October 19, 2021

Volume XI, Number 292


October 18, 2021

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CEO Pay Ratio Disclosure: What We’ve Seen in Filings So Far

Business Point

As proxy season gets started, we have already seen quite a few proxy statements and other filings, like Forms 10-K, that include the CEO pay ratio disclosures required by Dodd-Frank. In these filings, some consistent themes have arisen as well as some items and language that companies may want to consider including in their upcoming proxy statements.

Technical Points

Below are some observations that we have made after reviewing some of the currently available pay ratio disclosure:

  • Magnitude of RatiosThe largest ratio we have seen is 429:1 (KKR & Co. L.P.) and the smallest is 1:1 (Apollo Global Management LLC). Many ratios are disclosed as whole numbers, though some have gone out to one or two decimal places.

  • Location of Disclosure within the Proxy StatementMany of the proxy statements include the pay ratio disclosure right after the summary compensation table and related tables and before the director compensation section. This placement is logical because the disclosure is kept out of the CD&A and is, therefore, not subject to the Compensation Committee certification. One proxy statement included the disclosure in an “Other Legal Disclosures” section at the end of its proxy statement.

  • Format of DisclosureMost of the ratios have been disclosed in narrative format, though some issuers have chosen to disclose in a tabular format.

  • Reasonable EstimatesAs permitted by Item 402(u) of Regulation S-K (“Item 402(u)”) and related guidance, many issuers are choosing to reference the use of estimates for both the pay ratio itself and in the underlying calculations for determining the ratio. Though not required, issuers might consider leaving themselves some latitude in the disclosure when dealing with compensation numbers, particularly where foreign employees and/or large employee populations exist.

  • Compensation Elements for Ranking EmployeesFor purposes of ranking employees by compensation in selecting the median employee, using W-2 compensation as the measure has been quite popular, though myriad variations on cash compensation (e.g., base salary, base salary plus bonus, base salary plus bonus plus equity awards) have also frequently been used.

  • Alternative RatiosAs permitted by Item 402(u), several issuers have included alternative pay ratios that are smaller than the required ratio. These alternative ratios often appear in the sentence immediately following the required disclosure and explain that some unusual item of compensation (such as a sign-on bonus for a newly hired CEO or a retention bonus as part of a merger) skewed the required ratio and that the CEO compensation used in the alternative ratio is more indicative of historical CEO compensation.

  • Do Not Compare to Peers StatementMany companies are pointing out in their proxy statements that pay ratios should not be used to compare the company to its peers because of the flexibility that each company is permitted in determining its ratio (e.g., differing compensation elements included for ranking employees, statistical sampling, and limited exclusions for foreign employees).

  • CEO Replacement: Several filings have discussed the replacement of the CEO during the prior year. In these examples, the issuers most often chose to annualize the compensation of the new CEO (so long as that CEO was in place on the date selected for identifying the median employee) as opposed to combining the compensation for the new and old CEOs.

  • Annualization of Compensation for New HiresNot as many issuers are annualizing the compensation of new hires as we had expected. Such annualization likely would have resulted in a median employee with a higher compensation and thus decreased the pay ratio. Companies may be avoiding annualization out of concern over employee reaction to a more highly compensated median employee.

  • Business Combination ExceptionAs permitted under the instructions to Item 402(u), some issuers have excluded individuals who became employees of the issuer as the result of an acquisition or merger for pay ratio purposes. This exclusion could be because of the administrative difficulties of gathering the needed information or perhaps because such inclusion would increase the pay ratio or the compensation of the median employee, depending on the company’s primary sensitivity. Other filings have explicitly stated that such employees have been included in the calculations.

Copyright © 2021, Hunton Andrews Kurth LLP. All Rights Reserved.National Law Review, Volume VIII, Number 59

About this Author

 Matthew B. Grunert, Andrews Kurth Kenyon Law Firm, Employee Benefits Implementation Attorney

Matt's practice focuses on tax matters with an emphasis on employee benefits. Matt works with clients in the design, implementation, maintenance and termination of defined contribution plans, defined benefits plan, health and welfare plans and executive compensation plans. He also has experience with the employee benefits aspects of mergers, acquisitions, dispositions and spin-offs.

Matt represents clients on benefits-related matters before the Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corporation. He...

Emily Cabrera, Andrews Kurth Law Firm, The Woodlands, Corporate Law Attorney

Emily's legal practice focuses on executive compensation and employee benefit arrangements (including their related tax, accounting, securities and corporate governance issues).

Representative Experience

Corporate Representation: Advises private and publicly-traded clients and their boards of directors on compensation and benefits matters, including:

  • Drafting and maintaining equity. phantom equity and cash bonus plans

  • Drafting CD...

Carolyn Exnicios, Andrews Kurth Law Firm, Finance and Energy Attorney

Carolyn assists clients in capital market transactions and advises clients regarding periodic reporting and corporate governance obligations under the federal securities laws as well as the rules and regulations of securities exchanges and other regulatory bodies. She has worked on several matters for two publicly traded real estate investment trusts.