenter suggested, however, that the final rule
should allow registrants to include their pay ratio disclosure in other
filings if they choose to do so.\72\
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    \71\ See, e.g., letters from ABA, AFL-CIO I, California Public
Employees' Retirement System (Dec. 2, 2013) (``CalPERS''), Calvert,
Capital Strategies, CII, Connecticut State Treasurer (Dec. 2, 2013)
(``CT State Treasurer''), Davis Polk, Intel, Johnson & Johnson,
McGuireWoods, NIRI, NRF, Pax World Funds, PM&P, Prof. Ray, and
WorldatWork I.
    \72\ See letter from Capital Strategies.
---------------------------------------------------------------------------

c. Final Rule
    We are adopting the final rule as proposed. It requires registrants
to include their pay ratio disclosure in any filing described in Item
10(a) that calls for executive compensation disclosure under Item 402,
including annual reports on Form 10-K, registration statements under
the Securities Act and Exchange Act, and proxy and information
statements to the same extent that these forms require compliance with
Item 402, consistent with the statutory directive. Registrants must
follow the instructions in each form to determine whether Item 402
information is required, including any instructions that allow for the
omission of Item 402 information.\73\ The final rule does not require
registrants to include the pay ratio disclosure in any filings that are
not required to include Item 402 information, but registrants can
voluntarily include non-mandated information in any of their filings if
they choose to do so and the information is not misleading in the
context of that filing. Further, registrants do not need to update
their pay ratio disclosure for their most recently completed fiscal
year until they file their annual report on Form 10-K, or, if later,
their proxy or information statement for their next annual meeting of
shareholders (or written consents in lieu of such a meeting) but, in
any event, not later than 120 days after the end of such fiscal year.
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    \73\ See, e.g., General Instructions I(2)(c) and J(1)(m) to Form
10-K containing special provisions for the omission of Item 402
information by wholly-owned subsidiaries and asset-backed
registrants.
---------------------------------------------------------------------------

    We do not read Section 953(b) to require pay ratio disclosure in
filings that do not contain other executive compensation information.
In our view, the most meaningful way to present pay ratio disclosure is
in context with other executive compensation disclosure, such as the
Summary Compensation Table required by Item 402(c) and the Compensation
Discussion and Analysis required by Item 402(b), rather than provided
on a stand-alone basis. In this manner, the pay ratio information will
be presented in the same context as other information that shareholders
can use in making their voting decisions on executive compensation.
Finally, although we understand the primary purpose of the pay ratio
disclosure to be to inform shareholder's say-on-pay votes under Section
951, we acknowledge that some commenters indicated the disclosure could
be useful to investors in making investment decisions. For that reason,
and in light of the statutory language of Section 953(b), the final
rule retains the requirement to include this disclosure in registration
statements under the Securities Act.\74\
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    \74\ Although the final rule requires registrants to include the
pay ratio disclosure in registration statements under the Securities
Act, as discussed below, the final rule permits new registrants to
delay compliance so that the pay ratio requirement is not required
in a registration statement on Form S-1 or Form S-11 for an initial
public offering or registration statement on Form 10.
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3. Excluded Registrants--Smaller Reporting Companies, Foreign Private
Issuers, MJDS Filers, and Emerging Growth Companies
a. Proposed Rule
    In the Proposing Release, we noted that the reference to ``each
issuer'' in Section 953(b) could be read to apply to all registrants,
including smaller reporting companies,\75\ foreign private issuers,\76\
U.S.-Canadian Multijurisdictional Disclosure System filers,\77\ and
emerging growth companies. Because Section 953(b) refers specifically
to the definition of total compensation in Item 402(c)(2)(x), and is
silent on whether pay ratio disclosure should be required for
registrants not previously subject to Item 402(c) requirements,
however, we proposed to limit the pay ratio disclosure requirement to
registrants required to provide Item 402(c) disclosure. As a result,
the proposed rule stated that smaller reporting companies, foreign
private issuers, and MJDS filers did not have to provide pay ratio
disclosure in any of their filings.
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    \75\ A ``smaller reporting company'' is an issuer that had a
public float of less than $75 million as of the last business day of
its most recently completed second fiscal quarter or had annual
revenues of less than $50 million during the most recently completed
fiscal year for which audited financial statements are available. 17
CFR 229.10(f)(1).
    \76\ A ``foreign private issuer'' is any foreign issuer other
than a foreign government, except for a registrant that, as of the
last business day of its most recent fiscal year, has more than 50%
of its outstanding voting securities held of record by United States
residents and any of the following: a majority of its officers and
directors are citizens or residents of the United States, more than
50% of its assets are located in the United States, or its business
is principally administered in the United States. 17 CFR 240.3b-
4(c).
    \77\ A U.S.-Canadian Multijurisdictional Disclosure System
(``MJDS'') filer is a registrant that files reports and registration
statements with us in accordance with the requirements of the MJDS.
---------------------------------------------------------------------------

