SEC Seeks Additional Feedback on Impact of Excluding Employee Populations from Pay Ratio Calculation

June 05, 2015

In an unusual move that may reinforce that final pay ratio rules are nearing completion, the Securities and Exchange Commission this week asked for public input on its staff analysis "evaluating the potential effects on the accuracy of the pay ratio calculation of excluding different percentages of certain categories of employees such as employees in foreign countries, part-time, seasonal, or temporary employees as suggested by commenters."  The statistical study performed by the agency's Division of Economic and Risk Analysis (DERA), which performs the cost-benefit analysis for SEC rulemakings, indicates that the Commission is considering the effects on the accuracy of the pay ratio disclosure of allowing companies to exclude certain employee populations from the pay ratio calculation.  The report states that excluding 20 percent of the employee population could decrease the pay ratio estimate by 13 percent or increase it by 15 percent, overall an inconsequential impact on the accuracy of the pay ratio, given the variability in the estimates required to calculate the ratio.  DERA's analysis is based on general assumptions of the distribution of employee wages based on Bureau of Labor Statistics data and estimates from federal government employees, and it does not break down the impact of excluding specific employee populations (i.e., employees in foreign countries, part-time, etc.).  In addition, the analysis does not examine the cost savings that would result by allowing companies to exclude such employees.  The press release accompanying the analysis has asked for public comment by July 6, 2015, the same day that comments are due on the Commission's proposed rule on pay for performance.  The release also notes that additional information may be released for comments.  The Association's Center On Executive Compensation will review the release and provide appropriate feedback to the Commission.