Preparing for CEO pay ratio disclosures.

• Author: Bridges, Lisa
• Position: Accounting

The new chief executive/rank-and-file employee pay-ratio disclosure rules released by the U.S. Securities and Exchange Commission (SEC) seem to be as divisive as being a Chicago Cubs fan or a White Sox fan. There is no middle ground. Some believe the rules are essential and a long-awaited panacea to the executive pay debate, while others believe they are at best a drain on corporate resources.

But just as is the case with Chicago's rival baseball teams, if one team advances to the post-season, fans just need to learn to live with them. Now that the pay-ratio rules will likely be adopted, it is time to figure out how to best work with what the SEC has proposed.

Basics of the New Rules

Section 955 of the 2010 Wall Street Reform and Consumer Protection Act (known as the Dodd-Frank Act) requires public companies to disclose the pay ratio between the chief executive and rank-and-file employees. The pay-ratio calculation compares the annual total compensation of the chief executive officer (CEO) to the median of the annual total compensation of all employees.

Annual total compensation for this purpose includes base salary, bonuses, stock and option awards, long-term cash incentive pay, change in pension value, non-qualified deferred compensation earnings and certain other compensation, including perquisites.

Though the concept may be simple, it is riddled with complexities in determining pay amounts across a broad and diverse workforce, particularly for global employers. After a fairly significant delay, the SEC has now released proposed rules on the pay ratio. These rules are subject to public comments, which are due by Dec. 2, 2013.

The proposed rules require U.S. public companies to disclose:

* The median annual total compensation of all employees of a company other than the CEO;

* The annual total compensation of the company's CEO; and

* The ratio of the two amounts.

The SEC has responded to concerns raised in the many comment letters and petitions with an approach that stresses flexibility while complying with the statutory requirements of the Dodd-Frank Act. Rather than imposing prescriptive requirements, the proposed rules give corn-panies flexibility in identifying the "median" compensation.

Four steps need to be completed to calculate the pay ratio: identify the employee population to be included when identifying the median total compensation, identify the median total compensation and the employee tied to the median total compensation, calculate the annual total compensation of the median employee and the CEO and calculate and disclose the ratio of the median employee to the CEO.

Again, these four steps may appear simple, but there are complexities--particularly in the first three steps. Key details of each step are described.

1] EMPLOYEES INCLUDED IN IDENTIFYING THE 'MEDIAN'

Step one of the proposed rules requires a company to identify the employee population to be included when identifying the median total compensation...