[Federal Register Volume 78, Number 190 (Tuesday, October 1, 2013)]
[Proposed Rules]
[Pages 60560-60605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-23073]



[[Page 60559]]

Vol. 78

Tuesday,

No. 190

October 1, 2013

Part IV





Securities and Exchange Commission





-----------------------------------------------------------------------





17 CFR Parts 229 and 249





Pay Ratio Disclosure; Proposed Rule

  Federal Register / Vol. 78 , No. 190 / Tuesday, October 1, 2013 / 
Proposed Rules  

[[Page 60560]]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229 and 249

[Release Nos. 33-9452; 34-70443; File No. S7-07-13]
RIN 3235-AL47


Pay Ratio Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: We are proposing amendments to Item 402 of Regulation S-K to 
implement Section 953(b) of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act. Section 953(b) directs the Commission to amend 
Item 402 of Regulation S-K to require disclosure of the median of the 
annual total compensation of all employees of an issuer (excluding the 
chief executive officer), the annual total compensation of that 
issuer's chief executive officer and the ratio of the median of the 
annual total compensation of all employees to the annual total 
compensation of the chief executive officer. The proposed disclosure 
would be required in any annual report, proxy or information statement 
or registration statement that requires executive compensation 
disclosure pursuant to Item 402 of Regulation S-K. The proposed 
disclosure requirements would not apply to emerging growth companies, 
smaller reporting companies or foreign private issuers.

DATES: Comments should be received on or before December 2, 2013.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an email to [email protected]. Please include 
File Number S7-07-13 on the subject line; or
     Use the Federal Rulemaking ePortal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Elizabeth M. Murphy, Secretary, 
Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-1090.

All submissions should refer to File Number S7-07-13. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE., Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. All comments received will be posted without change; we do 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Christina L. Padden, Attorney Fellow 
in the Office of Rulemaking, at (202) 551-3430, in the Division of 
Corporation Finance; 100 F Street NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are proposing amendments to Item 402 \1\ 
of Regulation S-K \2\ and a conforming amendment to Form 8-K \3\ under 
the Securities Exchange Act of 1934 (the ``Exchange Act'').\4\
---------------------------------------------------------------------------

    \1\ 17 CFR 229.303.
    \2\ 17 CFR 229.10 et seq.
    \3\ 17 CFR 249.220f.
    \4\ 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

Table of Contents

I. Background
    A. Section 953(b) of the Dodd-Frank Act
    B. Comments Received
II. Discussion of the Proposed Amendments
    A. Introduction
    B. Scope of Section 953(b) of the Dodd-Frank Act
    1. Filings Subject to the Proposed Disclosure Requirements
    2. Registrants Subject to the Proposed Disclosure Requirements
    C. Proposed Requirements for Pay Ratio Disclosure
    1. New Paragraph (u) of Item 402 (Pay Ratio Disclosure)
    2. Employees Included in the Identification of the Median
    3. Identifying the Median
    4. Determination of Total Compensation
    5. Disclosure of Methodology, Assumptions and Estimates
    6. Clarification of the Meaning of ``Annual''
    7. Timing of Disclosure
    8. Status as ``Filed'' Not ``Furnished''
    D. Transition Matters
    1. Proposed Compliance Date
    2. Proposed Transition for New Registrants
III. General Request for Comment
IV. Economic Analysis
V. Paperwork Reduction Act
VI. Small Business Regulatory Enforcement Fairness Act
VII. Regulatory Flexibility Act Certification
VIII. Statutory Authority and Text of Amendments

I. Background

A. Section 953(b) of the Dodd-Frank Act

    Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the ``Dodd-Frank Act'') \5\ directs the Commission to 
amend section 229.402 of title 17, Code of Federal Regulations, to 
require each issuer, other than an emerging growth company, as that 
term is defined in Section 3(a) of the Securities Exchange Act of 1934, 
to disclose in any filing of the issuer described in section 229.10(a) 
of title 17, Code of Federal Regulations (or any successor thereto)-- 
the median of the annual total compensation of all employees of the 
issuer, except the chief executive officer (or any equivalent position) 
of the issuer; the annual total compensation of the chief executive 
officer (or any equivalent position) of the issuer; and the ratio of 
the median of the total compensation of all employees of the issuer to 
the annual total compensation of the chief executive officer of the 
issuer. Section 953(b) also requires that the total compensation of an 
employee of an issuer shall be determined in accordance with section 
229.402(c)(2)(x) of title 17, Code of Federal Regulations, as in effect 
on the day before the date of enactment of the Dodd-Frank Act.\6\
---------------------------------------------------------------------------

    \5\ Public Law 111-203, 124 Stat. 1376 (2010), as amended by 
Public Law 112-106,126 Stat. 306 (2012).
    \6\ Public Law 111-203, sec. 953(b), 124 Stat. 1376, 1904 
(2010), as amended by Public Law 112-106, sec. 102(a)(3), 126 Stat. 
306, 309 (2012). Section 102(a)(3) of the Jumpstart Our Business 
Startups Act (the ``JOBS Act'') amended Section 953(b) of the Dodd-
Frank Act to provide an exemption for registrants that are emerging 
growth companies as that term is defined in Section 3(a) of the 
Exchange Act.
---------------------------------------------------------------------------

    We are proposing amendments to implement Section 953(b). We refer 
to this disclosure of the median of the annual total compensation of 
all employees of the issuer, the annual total compensation of the chief 
executive officer of the issuer and the ratio of the two amounts as 
``pay ratio'' disclosure.
    Section 953(b) of the Dodd-Frank Act does not amend the Securities 
Act of 1933 (``Securities Act'') \7\ or the Exchange Act. Instead, 
Section 953(b) directs the Commission to amend Item 402 of Regulation 
S-K (``Item 402'') to add the pay ratio disclosure requirements 
mandated by the Dodd-Frank Act. Although Section 953(b) defines some 
terms used in the provision, commenters have raised questions about the 
scope of the

[[Page 60561]]

statutory requirements and the need for additional interpretive 
guidance.\8\
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 77a et seq.
    \8\ Comments submitted to the Commission in connection with 
Section 953(b) are discussed generally in Section I.B. and 
throughout this release as they relate to specific aspects of the 
proposals.
---------------------------------------------------------------------------

B. Comments Received

    In connection with rulemakings implementing the Dodd-Frank Act, we 
have sought comment from the public before the issuance of a proposing 
release. With respect to Section 953(b) of the Dodd-Frank Act, as of 
September 15, 2013, we have received approximately 22,860 comment 
letters and a petition with approximately 84,700 signatories.\9\ We 
have considered these comments in proposing the rules described in this 
release.
---------------------------------------------------------------------------

    \9\ Comments related to the executive compensation provisions of 
the Dodd-Frank Act, including Section 953(b), are available at 
http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml. In connection with Section 953(b), the 
Commission received approximately 260 unique comment letters and 
approximately 22,600 form letters (posted on the Web site as Letter 
Type A) as of September 15, 2013. The Commission also received a 
petition (posted on the Web site as Letter Type B) with 
approximately 84,700 signatories. In this release, references to 
comment letters identify the commenter by the name of the 
organization or individual submitting the letter. Letters by 
commenters who submitted multiple letters are identified by date.
---------------------------------------------------------------------------