    Also, the JOBS Act,\78\ which was passed by Congress subsequent to
the

Dodd-Frank Act but prior to publication of the Proposing Release,
specifically excluded registrants that qualify as emerging growth
companies, as that term is defined in Section 3(a) of the Exchange
Act,\79\ from the requirements of Section 953(b). To give effect to the
statutory exemption, we proposed an instruction to Item 402(u)
providing that a registrant that is an emerging growth company is not
required to comply with Item 402(u).
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    \78\ See Section 102(a)(3) of the JOBS Act.
    \79\ An ``emerging growth company'' is an issuer that had total
annual gross revenues of less than $1 billion during its most
recently completed fiscal year, has not reached the fifth
anniversary of the date of the first sale of its common equity
securities pursuant to an effective registration statement under the
Securities Act, had not issued $1 billion in non-convertible debt
during the previous 3-year period, or is deemed to be a ``large
accelerated filer.'' 15 U.S.C. 78c(a).
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b. Comments on the Proposed Rule
    Most commenters concurred with the proposed rule's exclusion of
emerging growth companies, consistent with the JOBS Act.\80\ One
commenter noted specifically that, while it ``believes all registrants
accessing U.S. capital markets should be subject to comparable
financial regulation,'' including smaller reporting companies, foreign
private issuers, and MJDS filers, the pay ratio information ``is best
viewed in the context of other compensation disclosures and the pay
ratio disclosure should be limited to those registrants required to
provide a summary compensation disclosure.'' \81\
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    \80\ See, e.g., letters from CalPERS; Davis Polk; Hay Group,
Inc. (Dec. 2, 2013) (``Hay Group''); NY State Comptroller; PM&P and
US SIF. Some commenters, however, disagreed or were uncomfortable
with this exclusion. See letters from CII and Andrew Kushner (Nov.
12, 2013) (``Kushner'').
    \81\ See letter from CalPERS.
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    Additionally, most of the commenters who addressed the issue agreed
that we should exclude smaller reporting companies from the pay ratio
requirements.\82\ One commenter reasoned that, by excluding emerging
growth companies, Congress demonstrated its intent to relieve this
category of registrants from the costs and burdens of compliance, and
because both emerging growth companies and smaller reporting companies
are subject to scaled executive compensation disclosure, it would be
consistent with Congressional intent to exclude smaller reporting
companies.\83\ Another commenter recommended that the final rule exempt
any business with revenues of less than $500 million or a market
capitalization of less than $1 billion.\84\
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    \82\ See, e.g., letters from ABA, Prof. Angel, CalPERS, Capital
Strategies, Davis Polk, Hay Group, NIRI, NY State Comptroller, PM&P,
Vivient, and WorldatWork I.
    \83\ See letter from ABA.
    \84\ See letter from Hay Group.
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    By contrast, a few commenters asserted that the final rule should
include smaller reporting companies.\85\ One of these commenters
asserted that Congress did not expressly exclude smaller reporting
companies because the phrase ``each issuer'' in Section 953(b)(1)
signals its intent that there should be no exemption for any particular
registrant and that excluding certain registrants from the disclosure
would defeat the purpose and policy of Section 953(b).\86\
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    \85\ See, e.g., letters from CII; Ashley Ray, University of
Idaho College of Law (Nov. 13, 2013) (``Ray''); and US SIF.
    \86\ See letter from Ray.
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    Finally, some commenters agreed that the proposed rule should
exclude foreign private issuers and MJDS filers,\87\ while a few other
commenters disagreed with excluding them.\88\ One commenter noted that,
in ``view of the Commission's long-standing rules allowing foreign
private issuers and MJDS filers to provide information about their
executive compensation programs based on the applicable disclosure
requirements of their home jurisdiction, we would find it anomalous to
single out this specific Item 402-based disclosure requirement for
mandatory application to these registrants without regard to important
policy considerations that have led the Commission for decades to
permit disclosure in this area based on home-country law.'' \89\
