United States – Preparing for the CEO Disclosure Rules

United States – Preparing for the CEO Disclosure Rules

This GMS Flash Alert reports that the U.S. CEO Pay Ratio disclosure rules mandated by the Dodd-Frank Act will soon take effect and the requirements will impose new disclosure burdens on companies.

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Flash Alert 2016-094

The U.S. CEO Pay Ratio disclosure rules mandated by the Dodd-Frank Act1 will soon take effect and the requirements will impose new disclosure burdens on companies, which will have to properly disclose CEO compensation, median employee total annual compensation, and the ratio of CEO pay compared to median employee pay.  Moreover, there will be heightened scrutiny of executive compensation policies by employees, shareholders, and the public.  

The disclosure requirements are expected to have wide-reaching implications for a company’s:

  • Shareholder outreach;
  • Proxy disclosure and external communications;
  • Internal communications;
  • Employee engagement and productivity; and 
  • Executive- and broad-based-Pay strategy. 

WHY THIS MATTERS

U.S. companies will be affected by these requirements and will have to properly disclose CEO compensation, median employee total annual compensation, and the ratio of CEO pay compared to median employee pay. These requirements could result in heightened scrutiny of their executive compensation policies.

Companies will need to understand how to develop a process, a work-plan, and weigh median employee methodology options, amongst other things, as a means of properly fulfilling their responsibilities under the CEO pay ratio disclosure rules.  

Background

In August 2015, the U.S. Securities and Exchange Commission (SEC) adopted final rules2 implementing the CEO pay ratio disclosure requirements under the Dodd-Frank Act.  Under the rules, companies will be required to disclose: (i) CEO compensation; (ii) median employee total annual compensation; and (iii) the ratio of CEO pay compared to median employee pay.  

Requirements Apply for First Fiscal Year on or after January 1, 2017

Companies are required to provide the new pay ratio disclosures for the first fiscal year commencing on or after January 1, 2017.  As a result, companies with a fiscal year ending December 31, 2017, will need to disclose the pay ratio information (reflecting 2017 compensation) in their 2018 proxy statements.

The rules provide companies with flexibility to determine the “median” employee to recognize the inherent differences in business and talent models while satisfying the filing requirements.  Companies can choose the compensation variable to determine median employee (e.g., payroll records, cash compensation, total compensation), whether to use full employee population (which includes those employees seconded overseas by the U.S. company) or a statistical sample of the population, and the point in time to determine the “median” employee (between fiscal year-end and the following three months) among other decisions.

KPMG NOTE

Flexibility creates a demand for analysis and decision-making to report the pay ratio that is most reflective of each company’s pay and staffing model.  It is recommended that companies begin discussing their concerns in respect of their obligations under the CEO pay ratio disclosure rules with their qualified compensation, statistics, and payroll professionals – the new rules apply in just a few short months.

FOOTNOTES

1  Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111–203, H.R. 4173). 

2  See “SEC Adopts Rule for Pay Ratio Disclosure“ on the SEC website.

CONTACTS

For additional information or assistance, please contact your local GMS or People Services professional or one of the following professionals with the KPMG International member firm in the United States:

 

Jill Hemphill 

Tel. + 1 (212) 954 1942

jhemphill@kpmg.com

 

Tony DaSilva

Tel. + 1 (617) 988 1557

anthonypdasilva@kpmg.com

 

Greg Kopp

Tel. + 1 (202) 533 8011

gkopp@kpmg.com

The above information is not intended to be "written advice concerning one or more Federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 as the content of this document is issued for general informational purposes only.

The information contained in this newsletter was submitted by the KPMG International member firm in the United States.

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Flash Alert is an Global Mobility Services publication of KPMG LLPs Washington National Tax practice. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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