    Commenters were divided in their recommended approaches to Section 
953(b) and the implementation issues it raises. Comments from industry 
groups, issuers, law firms and executive compensation professionals 
generally raised concerns about the complexity of the Section 953(b) 
requirements, the significant compliance costs that could be involved 
and the potential inability for many companies to verify the accuracy 
of their disclosure.\10\ These commenters generally asserted that this 
type of disclosure would not be material to investors or useful to an 
investment or voting decision, and they disputed the potential benefits 
cited by commenters who supported the provision.\11\ Comments from 
individual and institutional investors and some public policy 
organizations generally outlined what they expected to be the benefits 
of the mandated information and urged the Commission to implement the 
provision in a way that would preserve those benefits.\12\ 
Notwithstanding these differing viewpoints, several commenters 
supported a flexible approach to implementation that would retain the 
potential benefits of the mandated disclosure, while avoiding the 
additional compliance costs that a less flexible approach could 
impose.\13\
---------------------------------------------------------------------------

    \10\ See, e.g., letters from American Bar Association (``ABA''); 
Center on Executive Compensation dated September 10, 2010 (``COEC 
I''); Center on Executive Compensation dated November 11, 2011 
(``COEC II''); Davis Polk & Wardwell LLP (``Davis Polk''); Business 
Roundtable et al., (``Group of Trade Associations''); Society of 
Corporate Secretaries and Governance Professionals (``SCSGP''); 
Greta E. Cowart, Haynes & Boone LLP et al. (``Group of Exec. Comp. 
Lawyers''); Protective Life Corporation; Towers Watson; Brian Foley 
& Co.; and Pay Governance LLC. We discuss these costs in detail in 
Section IV of this release.
    \11\ See, e.g., COEC I and letters from Brian Foley & Co.; Group 
of Trade Associations; Meridian Compensation Partners, LLC; National 
Association of Corporate Directors (``NACD''); and Retail Industry 
Leaders Association (``RILA'').
    \12\ See, e.g., letters from AFL-CIO dated December 13, 2010 
(``AFL-CIO I'') and AFL-CIO dated August 11, 2011 (``AFL-CIO II''); 
Americans for Financial Reform; Batirente et al. (``Group of 
International Investors''); J. Brown; K. Burgoyne; Calvert 
Investment Management; Community Action Commission; CtW Investment 
Group; Drucker Institute; Institute for Policy Studies; R. Landgraf; 
D. Miron; Social Investment Forum; S. Towns; Trillium Asset 
Management; UAW Retiree Medical Benefits Trust; and Walden Asset 
Management. See also Letter Type A. We discuss these benefits in 
detail in Section IV of this release.
    \13\ See, e.g., AFL-CIO II and letters from ABA; American 
Benefits Council; COEC II; Protective Life Corporation; and Davis 
Polk.
---------------------------------------------------------------------------

    We discuss the concerns and recommendations from the commenters in 
more detail throughout this release. We agree with commenters that, 
depending on how Section 953(b) is implemented, the cost of compliance 
with these new disclosure requirements could be, at least for some 
registrants, substantial. The rules we are proposing are intended to 
address commenters' concerns and are designed to lower the cost of 
compliance while remaining consistent with Section 953(b).

II. Discussion of the Proposed Amendments

A. Introduction

    Section 953(b) imposes a new requirement on registrants to disclose 
the median of the annual total compensation of all employees (excluding 
the chief executive officer), the annual total compensation of the 
chief executive officer and the ratio of the median disclosed to the 
annual total compensation of the chief executive officer. Section 
953(b)(2) specifies that, for purposes of Section 953(b), the total 
compensation of an employee of an issuer shall be determined in 
accordance with Item 402(c)(2)(x) of Regulation S-K. The Commission's 
rules for compensation disclosure have traditionally focused on the 
compensation of executive officers and directors.\14\ Although 
registrants subject to Item 402 are required to provide extensive 
information about the compensation of the principal executive officer 
(``PEO'') and other named executive officers identified pursuant to 
Item 402(a), current disclosure rules generally do not require 
registrants to disclose detailed compensation information for other 
employees in their filings with the Commission.\15\ Commenters have 
observed that, because of the complexity of the requirements of Item 
402(c)(2)(x), registrants typically compile information required by 
Item 402(c) manually for the named executive officers, which they have 
stated takes significant time and resources.\16\ We do not expect that 
many registrants, if any, currently disclose or track total 
compensation as determined pursuant to Item 402 for their 
workforce.\17\

[[Page 60562]]

Registrants are required to present various elements of employee 
compensation, on an aggregate basis, in the relevant line items of 
their financial statements and related footnotes (such as accrued 
payroll and benefits amounts recorded in current liabilities on the 
balance sheet, or salary and bonus amounts included in selling and 
administrative expenses or cost of goods sold on the income 
statement).\18\ These amounts are calculated and presented in 
accordance with the comprehensive set of accounting principles that the 
registrant uses to prepare its primary financial statements. For 
example, under United States generally accepted accounting principles 
(``U.S. GAAP''), there are several accounting standards that relate to 
compensation,\19\ and these standards are distinct from the 
Commission's executive compensation disclosure rules. In addition, the 
Commission's executive compensation disclosure rules differ from tax 
accounting and reporting standards.\20\ Therefore, Section 953(b) 
requires registrants to disclose specific information about non-
executive employee compensation that is not currently required for 
disclosure, accounting or tax purposes.
---------------------------------------------------------------------------