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    \87\ See, e.g., letters from ABA, CalPERS, Capital Strategies,
Davis Polk, Hay Group, and PM&P.
    \88\ See, e.g., letters from CII, Ray, and US SIF.
    \89\ See letter from ABA.
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c. Final Rule
    After considering the comments, we are adopting the final rule as
proposed. The final rule, therefore, does not require pay ratio
disclosure by smaller reporting companies, foreign private issuers,
MJDS filers, and emerging growth companies.\90\
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    \90\ Registered investment companies will also not be required
to provide Item 402(u) disclosure. Business development companies
are a category of closed-end investment company that are not
registered under the Investment Company Act [15 U.S.C. 80a-2(a)(48)
and 80a-53-64]. Business development companies will be treated in
the same manner as issuers other than registered investment
companies and therefore will be subject to the pay ratio disclosure
requirement.
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    As stated above, Congress explicitly excluded emerging growth
companies from the pay ratio disclosure requirement. Regarding smaller
reporting companies, Section 953(b)(2) requires total compensation to
be calculated in accordance with Item 402(c)(2)(x). Smaller reporting
companies, however, are permitted to follow the scaled disclosure
requirements set forth in Items 402(m)-(r),\91\ and therefore are not
required to calculate compensation in accordance with Item
402(c)(2)(x). Also, the requirement set forth in Item 402(n) for
disclosure of Summary Compensation Table information, which includes
disclosure of ``total compensation,'' does not require smaller
reporting companies to include the same types of compensation required
to be included in total compensation for other registrants under Item
402(c)(2).\92\ Congress's express reference to Item 402(c)(2)(x) to
calculate total compensation (without mentioning Item 402(n)(2)(x)) is
consistent with the exclusion of smaller reporting companies from the
pay ratio disclosure requirement.
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    \91\ See Item 402(l).
    \92\ See Item 402(n)(2)(viii) (indicating that smaller reporting
companies are not required to include the aggregate change in the
actuarial present value of pension benefits that is required for
companies subject to Item 402(c)(2)(viii)).
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    Requiring smaller reporting companies to provide the pay ratio
disclosure would compel them to collect data and calculate compensation
for the PEO in ways that they otherwise are not required to do. Nothing
in the statute indicates that was Congress's intent, and no commenters
indicated that they believed there was such an intent. To clarify
further that smaller reporting companies are excluded from the final
rule, we are making a technical amendment to paragraph (l) of Item 402
to add Item 402(u), as proposed, to the list of items that are not
required for smaller reporting companies.\93\
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    \93\ Smaller reporting companies are permitted to choose whether
they want to comply with either the scaled disclosure requirements
or the larger company disclosure requirements on an ``a la carte''
basis. As we discussed in the scaled disclosure adopting release,
the staff evaluates compliance by smaller reporting companies with
only the Regulation S-K requirements applicable to smaller reporting
companies, even if the company chooses to comply with the larger
company requirements. See Smaller Reporting Company Regulatory
Relief and Simplification, Release No. 33-8876 (Dec. 19, 2007) [73
FR 934], at 941.
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    The final rule similarly does not apply to foreign private issuers
and MJDS filers, which we believe is consistent with excluding
registrants that are not currently required to provide Summary
Compensation Table disclosure pursuant to Item 402(c). Foreign private
issuers file annual reports and registration statements on Form 20-F
\94\ and MJDS filers file annual reports and registration

statements on Form 40-F.\95\ Neither of these forms requires Item 402
disclosure. As with smaller reporting companies, requiring foreign
private issuers and MJDS filers to provide the pay ratio disclosure
would require these registrants to collect data and calculate
compensation for the PEO in ways they otherwise would not be required
to do. The final rule, therefore, does not apply to foreign private
issuers or MJDS filers.
---------------------------------------------------------------------------

