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SEC and Division of Corporation Finance Issue New Pay Ratio Disclosure Guidance

n September 21, the Securities and Exchange Commission (SEC) issued an interpretive release (available here) regarding compliance with Item 402(u) of Regulation S-K (the Pay Ratio Disclosure Rule), which sets forth the requirement that each registrant disclose the ratio of the compensation of its principal executive officer (PEO) to its median employee’s compensation. In the interpretive release, the SEC emphasized that the Pay Ratio Disclosure Rule is designed to provide registrants with the flexibility to determine appropriate methodologies to identify and calculate the compensation of the median employee and prepare the required disclosures. Significantly, the SEC indicated in the interpretive release that, if a registrant uses reasonable estimates, assumptions or methodologies to determine the pay ratio, the pay ratio and related disclosure would not provide the basis for an SEC enforcement action, unless such disclosure was made or reaffirmed without a reasonable basis or was provided other than in good faith.

The interpretive release also provides that a registrant may use existing internal records (e.g., tax or payroll records) to identify and calculate the annual compensation of its median employee, even if the existing records do not include every element of compensation (such as widely-distributed employee equity awards). Such existing internal records may, according to the interpretive release, also be appropriately used to determine the availability of the de minimis exemption for foreign employees (i.e., the provision which, subject to certain limitations, allows a registrant to exclude non-US employees from the data used to determine its median employee’s compensation, if non-US. employees account for 5 percent or less of the registrant’s total number of employees).

The SEC also clarified that, although the Pay Ratio Disclosure Rule specifically excludes workers who provide services to the registrant or its consolidated subsidiaries, but are employed (or whose compensation is determined) by an unaffiliated third party (the Leased Workers Exclusion), the Leased Workers Exclusion is not the exclusive basis for a registrant to determine that a worker is not required to be included in the data used to identify and calculate the annual compensation of its median employee. The interpretive release goes on to provide that a registrant may apply a widely recognized test under another area of law (e.g., tax or employment law) that the registrant otherwise uses to determine whether its workers are employees and are, therefore, required to be included in the data for purposes of the Pay Ratio Disclosure Rule.

In light of the SEC’s interpretive release regarding the Pay Ratio Disclosure Rule, on September 21, the SEC’s Division of Corporation Finance (the Division) also issued a new Compliance & Disclosure Interpretation (C&DI) (available here) and a revised C&DI (available here) and withdrew a C&DI. New C&DI 128C.06 indicates that the SEC will not object if a registrant describes the disclosure required by the Pay Ratio Disclosure Rule as a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K. C&DI 128C.01 was updated to add a reference to the SEC’s interpretive release in order to clarify that, if a registrant elects to use a consistently applied compensation measure (CACM) (instead of total annual compensation calculated in accordance with Item 402(c)(2)(x) of Regulation S-K) to identify the median employee, the CACM may be formulated based on a registrant’s internal records, even if such records do not include every element of compensation (as previously described above). C&DI 128C.05, which previously described the circumstances under which a worker is employed or his or her compensation is determined by an unaffiliated third party (for purposes of the Leased Workers Exclusion), was withdrawn.

Also on September 21, the Division issued detailed guidance (available here) regarding the use of reasonable estimates, statistical sampling and other reasonable methodologies to identify the median employee and calculate such employee’s annual compensation. In particular, the Division’s guidance and hypothetical examples indicate, among other things, that:

  • a registrant must determine its own median employee compensation and may not rely upon industry estimates;

  • a registrant may use a combination of methods to determine the employees from which the median employee is identified (such as using reasonable estimates for one geographic or business unit and using statistical sampling for another geographic or business unit);

  • a registrant may use a combination of statistical sampling methods, so long as the methods draw observations from each geographical or business unit and infer the registrant’s overall median employee’s compensation based on the observations drawn;

  • appropriate sampling methods, depending upon a registrant’s particular facts and circumstances, may include random sampling, stratified sampling, cluster sampling and systematic sampling;

  • situations where it may be appropriate to use reasonable estimates include analyzing the composition of a registrant’s workforce, calculating a consistent measure of compensation (as to annual compensation and/or the elements of annual compensation) of a registrant’s median employee and using the mid-point of a compensation range to estimate compensation; and

  • “other reasonable methodologies” registrants may consider include reasonable methods of imputing or correcting missing values and reasonable methods of addressing extreme data (such as outliers).

©2020 Katten Muchin Rosenman LLP


About this Author

Mark Reyes Securities Lawyer Katten Muchin law firm Chicago office

Mark J. Reyes concentrates his practice in corporate and securities matters, including representing issuers and investors in public offerings and private placements of equity and debt securities and advising clients in complex corporate transactions such as mergers, acquisitions, private investments in public equity (PIPEs), private equity investments and joint ventures. He also counsels public companies on securities law compliance, disclosures and corporate governance matters.

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Mark D. Wood, corporate securities lawyer Katten Muchin Chicago Law firm

Mark D. Wood is head of Katten's Securities practice and concentrates in corporate and securities law. Mark represents public companies, issuers and investment banks in initial public offerings (IPOs) and other public offerings, private investment in public equity (PIPE) transactions, debt securities and other securities matters.

Mark also represents clients in complex corporate transactions, including tender offers, mergers, acquisitions, dispositions, going-private transactions, private equity investments, joint ventures and strategic alliances.  He is a leading practitioner in representing investors, public companies and placement agencies in private investment in public equity (PIPE) transactions. In addition, he also counsels public companies on securities law compliance, disclosures, corporate governance and compensation-related issues. Many of his clients are middle market and upper middle market companies in the technology, oil and gas, manufacturing, health care and commercial banking industries.


Alyse Sagalchik concentrates her practice on corporate matters, with an emphasis on mergers and acquisitions, joint ventures, private equity and securities transactions. Alyse also advises companies on a broad range of general corporate, federal securities laws and corporate governance matters, including Securities Exchange Act of 1934 reporting and disclosure matters. She has represented strategic and financial buyers and sellers in M&A transactions ranging in value from $10 million to more than $15 billion and spanning a wide variety of industries, including health...