    \14\ Initially, disclosure requirements for executive and 
director compensation were set forth in Schedule A to the Securities 
Act and Section 12(b) of the Exchange Act, which list the type of 
information to be included in Securities Act and Exchange Act 
registration statements. In 1938, the Commission promulgated its 
first executive and director compensation disclosure rules for proxy 
statements. See Amended Proxy Rules, Release No. 34-1823 (Aug. 11, 
1938) [3 FR 1991].
    From time to time thereafter, the Commission has amended its 
executive and director compensation disclosure requirements in light 
of changing trends in executive compensation and other issues, and, 
more recently, to comply with the mandates of the Dodd Frank Act. 
See, e.g., Solicitation of Proxies Under the Act, Release No. 34-
3347 (Dec. 18, 1942) [7 FR 10655]; Solicitation of Proxies, Release 
No. 34-4775 (Dec. 11, 1952) [17 FR 11431]; Uniform and Integrated 
Reporting Requirements: Management Remuneration, Release No. 33-6003 
(Dec. 4, 1978) [43 FR 58181]; Disclosure of Executive Compensation, 
Release No. 33-6486 (Sept. 23, 1983) [48 FR 44467]; Executive 
Compensation Disclosure, Release No. 33-6962 (Oct. 16, 1992) [57 FR 
48126]; Executive Compensation Disclosure; Securityholder Lists and 
Mailing Requests, Release No. 33-7032 (Nov. 22, 1993) [58 FR 63010]; 
Executive Compensation and Related Person Disclosure, Release No. 
33-8732A (Aug. 29, 2006) [71 FR 53158] (``2006 Adopting Release''); 
Proxy Disclosure Enhancements, Release No. 33-9089A (Dec. 16, 2009) 
[74 FR 68334]; and Shareholder Approval of Executive Compensation 
and Golden Parachute Compensation, Release No. 33-9178 (Jan. 25, 
2011)[76 FR 6010].
    \15\ Although the group of covered individuals for whom 
disclosure is required has changed over time, the rules generally 
have sought to require compensation disclosure for ``persons who, in 
fact, function as key, policy-making members of management.'' 
Uniform and Integrated Reporting Requirements: Management 
Remuneration, Release No. 33-5950 (July 28, 1978) [43 FR 34415], at 
34416.
    \16\ See letter from Davis Polk. See also letter from R. 
Morrison.
    \17\ See letter from Protective Life (noting that ``very few 
employers routinely determine certain items of compensation for 
individual `rank and file' employees, notably the values of stock 
and stock option awards and the aggregate change in the actuarial 
present value of defined benefit pension plan accruals. For most 
employers, determining these amounts will require, for the first 
time, calculations for all (or a large subset) of their 
employees''). See also COEC I (``No public company currently 
calculates each employee's total compensation as it calculates total 
pay on the Summary Compensation Table for the named executive 
officers, because disclosure of executive pay has a different 
purpose than internal accounting.''); and letter from R. Morrison 
(``Collecting, organizing, and analyzing this kind of data for all 
employees in order to develop a median comp figure would be 
extremely complex, time-consuming, and burdensome, assuming this is 
even possible.'').
    \18\ ``Total compensation'' as determined pursuant to Item 402 
is not an amount that is reported or calculated in connection with a 
registrant's financial statements.
    \19\ See, e.g., FASB ASC 710, Compensation--General; ASC 715, 
Retirement Benefits Compensation; ASC 960, Defined Benefit Pension 
Plans; ASC 962, Defined Contribution Pension Plans; ASC 965, Health 
and Welfare Benefit Plans; and ASC 718, Compensation--Stock 
Compensation.
    \20\ For example, registrants that are subject to the United 
States Internal Revenue Code [26 U.S.C. 1 et seq.] are required to 
report certain compensation information for each employee to the 
Internal Revenue Service, typically on Form W-2. The elements of 
compensation that are required to be calculated and reported on Form 
W-2 are not the same as those covered by Item 402 requirements, and 
the reported amounts relate to the relevant calendar year for tax 
purposes, rather than the registrant's fiscal year.
    Additionally, the compensation required to be disclosed under 
Item 402 reflects the compensation that was awarded to, earned by or 
paid to the executive officer during the fiscal year in contrast to 
compensation reported on Form W-2, which reflects only compensation 
that was includible in income for income tax purposes during the 
calendar year regardless of when that compensation was earned. For 
example, under Item 402, the value of stock options, deferred salary 
and bonuses would be included in compensation in the period they 
were awarded or earned. In contrast, for purposes of Form W-2, 
income from stock options is generally included in income at the 
time of exercise, and income relating to deferred salary and bonuses 
is included only when those amounts are actually paid, which could 
be in a future year.
---------------------------------------------------------------------------

    Many commenters raised concerns about the significant compliance 
costs that could result from requiring the use of ``total 
compensation'' as defined in Item 402(c)(2)(x) to calculate employee 
pay and requiring registrants to identify the median instead of the 
average.\21\ According to these commenters, the primary driver of the 
significant compliance costs is that many registrants, whether large 
multinationals or companies of modest revenue size and market 
capitalization, maintain multiple and complex payroll, benefits and 
pension systems (including systems maintained by third party 
administrators) that are not structured to easily accumulate and 
analyze all the types of data that would be required to calculate the 
annual total compensation for all employees in accordance with Item 
402(c)(2)(x). Thus, in order to compile such disclosure, registrants 
would either need to integrate these data systems or consolidate the 
data manually, which, in both cases, would be, according to these 
commenters, highly costly and time consuming.\22\
---------------------------------------------------------------------------

    \21\ See, e.g., letters from Davis Polk (noting that compliance 
will be ``highly costly and burdensome, with tremendous uncertainty 
as to accuracy. Companies are justifiably concerned about the costs 
and burdens to accomplish the formidable data collection and 
calculation tasks for employees worldwide between the end of the 
year and the first required filing.''); Frederick W. Cook & Co., 
Inc. (stating, ``the calculation of median total pay for all 
employees other than the CEO is problematic, burdensome and perhaps 
impossible for many issuers'') and Protective Life Corporation (``It 
is difficult to overemphasize how burdensome this requirement could 
be for large employers. Calculating annual total compensation is 
much more complicated than simply adding up numbers that companies 
already have available. . . . Since many large companies use outside 
accounting, actuarial nd compensation and pension administration 
firms to perform these calculations, the costs of disclosure will 
increase accordingly.''). See also letters from ABA; COEC I; Group 
of Exec. Comp. Lawyers; Group of Trade Associations; Meridian 
Compensation Partners, LLC; NACD; and R. Morrison.
    \22\ See, e.g., letter from Group of Trade Associations (``There 
is a widespread misconception that this information is readily 
available at the touch of a button.'') See also COEC II and letters 
from Group of Exec. Comp. Lawyers; Meridian Compensation Partners, 
LLC; and R. Morrison.
---------------------------------------------------------------------------

    The proposed rules to implement Section 953(b) are designed to 
comply with the statutory mandate and to address commenters' concerns 
regarding the potential costs of complying with the disclosure 
requirement. Where we have exercised discretion in implementing the 
statutory requirements, we are proposing alternatives that we believe 
will reduce costs and burdens, while preserving what we believe to be 
the potential benefits, as articulated by commenters, of the disclosure 
requirement mandated by the Dodd-Frank Act. We note, however, that 
neither the statute nor the related legislative history directly states 
the objectives or intended benefits of the provision.\23\ Commenters 
supporting Section 953(b) have emphasized that potential benefits could 
arise from adding pay ratio-type information to the total mix of 
executive compensation information.\24\ We have considered the 
statutory mandate of Section 953(b) in the context of other executive 
compensation disclosure under Item 402, and, where practicable, we have 
sought to make the mandated disclosure of Section 953(b) work with the 
existing executive compensation disclosure regime.
---------------------------------------------------------------------------

    \23\ The requirements imposed by Section 953(b) originated in 
the Senate. A provision identical to Section 953(b) was first 
included in S. 3049, the ``Corporate Executive Accountability Act of 
2010,'' which was sponsored by Senator Menendez and introduced on 
February 26, 2010. In that bill, the provision accompanied a say-on-
pay provision. A provision identical to Section 953(b) next appeared 
in S. 3217, the ``Restoring American Financial Stability Act of 
2010'' sponsored by Senator Dodd and introduced on April 15, 2010, 
which served as the basis for the Senate's amendments to H.R. 4173. 
The legislative record includes only a few brief references to the 
pay ratio disclosure requirements, each opposing the provision. See 
156 Con. Rec. S3121 (daily ed. May 5, 2010) (statement of Sen. 
Gregg) and 156 Cong. Rec. S4075 (daily ed. May 20, 2010) (statement 
of Sen. Shelby). The April 30, 2010 report issued by the Senate 
Committee on Banking, Housing and Urban Affairs does not mention the 
pay ratio requirements other than a short statement by the minority. 
See Report of the Senate Committee on Banking, Housing and Urban 
Affairs to Accompany S. 3217 (``the Senate Report''), S. Rep. No. 
111-176, at 245.
    The requirements of Section 953(b) were not discussed during the 
conference committee's deliberations on the legislation. Similarly, 
the Joint Explanatory Statement of the Committee of Conference does 
not mention the pay ratio requirements in its summary of Title IX, 
Subtitle E. See Conference Report on H.R. 4173, H. Rep. No. 111-517, 
at 872.
    \24\ See, e.g., letters from Americans for Financial Reform 
(``Existing requirements mandate disclosure of top executive 
compensation only, encouraging companies to focus unduly on peer to 
peer comparisons when setting CEO pay. . . . Disclosure of CEO-to-
worker pay ratios will encourage Boards of Directors to also 
consider vertical pay equity within firms.''); Calvert Investment 
Management (``The disclosure required by Section 953(b) will help 
investors understand how issuers are distributing compensation 
dollars throughout the firm in ways that may help improve employee 
morale and productivity.''); CtW Investment Group (``The new 
disclosure offers an insight into compensation within the entire 
organization, and provides a different way for boards and 
shareholders to evaluate the relative worth of a CEO.''); and UAW 
Retiree Medical Benefits Trust (``[W]e view Section 953(b) as an 
essential tool that will increase corporate board accountability to 
investors . . . a comparison between CEO and employee pay may help 
shareholders identify the board's strengths and weaknesses, and may 
provide insight into [the board's] relationship with the CEO.'').