    \94\ 17 CFR 249.220f.
    \95\ 17 CFR 249.240f.
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    Finally, for the same reasons, the final rule, consistent with the
proposal, does not change existing Item 402(a)(1) with respect to
foreign private issuers. Item 402(a)(1) states that a ``foreign private
issuer will be deemed to comply with Item 402 if it provides the
information required by Items 6.B and 6.E.2 of Form 20-F, with more
detailed information provided if otherwise made publicly available or
required to be disclosed by the registrant's home jurisdiction or a
market in which its securities are listed or traded.'' Foreign private
issuers that file annual reports on Form 10-K, therefore, are still
able to satisfy Item 402 requirements by following Items 6.B and 6.E.2
of Form 20-F and are not required to provide the pay ratio disclosure
mandated by Section 953(b).

B. Requirements of Final Rule

1. ``All Employees'' Covered Under the Rule
    The final rule defines ``employee'' to include a registrant's U.S.
and non-U.S. employees, as well as its part-time, seasonal, and
temporary employees, as proposed. We believe that the ``all employees
of the issuer'' language in Section 953(b) is best implemented by
including rather than excluding broad categories of employees. Further,
even assuming there was any ambiguity in the statutory language, we
believe that a more inclusive approach better serves Section 953(b)'s
purpose of providing shareholders with additional information about a
registrant's compensation practices that can be used in making voting
decisions on executive compensation because it results in a pay ratio
that is more reflective of the actual composition of the registrant's
workforce.\96\ As discussed in greater detail below, however, in
response to particular issues and concerns raised by comments, we have
provided two tailored exemptions from the general requirement to
include all employees. In particular, for the reasons discussed below,
we have provided an exemption for employees in foreign jurisdictions in
which it is not possible for a registrant to obtain or process
information necessary to comply with the rule without violating the
data privacy laws or regulations of that jurisdiction and a de minimis
exemption for non-U.S. employees.
---------------------------------------------------------------------------