---------------------------------------------------------------------------

[[Page 60563]]

    In light of the significant potential costs articulated by 
commenters,\25\ we believe that it is appropriate for the proposed 
rules to allow registrants flexibility in developing the disclosure 
required by the statute. The proposal seeks to implement Section 953(b) 
without imposing additional prescriptive requirements that are not 
mandated by the Dodd-Frank Act and reflects our consideration of the 
relative costs and benefits of this approach as opposed to a more 
prescriptive one. For example, registrants would be able to choose from 
several options in order to provide the disclosure. Registrants may 
choose to identify the median using their full employee population or 
by using statistical sampling or another reasonable method. In doing 
so, the proposed requirements would allow registrants to choose a 
statistical method to identify the median that is appropriate to the 
size and structure of their own businesses and the way in which they 
compensate employees, rather than prescribing a particular methodology 
or specific computation parameters. Registrants may calculate the 
annual total compensation for each employee included in the calculation 
(whether the entire population or a statistical sample) and the PEO 
using Item 402(c)(2)(x) and to identify the median using this method. 
As an alternative, registrants may identify the median employee based 
on any consistently applied compensation measure and then calculate the 
annual total compensation for that median employee in accordance with 
Item 402(c)(2)(x). The proposed requirements also would permit 
registrants to use reasonable estimates in calculating the annual total 
compensation for employees other than the PEO, including when 
disclosing the annual total compensation of the median employee 
identified using a consistently applied compensation measure. We 
believe that this flexible approach is consistent with Section 953(b) 
and could ease commenters' concerns about the potential burdens of 
complying with the disclosure requirement. We do not believe that a 
one-size-fits-all approach would be prudent, given the wide range of 
registrants and the disparate burdens on registrants based on factors 
such as their type of business and the complexity of their payroll 
systems. We seek comment on whether the proposed rules address 
sufficiently the practical difficulties of data collection and whether 
there are other alternative approaches consistent with Section 953(b) 
that could provide the potential benefits of pay ratio information at a 
lower cost. We also seek comment on whether the flexible approach 
proposed in this release appropriately implements Section 953(b).
---------------------------------------------------------------------------

    \25\ The potential costs arising from the requirements of 
Section 953(b), as well as the potential costs relating to the 
proposed rules, are discussed in detail below in Section IV of this 
release.
---------------------------------------------------------------------------

    The details of the proposal are set forth in the sections below. 
First, we interpret the scope of Section 953(b) with respect to the 
filings and the registrants that are subject to the proposed 
requirements. Next, we set forth the proposed new pay ratio disclosure 
requirement in Item 402, to be designated paragraph (u), and provide 
details on a variety of technical and interpretive issues, including:
     The employees that are to be included in the 
identification of the median;
     identifying the median;
     determining ``total compensation;''
     disclosure of the methodology, assumptions and estimates 
used;
     the meaning of ``annual'' in the context of ``annual total 
compensation;''
     various timing matters that arise in connection with the 
proposed requirements; and
     the status of the disclosure as ``filed'' rather than 
``furnished.''

Finally, we address transition matters, including the proposed 
compliance date for registrants that would be subject to the rules, and 
proposed transition provisions for new registrants.

B. Scope of Section 953(b) of the Dodd-Frank Act

1. Filings Subject to the Proposed Disclosure Requirements
    In accordance with Section 953(b) of the Dodd-Frank Act, we are 
proposing to require registrants to include pay ratio disclosure in any 
filing described in Item 10(a) of Regulation S-K that requires 
executive compensation disclosure under Item 402 of Regulation S-K. 
Therefore, the proposed pay ratio disclosure would be required in 
annual reports on Form 10-K,\26\ registration statements under the 
Securities Act and Exchange Act, and proxy and information statements, 
to the same extent that the requirements of these forms require 
compliance with Item 402.\27\ We are not proposing changes to the 
requirements of these forms relating to Item 402. Section 953(b) does 
not direct the Commission to amend any of its forms to add the pay 
ratio disclosure requirements to filings that do not already require 
disclosure of Item 402 information, and we are not proposing to do so.
---------------------------------------------------------------------------

    \26\ 17 CFR 249.310.
    \27\ Registrants would follow the instructions in each form to 
determine whether Item 402 information is required, including any 
instructions that allow for the omission of Item 402 information in 
certain circumstances, such as General Instructions I(2)(c) and 
J(1)(m) to Form 10-K containing special provisions for the omission 
of Item 402 information by wholly-owned subsidiaries and asset-
backed issuers.
    As described below in Section II.C.7., the proposed requirements 
do not require a registrant to update its pay ratio disclosure for 
the most recently completed fiscal year until it files its annual 
report on Form 10-K, or, if later, its proxy or information 
statement for its next annual meeting of shareholders (or written 
consents in lieu of such a meeting).
    In addition, we are proposing a transition period for compliance 
by new registrants that are subject to Section 953(b), so that the 
pay ratio requirement is not required in a registration statement on 
Form S-1 [17 CFR 239.11] or Form S-11 [17 CFR 239.18] for an initial 
public offering or registration statement on Form 10 [17 CFR 
249.210]. See Section II.D.2. of this release.
---------------------------------------------------------------------------

    Although some commenters suggested that Section 953(b)(1) requires 
pay ratio disclosure in every Commission filing,\28\ other commenters 
suggested that the statute, by referring to filings described in Item 
10(a) of Regulation S-K, is intended to apply only to those filings for 
which the applicable form requires Item 402 disclosure.\29\ We agree 
with the latter reading of Section 953(b). We believe that reading 
Section 953(b) to require pay ratio disclosure in filings that do not 
contain other executive compensation information would not present this 
information in a meaningful context. Because some commenters have 
asserted that the pay ratio disclosure would provide another metric to 
evaluate executive compensation disclosure,\30\ we believe that the 
proposed pay ratio disclosure should be placed in context with other 
executive compensation disclosure, such as the summary compensation 
table required by Item 402(c) and the compensation discussion and 
analysis required by Item 402(b), rather than provided on a stand-alone 
basis. Therefore, we believe it is appropriate to read Section 953(b) 
as requiring pay ratio disclosure in only those filings that are 
required to include other Item 402 information.
---------------------------------------------------------------------------

    \28\ See, e.g., COEC I and letters from American Benefits 
Council; Compensia, Inc.; Davis Polk; SCSGP; and Towers Watson.
    \29\ See, e.g., letters from ABA and RILA.
    \30\ See, e.g., AFL-CIO I, House Letter and Senate Letter; and 
letters from CtW Investment Group and UAW Retiree Medical Benefits 
Trust.
---------------------------------------------------------------------------

Request for Comment
    1. Should we require the pay ratio disclosure only in filings in 
which Item 402 disclosure is required, as proposed? Should we require 
the pay ratio disclosure in Commission forms that do

[[Page 60564]]

not currently require Item 402 disclosure? If so, which forms, and why? 
Would disclosure be meaningful to investors where no other executive 
compensation disclosures are required?
    2. Do registrants need any additional guidance about which filings 
would require the proposed pay ratio disclosure? Are there 
circumstances where the requirements of a particular form call for Item 
402 information in certain circumstances, but the applicability of the 
proposed pay ratio disclosure requirements may not be clear? If so, 
please provide details about what should be clarified and what guidance 
is recommended.
2. Registrants Subject to the Proposed Disclosure Requirements
    The proposed pay ratio disclosure requirements would apply to only 
those registrants that are required to provide summary compensation 
table disclosure pursuant to Item 402(c). We recognize that the 
reference to ``each issuer'' in Section 953(b) could be read to apply 
to all issuers that are not emerging growth companies, including 
smaller reporting companies and foreign private issuers. As a result of 
the specific reference in Section 953(b) to the definition of total 
compensation contained in Item 402(c)(2)(x), and the absence of 
direction to apply this requirement to companies not previously subject 
to Item 402(c) requirements, we propose to limit the pay ratio 
disclosure requirement to registrants that are subject to Item 402(c) 
requirements, as described in more detail below.
a. Emerging Growth Companies Are Not Covered
    Under JOBS Act Section 102(a)(3), registrants that qualify as 
emerging growth companies, as that term is defined in Section 3(a) of 
the Exchange Act,\31\ are not subject to Section 953(b). To give effect 
to the statutory exemption, we are proposing an instruction to Item 
402(u) that provides that a registrant that is an emerging growth 
company is not required to comply with Item 402(u).\32\
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78c(a).
    \32\ See proposed Instruction 6 to Item 402(u).
---------------------------------------------------------------------------

b. Smaller Reporting Companies Are Not Covered
    Section 953(b) requires total compensation to be calculated in 
accordance with Item 402(c)(2)(x). Smaller reporting companies (as 
defined in Item 10(f)(1) of Regulation S-K) \33\ are permitted to 
follow the scaled disclosure requirements set forth in Items 402(m)-(r) 
instead of complying with the disclosure requirements set forth in 
Items 402(a)-(k) and (s),\34\ and therefore are not required to 
calculate compensation in accordance with Item 402(c)(2)(x). The 
requirement set forth in Item 402(n) for disclosure of summary 
compensation table information, which includes disclosure of ``total 
compensation,'' does not require smaller reporting companies to include 
all of the same types of compensation required to be included in total 
compensation for other registrants under Item 402(c)(2).\35\ We believe 
that by requiring the use of Item 402(c)(2)(x) to calculate total 
compensation (without mention of Item 402(n)(2)(x)), Congress intended 
to exclude smaller reporting companies from the scope of Section 
953(b). In addition, requiring smaller reporting companies to provide 
the pay ratio disclosure consistent with the requirement for other 
registrants would require smaller reporting companies to collect data 
and calculate compensation for the PEO in a manner they otherwise would 
not be required to calculate compensation. Thus, we do not believe this 
is the intent of the provision.
---------------------------------------------------------------------------

    \33\ 17 CFR 229.10(f)(1).
    \34\ See Item 402(l). Smaller reporting companies are permitted 
to choose compliance with either the scaled disclosure requirements 
or the larger company disclosure requirements on an ``a la carte'' 
basis. As discussed in the scaled disclosure adopting release, the 
staff evaluates compliance by smaller reporting companies with only 
the Regulation S-K requirements applicable to smaller reporting 
companies, even if the company chooses to comply with the larger 
company requirements. See Smaller Reporting Company Regulatory 
Relief and Simplification, Release No. 33-8876 (Dec. 19, 2007) [73 
FR 934], at 941.
    \35\ Specifically, under Item 402(n)(2)(viii), smaller reporting 
companies are not required to include the aggregate change in the 
actuarial present value of pension benefits that is required for 
companies subject to Item 402(c)(2)(viii).
---------------------------------------------------------------------------

    Therefore, as proposed, the pay ratio disclosure requirements would 
not apply to smaller reporting companies. To make this clear, we are 
proposing a technical amendment to paragraph (l) of Item 402, to add 
proposed paragraph (u) to the list of items that are not required for 
smaller reporting companies.
c. Foreign Private Issuers and MJDS Filers Are Not Covered
    Foreign private issuers that file annual reports and registration 
statements on Form 20-F and MJDS filers that file annual reports and 
registration statements on Form 40-F would not be required to provide 
the proposed pay ratio disclosure, because those forms do not require 
Item 402 disclosure.\36\ We do not read Section 953(b) as requiring the 
Commission to expand the scope of Item 402 to apply to companies that 
are not currently subject to the executive compensation disclosure 
requirements set forth in Item 402. Accordingly, we are not proposing 
to amend Form 20-F or Form 40-F, and the proposed pay ratio disclosure 
requirements would not be applicable to foreign private issuers or MJDS 
filers. In addition, we are not proposing any changes to existing Item 
402(a)(1), which provides for the treatment of foreign private issuers. 
Accordingly, foreign private issuers that file annual reports on Form 
10-K will continue to be able to satisfy Item 402 requirements by 
following the requirements of Items 6.B and 6.E.2 of Form 20-F and 
would not be required to make the pay ratio disclosure mandated by 
Section 953(b). In addition, requiring foreign private issuers and MJDS 
filers to provide the pay ratio disclosure consistent with the 
requirement for other registrants would require these registrants to 
collect data and calculate compensation for the PEO in a manner they 
otherwise would not be required to calculate compensation. Thus, we do 
not believe this is the intent of the provision.
---------------------------------------------------------------------------

    \36\ The term ``MJDS filers'' refers to registrants that file 
reports and registration statements with the Commission in 
accordance with the requirements of the U.S.- Canadian 
Multijurisdictional Disclosure System (the ``MJDS''). The definition 
for ``foreign private issuer'' is contained in Exchange Act Rule 3b-
4(c) [17 CFR 240.3b-4(c)]. A foreign private issuer is any foreign 
issuer other than a foreign government, except for an issuer that, 
as of the last business day of its most recent fiscal year, has more 
than 50% of its outstanding voting securities held of record by 
United States residents and any of the following: A majority of its 
officers and directors are citizens or residents of the United 
States, more than 50% of its assets are located in the United 
States, or its business is principally administered in the United 
States.
---------------------------------------------------------------------------

Request for Comment
    3. Should the pay ratio disclosure requirements, as proposed, apply 
only to those registrants that are required to provide summary 
compensation table disclosure pursuant to Item 402(c)? If not, to which 
registrants should pay ratio disclosure requirements apply?
    4. Should we revise the proposal so that smaller reporting 
companies would be subject to the proposed pay ratio disclosure 
requirements? If so, why? If so, also discuss how smaller reporting 
companies should calculate total compensation for employees and the 
PEO. For example, should they be required to calculate total 
compensation in accordance with Item 402(c)(2)(x) instead of the scaled 
disclosure requirements? In the alternative, should smaller reporting 
companies be required to provide a modified version of the pay ratio 
disclosure? If so, why, and what should that modified version entail?