    \96\ As discussed below, commenters have made competing
arguments that the pay ratio disclosure would be ``distorted'' in
one way or another if the final rule included (or excluded) various
categories of employees. See, e.g., letter from Prof. Ray (asserting
that the pay ratio will be distorted depending on whether the final
rule includes non-U.S. employees). We appreciate that a particular
registrant's pay ratio information may vary--perhaps, in some cases,
significantly--depending on whether the final rule includes or
excludes these employee categories (e.g., non-U.S. employees; part-
time, temporary and seasonal employees; and leased workers). We do
not, however, view the choices made on these issues as involving a
``distortion'' of the pay ratio disclosure that Congress directed
should be provided to investors. As noted elsewhere in this release,
we have been guided by our general view that Section 953(b) reflects
Congress's intention that the pay ratio disclosure should be broadly
inclusive of all types of a registrant's employees; thus, absent a
reason that takes into account the statutory objective, we have
declined to make choices in the final rule that would exclude broad
categories of employees from the process of identifying the median
employee. At the same time, however, in an effort to mitigate the
potential costs and burdens of the final rule, we have built in some
flexibility and provided several other accommodations to elements of
the final rule, where we have concluded that these measures would
not result in any undue impact on the required pay ratio disclosure.
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a. Types of Employees
i. Proposed Rule
    The proposed rule included in the definition of ``employee'' all of
a registrant's full-time, part-time, seasonal, and temporary workers,
including officers other than the PEO. In the Proposing Release, we
reasoned that these individuals should be included in the rule because
Section 953(b)(1)(A) expressly requires disclosure of the median of the
annual total compensation of ``all employees,'' which would encompass
full-time, part-time, seasonal, and temporary workers. Also, we
proposed to include all of a registrant's officers other than the PEO
in the definition of ``employee.''
    Workers not employed by a registrant (or its subsidiaries),
however, such as independent contractors, ``leased'' workers, or other
workers who are employed by a third party, were not covered by our
proposed definition of ``employee.'' As an example, we noted that, if a
registrant pays a fee to another company (such as a management company
or an employee leasing agency) that supplies workers to the registrant,
and those workers receive compensation from that other company, these
workers should not be considered employees of the registrant for
purposes of the disclosures required by Section 953(b) of the Dodd-
Frank Act.
ii. Comments on the Proposed Rule
    A number of commenters supported the proposed rule's requirement
that registrants include their part-time, temporary, and seasonal
employees in addition to their full-time employees in their median
employee determination.\97\ Some commenters asserted that the reference
in Section 953(b) to ``all employees'' demonstrates Congress's intent
was not to limit the pay ratio to only full-time employees.\98\ Some
commenters contended that including temporary employees would cost
registrants very little because they routinely develop that information
for their own internal use.\99\ Commenters supporting the proposed rule
also contended that, if part-time, temporary, and seasonal employees
were excluded from the pay ratio, the disclosure would be incomplete,
inaccurate, and/or misleading.\100\ One commenter suggested that the
exclusion of part-time, seasonal, and temporary employees would not
reduce the regulatory burdens on registrants because registrants with
such employees would have substantial flexibility in identifying the
median employee.\101\
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    \97\ See, e.g., letters from AFSCME, CalPERS, Calvert, Chicago
Teachers Fund, Cummings Foundation, CUPE, Domini, Susan A. Estep
(Nov. 15, 2013) (``Estep''), Frank Gould (Oct. 4, 2013) (``Gould''),
ICCR, IL Bricklayers and Craftworkers Union, Marco Consulting,
McMorgan & Co., Novara Tesija, NY State Comptroller, Oxfam, Pax
World Funds, Sen. Robert Menendez et al. (Nov. 26, 2013) (``Sen.
Menendez et al. I''), Sen. Menendez et al. II, Socially Responsive
Financial Advisors, Teamsters, Trillium I, Trustee Campbell, US SIF,
and Walden.
    \98\ See letters from AFL-CIO (Jul. 6, 2015) (``AFL-CIO II''),
Institute for Policy Studies (Oct. 30, 2013) (``IPS''), and Sen.
Menendez et al. II.
    \99\ See, e.g., letters from Virginia Fischer (Oct. 3, 2013)
(``Fischer'') and Public Citizen II.
    \100\ See, e.g., letters from AFL-CIO I, AFL-CIO II, Americans
for Financial Reform (Dec. 2, 2013) (``AFR''), B[acirc]tirente et
al., Bricklayers International, CII, CT State Treasurer, FS FTQ,
Public Citizen I, Public Citizen II, and John Theodore (Nov. 5,
2013) (``Theodore'').
    \101\ See letter from AFL-CIO II.
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    Other commenters contended that the final rule should include only
full-time employees.\102\ Many of these commenters claimed that
applying the rule to part-time, temporary, and seasonal employees would
make the pay ratio disclosure less meaningful because the compensation
of these different types of employees are not comparable to each other
or to the PEO's compensation.\103\ Some commenters

also asserted that including employees other than full-time employees
would be burdensome and increase costs.\104\ One commenter noted that,
according to a survey it conducted of companies with more than 10,000
employees, ``86 percent of the average employer's employees are full-
time, with the median employer having 95 percent of its workforce as
full-time employees.'' This commenter asserted that the incremental
information that would be obtained from including part-time or seasonal
employees does not justify the effort to collect it and could provide a
distorted picture of the employee's annual income.\105\
---------------------------------------------------------------------------

    \102\ See, e.g., letters from Best Buy et al., Brian Foley &
Company, Inc. (Dec. 2, 2013) (``Brian Foley & Co.''), Chamber I,
FuelCell Energy, Garmin, Hyster-Yale, Mercer I, NACCO, PM&P,
Semtech, Steven Hall and Partners (Dec. 2, 2013) (``SH&P''), Vectren
Corp., WorldatWork I, and WorldatWork II.
    \103\ See, e.g., letters from American Apparel & Footwear
Association (Dec. 2, 2013) (``AAFA I''), American Apparel & Footwear
Association (Dec. 23, 2013) (``AAFA II''), American Benefits
Council, COEC I, Corporate Secretaries, Davis Polk, Dover Corp.,
ExxonMobil, FSR, General Mills, Hay Group, IBC, KBR, Meridian, NACD,
NIRI, NRF, NYC Bar, Retail Industry Leaders Association (Dec. 2,
2013) (``RILA''), and WorldatWork I.
    \104\ See, e.g., letters from American Benefits Council, COEC I,
Corporate Secretaries, Davis Polk, and General Mills.
    \105\ See letter from COEC I.
---------------------------------------------------------------------------