[[Page 60565]]

Should it be based on the compensation amounts required under the 
scaled disclosure requirements applicable to smaller reporting 
companies, such as a ratio where the PEO compensation and other 
employee compensation are calculated in accordance with Item 
402(n)(2)(x)? Please provide information as to particular concerns that 
smaller reporting companies may have. Please discuss whether the 
disclosure would be useful to investors in smaller reporting companies.
    5. Should we amend either Form 20-F or Form 40-F to include 
disclosure that is similar to the proposed pay ratio disclosure 
requirements? If so, why? Assuming we would not otherwise subject 
foreign private issuers to the executive compensation disclosure rules, 
what modifications would be needed to address the different reporting 
requirements that foreign private issuers and MJDS filers have for 
executive compensation disclosure in order to require pay ratio 
disclosure? In particular, how should these registrants calculate total 
compensation (for the PEO and for employees) for purposes of such a 
requirement? Please provide information as to particular concerns that 
foreign private issuers or MJDS filers may have if they were required 
to comply with such a requirement. Please discuss whether the 
disclosure would be useful to investors, particularly in the absence of 
the executive compensation disclosure that would accompany disclosure 
of the ratio for registrants subject to Item 402 disclosure.

C. Proposed Requirements for Pay Ratio Disclosure

1. New Paragraph (u) of Item 402 (Pay Ratio Disclosure)
    We are proposing new paragraph (u) of Item 402 that would require 
disclosure of:
    (A) The median of the annual total compensation of all employees of 
the registrant, except the principal executive officer of the 
registrant;
    (B) the annual total compensation of the principal executive 
officer of the registrant; and
    (C) the ratio of the amount in (A) to the amount in (B), presented 
as a ratio in which the amount in (A) equals one or, alternatively, 
expressed narratively in terms of the multiple that the amount in (B) 
bears to the amount in (A).
    For consistency with existing Item 402 requirements, the proposed 
requirements would use the defined term ``PEO'' (principal executive 
officer), instead of the term ``chief executive officer'' used in 
Section 953(b).\37\ PEO is defined in Item 402(a)(3) as an ``individual 
serving as the registrant's principal executive officer or acting in a 
similar capacity during the last completed fiscal year.'' We believe 
that this consistency would simplify compliance for registrants and 
would clarify how the pay ratio disclosure relates to the PEO's total 
compensation figure disclosed in the summary compensation table. We 
also believe that this change in terminology is consistent with Section 
953(b).
---------------------------------------------------------------------------

    \37\ The term chief executive officer in the executive 
compensation rules was replaced by the term ``principal executive 
officer'' as part of the 2006 amendments to Item 402 of Regulation 
S-K in order to maintain consistency with the nomenclature used in 
Item 5.02 of Form 8-K. See 2006 Adopting Release, supra note 14, at 
n. 326.
---------------------------------------------------------------------------

    Section 953(b) specifies that registrants must disclose the ratio 
of the median of the annual total compensation of all employees to the 
PEO's annual total compensation. We note that three commenters raised 
concerns about the presentation of the pay ratio in the order set forth 
in Section 953(b).\38\ These commenters noted that the customary manner 
of presenting similar types of ratios would include the PEO's annual 
total compensation in the numerator and the median of the annual total 
compensation of all employees in the denominator and would typically be 
expressed in terms of the multiple that the PEO amount bears to the 
median amount (such as ``PEO pay is X times the median employee pay''). 
These commenters recommended that we allow registrants to present the 
ratio in this more customary manner.
---------------------------------------------------------------------------

    \38\ See letters from Compensia, Inc. (``For example, if the 
annual total compensation of a company's chief executive officer was 
$3,750,000 and the median of the annual total compensation of all 
employees was $75,000, then as currently formulated, the required 
disclosure would be 0.02 to 1, rather than the commonly understood 
calculation of 50 to 1.''); Frederick W. Cook & Co., Inc.; and Group 
of Exec. Comp. Lawyers (``For example, if CEO pay were 2 million and 
the median annual compensation of all employees were $25,000, the 
statute literally requires a disclosure that the median annual 
compensation of all employees is 1/80 of the CEO's pay.'').
---------------------------------------------------------------------------

    Although Section 953(b) calls for a ratio showing the median of the 
annual total compensation of all employees to the PEO's annual total 
compensation, it does not specify how the ratio should be expressed. In 
order to promote consistent presentation and address the potential for 
confusion, the proposed pay ratio disclosure requirements specify that 
the ratio must be expressed as a ratio in which the median of the 
annual total compensation of all employees is equal to one, or, 
alternatively, expressed narratively in terms of the multiple that the 
PEO total compensation amount bears to the median of the annual total 
compensation amount. For example, if the median of the annual total 
compensation of all employees of a registrant is $45,790,\39\ and the 
annual total compensation of a registrant's PEO is $12,260,000,\40\ 
then the pay ratio disclosed would be ``1 to 268'' (which could also be 
expressed narratively as ``the PEO's annual total compensation is 268 
times that of the median of the annual total compensation of all 
employees'').
---------------------------------------------------------------------------

    \39\ Average salary for all occupations, U.S. Bureau of Labor 
Statistics, May 2012 National Occupational Employment and Wage 
Estimates United States, available at http://www.bls.gov/oes/current/oes_nat.htm#00-0000.
    \40\ Derived from 2012 Average CEO at S&P 500 Index Companies, 
AFL-CIO, Trends in CEO Pay, available at http://www.aflcio.org/Corporate-Watch/CEO-Pay-and-the-99/Trends-in-CEO-Pay.
---------------------------------------------------------------------------

    We believe that the proposed requirements for the expression of the 
ratio would help to address the concerns of commenters and are 
consistent with the statute. It does not appear that the order of the 
ratio specified in Section 953(b) would impact investor understanding 
or the usefulness, as expressed by some commenters,\41\ to investors of 
the proposed pay ratio disclosure.
---------------------------------------------------------------------------

    \41\ The commenters asserting that Section 953(b) disclosure 
would be useful to investors did not raise the order of the ratio 
components as a factor that would diminish the meaningfulness of the 
information. These commenters are listed at notes 155 through 165, 
infra.
---------------------------------------------------------------------------

Request for Comment
    6. Are there any other presentation issues that companies need 
guidance on or that should be clarified in the pay ratio disclosure 
requirements? If so, please provide details about such issues and any 
recommended guidance that should be provided.
2. Employees Included in the Identification of the Median
a. All Employees
    Section 953(b) expressly requires disclosure of the median of the 
annual total compensation of ``all employees.'' Consistent with that 
mandate, the proposed requirements state that ``employee'' or 
``employee of the registrant'' includes any full-time, part-time, 
seasonal or temporary worker employed by the registrant or any of its 
subsidiaries \42\ (including officers other

[[Page 60566]]

than the PEO).\43\ Therefore, under the proposed requirements, ``all 
employees'' covers all such individuals. In contrast, workers who are 
not employed by the registrant or its subsidiaries, such as independent 
contractors or ``leased'' workers or other temporary workers who are 
employed by a third party, would not be covered.\44\
---------------------------------------------------------------------------

    \42\ By directing the Commission to amend Item 402, we believe 
that Section 953(b) is intended to cover employees on an enterprise-
wide basis, including both the registrant and its subsidiaries, 
which is the same approach as that taken for other Item 402 
information. See Item 402(a)(2) and Instruction 2 to Item 402(a)(3). 
Because this issue was not addressed by commenters, we specifically 
request comment below on this approach.
    In the context of Item 402 disclosure, a subsidiary of a 
registrant is an affiliate controlled by the registrant directly or 
indirectly through one or more intermediaries, as set forth in the 
definition of ``subsidiary'' under both Securities Act Rule 405 and 
Exchange Act Rule 12b-2. Therefore, for purposes of the proposed pay 
ratio disclosure, an employee would be covered by the disclosure 
requirements if he or she is employed by the registrant or a 
subsidiary of the registrant as defined in Rule 405 and Rule 12b-2.
    \43\ Rule 405 under the Securities Act states that the term 
``employee'' does not include a director, trustee or officer. The 
parenthetical ``(including officers other than the PEO)'' in Item 
402(u)(3) of the proposed rules is intended to clarify that 
officers, as that term is defined under Rule 405, are not excluded 
from the definition of employee for purposes of the proposed pay 
ratio disclosure requirements.
    \44\ For example, if a registrant pays a fee to another company 
(such as a management company or an employee leasing agency) that 
supplies workers to the registrant, and those workers receive 
compensation from that other company, those workers would not be 
counted as employees of the registrant for purposes of the proposed 
rules.
---------------------------------------------------------------------------

    We note that commenters were split in their support for a rule that 
would include all employees of the issuer,\45\ rather than only 
covering full-time U.S. workers.\46\ Many commenters raised concerns 
that the inclusion of workers located outside the United States, as 
well as employees that are not permanent, full-time employees, would 
render the comparison to the PEO less meaningful, while at the same 
time imposing significant costs on registrants that have global 
operations.\47\ According to these commenters, the international 
variation in compensation arrangements and benefits, in addition to 
cost-of-living differences and currency fluctuations, could distort the 
comparability of employee compensation to that of a PEO based in the 
United States.\48\ In addition, these commenters noted that the types 
of compensation that are recorded in payroll and benefits systems 
outside the United States may vary from those recorded as compensation 
in the United States due to local accounting standards and tax 
regulations. Because of these variations, they further suggest that 
requiring registrants to recompute or adjust the output of payroll 
systems to include non-payroll items that would be reportable as 
compensation under Item 402 has the potential to impose significant 
compliance costs.\49\
---------------------------------------------------------------------------

    \45\ See AFL-CIO I and letters from Americans for Financial 
Reform; CtW Investment Group; Group of International Investors; 
Senator Menendez; Social Investment Forum; Trillium Asset 
Management; UAW Medical Benefits Trust; and Walden Asset Management.
    \46\ See COEC I and letters from ABA; American Benefits Council; 
Brian Foley & Co.; Group of Exec. Comp. Lawyers; NACD; Protective 
Life Corporation; RILA; SCSGP; and Towers Watson.
    \47\ See COEC I and letters from ABA; American Benefits Council; 
Brian Foley & Co.; Group of Exec. Comp. Lawyers; NACD; Protective 
Life Corporation; RILA; SCSGP; and Towers Watson.
    \48\ See, e.g., letter from Group of Exec. Comp. Lawyers.
    \49\ Id.
---------------------------------------------------------------------------

    In contrast, one commenter asserted that the provision was intended 
to cover all employees of the issuer, including full-time, part-time, 
U.S. and non-U.S. employees.\50\ Some commenters asserted that the 
exclusion of non-U.S. and non-full-time employees would diminish the 
meaningfulness of the pay ratio disclosure to investors.\51\ Some of 
these commenters suggested allowing companies to present separate pay 
ratios covering U.S. and non-U.S. employees, which they believed could 
mitigate concerns that the comparison of the PEO to workers located 
outside of the United States could distort the disclosure.\52\
---------------------------------------------------------------------------

    \50\ See letter from Senator Menendez, the sponsor of Section 
953(b) (``Specifically, I want to clarify that when I wrote `all' 
employees of the issuer, I really did mean all employees of the 
issuer. I intended that to mean both full-time and part-time 
employees, not just full-time employees. I also intended that to 
mean all foreign employees of the company, not just U.S. 
employees.'').
    \51\ See AFL-CIO I and letters from Americans for Financial 
Reform; CtW Investment Group; Group of International Investors; 
Institute for Policy Studies; and UAW Medical Benefits Trust. But 
see letter from Social Investment Forum (``[W]e acknowledge that a 
comparison of a U.S. CEO's pay to the median for U.S. employees is 
the most useful comparison as a factor for the compensation 
committee in establishing executive pay packages.'') and letter from 
Walden Asset Management (``[F]or the purposes of analyzing trends in 
executive pay for U.S. executives, statistics comparing compensation 
of NEOs to the median U.S. employee [are] most useful.'').
    \52\ See AFL-CIO I and letters from Americans for Financial 
Reform; Walden Asset Management; and Social Investment Forum (``We 
recommend that the SEC require two statistics, one on pay disparity 
with only U.S. workers and another for non-U.S. workers so that 
investors can better study pay disparity trends and inherent 
risks.'').
---------------------------------------------------------------------------

    We acknowledge the concerns of commenters that the inclusion of 
non-U.S. employees raises compliance costs for multinational companies, 
introduces cross-border compliance issues, and could raise concerns 
about the impact of non-U.S. pay structures on the comparability of the 
data to companies without off-shore operations. We also recognize that 
differences in relative compliance costs may have an adverse impact on 
competition. We have weighed these considerations and are proposing 
that the requirement cover all employees without carve-outs for 
specific categories of employees. Although we believe that the 
inclusion of non-U.S. employees in the calculation of the median is 
consistent with the statute, we have considered ways to address the 
costs of compliance that commenters attribute to the provision's 
coverage of a registrant's global workforce.
    In particular, we are cognizant that data privacy laws in various 
jurisdictions could have an impact on gathering and verifying the data 
needed to identify the median of the annual total compensation of all 
employees. Commenters have asserted that, in some cases, data privacy 
laws could prohibit a registrant's collection and transfer of 
personally identifiable compensation data that would be needed to 
identify the median.\53\ We also understand that in many cases, the 
collection or transfer of the underlying data is made burdensome by 
local data privacy laws, but is not prohibited.
---------------------------------------------------------------------------

    \53\ See COEC II and letters from Davis Polk; Group of Exec. 
Comp. Lawyers; and SCSGP.
---------------------------------------------------------------------------

    For example, we acknowledge that multinational companies based in 
the United States may need to ensure compliance with data privacy 
regulations in transmitting personally identifiable human resources 
data (``personal data'') of European Union (``EU'') persons onto global 
human resource information system networks in the United States, 
sending personal data in hard copy from the European Union to the 
United States, as well as personal data ``onward transfers'' to third-
party payroll, pension and benefits processors outside of the European 
Union.\54\ In some EU Member States, employee consent is required, 
while in others, consent may not be sufficient.\55\ Commenters also 
have asserted that other jurisdictions, such as Peru, Argentina, Canada 
and Japan also have data privacy laws that could be implicated by the 
gathering of data for purposes of the proposed pay ratio 
disclosure.\56\
---------------------------------------------------------------------------

    \54\ The EU Directive 95/46/EC, 1995 O.J. L 281 (European Union 
Directive on the Protection of Individuals with Regard to the 
Processing of Personal Data and on the Free Movement of Such Data) 
sets forth the regulatory framework governing the transfer of 
personal data from an EU Member State to a non-EU country.
    \55\ See letter from Group of Exec. Comp. Lawyers.
    \56\ Id.
---------------------------------------------------------------------------

    Although we are not proposing any additional accommodation to 
address this concern, we believe that the flexibility afforded to all 
registrants under the proposed rules could permit registrants to manage 
any potential costs