    Another commenter asserted that the final rule should exclude part-
time, seasonal, and temporary employees unless a majority of a
registrant's employees work on a part-time, temporary, and/or seasonal
basis.\106\ A few commenters recommended that the rule should allow
registrants to exclude any employee who was not employed for at least
four months during the calendar year.\107\ Other commenters indicated
that, if the rule is not limited to full-time employees, registrants
should be able to annualize or make full-time equivalent adjustments to
the compensation of part-time, seasonal, and/or temporary
employees.\108\ One commenter suggested, in the alternative, that if
the rule includes part-time, seasonal, and temporary employees, it
should only include such employees who have been employed during the
90-day period ending on the last day of the registrant's fiscal
year.\109\ Finally, another commenter suggested, in the alternative,
that the rule should require a ``primary disclosure'' that compares
only full-time employees to the PEO's compensation.\110\
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    \106\ See letter from ABA.
    \107\ See, e.g., letters from Hyster-Yale and NACCO (stating
that such a provision could contain a consistency requirement to
prevent companies from selectively choosing which employees to
include or exclude).
    \108\ See, e.g., letters from AAFA II, American Benefits
Council, Brian Foley & Co., Corporate Secretaries, Hay Group, KBR,
NIRI, and NYC Bar.
    \109\ See letter from Meridian.
    \110\ See letter from NRF.
---------------------------------------------------------------------------

    Some commenters noted that neither Section 953(b) nor its
legislative history states explicitly that Congress intended for the
``all employees'' term to include part-time, seasonal, and temporary
employees. These commenters contended we could thus interpret the ``all
employees'' language to exclude such employees from the final
rule.\111\ Some commenters believed that the minimal effect these
employees would have on the pay ratio would not justify the high costs
required to include those employees in determining the pay ratio.\112\
Conversely, commenters in support of including part-time, seasonal, and
temporary employees in the pay ratio contended that failing to do so
would distort registrants' pay ratios because many of their employees
would not be included in the median calculation.\113\
---------------------------------------------------------------------------

    \111\ See, e.g., letter from ABA.
    \112\ See, e.g., letters from COEC I (stating that two-thirds of
respondents to a survey it conducted indicated that limiting the
application of the rule to full-time employees would reduce their
costs, that the ``average savings for these respondents would be
approximately 20 percent,'' and that the burden imposed by including
``global, full-time, part-time and seasonal employees'' is not
offset by other benefits) and General Mills (``We would expect
moderate cost savings from limiting the analysis to full-time
employees, versus covering our entire workforce, but the savings
could be significant for registrants in other industries. . .
Conversely, there has been little or no evidence to suggest that the
benefits of the Proposed Rule would be diminished as a result of
limiting its scope to full-time employees.'').
    \113\ See, e.g., letters from AFL-CIO I, AFR, B[acirc]tirente et
al., Bricklayers International, CII, CT State Treasurer, FS FTQ,
Public Citizen I, and Theodore.
---------------------------------------------------------------------------

    Several commenters agreed that a registrant's pay ratio should
exclude ``leased'' workers.\114\ One of these commenters noted that
including ``leased'' workers would add significant costs and distort
the pay ratio.\115\ Also, according to this commenter, such workers are
not ``statutory'' employees and the third parties employing these
workers may be unwilling to provide the information. A few commenters
recommended that the final rule require a registrant to include such
workers in its pay ratio.\116\ One commenter asserted that a registrant
should be required to clearly describe its reliance on ``leased''
workers if they comprise more than 40% of its workforce.\117\
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    \114\ See, e.g., letters from ABA; American Staffing Association
(Nov. 21, 2013) (``ASA''); CalPERS; CII; Corporate Secretaries;
Emergent BioSolutions, Inc. (Nov. 27, 2013) (``Emergent'');
ExxonMobil; Hyster-Yale; Intel; McGuireWoods, NACCO; and WorldatWork
I.
    \115\ See letter from ABA.
    \116\ See, e.g., letters from Demos (Nov. 22, 2013) (``Demos
I''), Fischer (referring to ``independent contractors''), and
Vectren Corp. (arguing that the rule should include full-time, U.S.-
based contractors if they make up a significant portion of the
registrant's workforce).
    \117\ See letter from LAPFF.
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iii. Final Rule
    After considering the public comments, we have concluded that the
final rule's definition of ``employee'' should include the full-time,
part-time, seasonal, and temporary employees employed by the registrant
or any of its consolidated subsidiaries. Because this definition refers
to workers ``employed by the registrant,'' workers who provide services
to the registrant or its consolidated subsidiaries as independent
contractors or ``leased'' workers are excluded from the definition as
long as they are employed, and their compensation is determined, by an
unaffiliated third party. The final rule includes in the definition of
``employee'' all of a registrant's officers other than the PEO, as
proposed. Section 953(b)(1)(A) expressly directs disclosure of the
median of the annual total compensation of ``all employees of the
issuer, except the chief executive officer (or any other equivalent
position) of the issuer.''
    We believe this statutory language indicates that Congress intended
the final rule to include all types of a registrant's employees,
including part-time, seasonal, and temporary workers, and we do not
think it is appropriate to provide a wholesale exemption for those
broad categories of employees that are not employed full-time.\118\ Any
such exemption would risk producing pay ratio disclosure that is
significantly different than the pay ratio disclosure that Congress
expressly directed us to require when it said ``all employees.''
Further, as noted above, we have generally limited our use of
discretionary or exemptive authority to those items that would not have
an appreciable effect on the information that Congress intended that
shareholders have when they make their say-on-pay votes. To the extent
there is any statutory ambiguity, we would still elect this inclusive
approach because we believe that it is more reflective of the actual
composition of the registrant's workforce and thus furthers the purpose
of providing shareholders with useful information about a registrant's
overall compensation practices. While we are sensitive to

concerns raised by some commenters that inclusion of these broad
categories of employees means that compliance with the final rule will
be more costly than if we adopted a broad exemption, we note that the
final rule provides other types of flexibility and accommodations
designed to reduce compliance costs while remaining faithful to our
understanding of the statutory directive and purpose of Section 953(b).
---------------------------------------------------------------------------

    \118\ See, e.g., County of Oakland v. Federal Housing Finance
Agency, 716 F.3d 935, 940 (6th Cir. 2013) (explaining that ``a
straightforward reading of the statute leads to the unremarkable
conclusion that when Congress said `all taxation,' it meant all
taxation'') (emphasis in original); Marie O. v. Edgar, 131 F.3d 610,
620 (7th Cir. 1997) (interpreting the phrase ``all infants and
toddlers'' and explaining that ``[a]ll is unambiguous; it means
every eligible child''); cf. GEICO v. Fetisoff, 958 F.2d 1137, 1142
(D.C. Cir. 1992) (describing ``the word `all''' as ``one of the
least ambiguous words in the English language'').
---------------------------------------------------------------------------

    A registrant can supplement its pay ratio disclosure or provide
additional pay ratios for its shareholders to consider if it wants to
explain the effect of including part-time, seasonal and temporary
employees on its pay ratio disclosure. While we do not believe a
purpose of the rule is to facilitate comparisons among registrants, the
opportunity to supplement the pay ratio disclosure and to provide
additional pay ratios should help mitigate some concerns that
shareholders may draw unwarranted conclusions from comparing one
registrant's disclosed ratio to the ratio of others. In addition, our
change to the proposed rule to allow a registrant some flexibility in
selecting the date for identifying the median employee may enable
registrants that employ temporary or seasonal employees only during a
very limited period at the end of their fiscal year to choose a date
that allows them to exclude these employees.
    One commenter pointed out that Item 402 does not contain a
reference to hourly or overtime compensation and contended, therefore,
that the rule should not apply to non-salaried employees who receive
``wages plus overtime,'' rather than salary.\119\ We believe that the
``all employees'' language is not limited to salaried employees.
Moreover, we are concerned that a contrary reading would be arbitrary
and would eliminate an entire category of employees from the pay ratio
disclosure, potentially depriving shareholders of a more complete
understanding of the median employee's compensation when making their
say-on-pay votes. Thus, we believe that it is appropriate to include
these employees as part of a registrant's pay ratio disclosure to
reflect the manner in which the registrant establishes its workforce.
---------------------------------------------------------------------------

    \119\ See letter from Chamber I.
---------------------------------------------------------------------------