[[Page 60567]]

arising from applicable data privacy laws. For example, consistent with 
the proposed requirements, registrants in this situation would be 
permitted to estimate the compensation of affected employees. We 
request comment below on whether the proposed flexibility afforded to 
registrants in selecting a method to identify the median, such as the 
use of statistical sampling or other reasonable estimation techniques 
and the use of consistently applied compensation measures to identify 
the median employee, could enable registrants to better manage any 
potential costs and burdens arising from local data privacy regulations 
or if there are other alternatives that would be consistent with 
Section 953(b). Commenters did not provide us with information about 
applicable data privacy laws sufficient to analyze how the flexibility 
allowed to all registrants under the proposed requirements could impact 
the potential costs arising from such laws, and we request information 
about the specific impact these matters would have on collecting or 
transferring data needed to comply with the proposed requirements.
Request for Comment
    7. Are there alternative ways to fulfill the statutory mandate of 
covering ``all employees'' that could reduce the compliance costs and 
cross-border issues raised by commenters? For example, would it be 
consistent with the statute to permit registrants to exclude non-U.S. 
employees from the calculation of the median? Would it be consistent 
with the statute to permit registrants to exclude non-full-time 
employees from the calculation of the median? If not, could these 
alternatives be implemented in a way that would be consistent with the 
statute?
    8. Should registrants be allowed to disclose two separate pay 
ratios covering U.S. employees and non-U.S. employees in lieu of the 
pay ratio covering all U.S. and non-U.S. employees? Why or why not? 
Should we require registrants to provide two separate pay ratios, as 
requested by some commenters? \57\ What should the separate ratios 
cover (e.g., should there be one for U.S. employees and one for non-
U.S. employees, or should there be one for U.S. employees and one 
covering all employees)? If separate ratios are required, should this 
be in addition to, or in lieu of, the pay ratio covering all U.S. and 
non-U.S. employees? Would such a requirement increase costs for 
registrants? Would it increase the usefulness to investors of the 
disclosure?
---------------------------------------------------------------------------

    \57\ See AFL-CIO I and letters from Americans for Financial 
Reform; Walden Asset Management; and Social Investment Forum.
---------------------------------------------------------------------------

    9. Please identify the applicable data privacy laws or regulations 
that could impact the collection or transfer of the data needed to 
comply with the proposed pay ratio requirement. Please also identify 
whether there are exclusions, exemptions or safe harbors that could be 
used to collect or transfer such data. Please quantify, to the extent 
practicable, the impact of such laws on registrants subject to Section 
953(b), such as an estimate of the number of registrants affected or 
the average percentage of employees affected. How would the proposed 
flexibility afforded to all registrants (i.e., selecting a method to 
identify the median, the use of statistical sampling or other 
reasonable estimation techniques and the use of consistently applied 
compensation measures to identify the median employee) impact any 
potential costs and burdens arising from local data privacy laws? In 
particular, would a registrant be able to make a reasonable estimation 
of the total compensation for affected employees? Would a registrant be 
able to select a consistent compensation measure that is not subject to 
local data privacy laws? If not, are there alternative ways to meet the 
statutory mandate of Section 953(b) that would reduce the costs and 
burdens arising from local data privacy laws?
    10. Are there applicable local data privacy laws that would 
prohibit the collection or transfer of data necessary to calculate the 
annual total compensation of an employee or group of employees or the 
identification of a median employee using a consistent compensation 
measure? In that situation, would a registrant be able to reasonably 
estimate compensation? If not, are there alternatives to the proposed 
rule that would address such a situation while still being consistent 
with Section 953(b)? Should any such alternatives be permitted? If an 
alternative should be permitted, what limitations or conditions should 
be imposed on using the alternative? For example, should registrants be 
required to disclose the approximate number of employees affected and 
identify the law that prohibits the collection or transfer of data? 
Please discuss whether any such alternatives would significantly impact 
the pay ratio disclosure.
    11. Should the rule cover employees of a registrant's subsidiaries 
as defined in Rule 405 and Rule 12b-2, as proposed? Are there any 
situations where an entity meets the subsidiary definition but its 
employees should not be included for purposes of the proposed 
requirement? For example, should the rule be limited to subsidiaries 
that consolidate their financial statements with those of the 
registrant? Should the rule not apply to subsidiaries of certain types 
of registrants, such as the portfolio companies of business development 
companies? Please provide details of any recommended limitations.
    12. Alternatively, should the requirements be limited to employees 
that are employed directly by the registrant (i.e., excluding employees 
of its subsidiaries)? Would such a limitation be consistent with 
Section 953(b)? How would such a limitation affect the potential 
benefits of the disclosure? Would such a limitation have other impacts, 
such as incentivizing registrants to alter their corporate structure, 
and, if so, are there alternative ways that the rule could address 
those impacts?
    13. Should Section 953(b) be read to apply to ``leased'' workers or 
other temporary workers employed by a third party? Does the proposed 
approach to such workers raise costs or other compliance issues for 
registrants, or impact potential benefits to investors, that we have 
not identified? Do registrants need guidance or instructions for 
determining how to treat employees of partially-owned subsidiaries or 
joint ventures? If so, what should such guidance or instructions 
entail?
    14. Is it likely that registrants would alter their corporate 
structure or employment arrangements to reduce the number of employees 
covered by the proposed requirements? How should we tailor the proposed 
requirements to address such an impact?
    15. Does the proposed inclusion of all employees raise competition 
concerns? If so, are there some industries or types of registrants that 
would be more affected than others? How should we tailor the proposed 
requirements to address such concerns?
b. Calculation Date for Determining Who Is An Employee
    The proposed requirement defines ``employee'' as an individual 
employed as of the last day of the registrant's last completed fiscal 
year.\58\ This calculation date for determining who is an employee 
would be consistent with the one used for the determination of the 
three most highly compensated executive officers under Item

[[Page 60568]]

402(a)(3)(iii). Two commenters expressly supported this approach.\59\
---------------------------------------------------------------------------

    \58\ Proposed Item 402(u)(3).
    \59\ See letters from RILA (``For consistency with the 
requirements of Item 402, we believe the best option is to determine 
the median total annual salary of the issuer's employees as of the 
close of the most recently completed fiscal year.'') and Towers 
Watson (``[I]t will be necessary to fix the employee group as of a 
particular date[hellip]The last day of the prior year would seem an 
obvious choice.'').
---------------------------------------------------------------------------

    Additionally, two commenters suggested that only employees that 
have been employed for the entire annual period (and as of the last day 
of the fiscal year) should be covered.\60\ The composition of a 
company's workforce typically changes throughout the fiscal year, and 
in some industries and businesses, it can change constantly. Although 
Section 953(b) requires the median calculation to cover all employees, 
it does not prescribe a particular calculation date for the 
determination of who should be treated as an employee for that purpose. 
We believe that a bright line calculation date for determining who is 
an employee would ease compliance for registrants by eliminating the 
need to monitor changing workforce composition during the year, while 
still providing a recent snapshot of the entire workforce.\61\ We agree 
with the commenters who suggest that the most appropriate calculation 
date is one that is consistent with the calculation date for 
determining the named executive officers under current Item 402 
requirements.
---------------------------------------------------------------------------

    \60\ See letters from ABA and RILA. One of these commenters 
suggested that the use of the word ``annual'' in Section 953(b) 
could be interpreted as limiting the scope of the provision to only 
those employees that have been employed for the full fiscal year. 
See letter from ABA.
    \61\ We note that a requirement to track which employees have 
been continuously employed for the entire annual period could 
increase costs for registrants, although, as discussed below, we are 
permitting registrants to annualize the compensation of certain 
employees.
---------------------------------------------------------------------------

    In proposing this approach, we have assumed that the potential 
benefits of the disclosure mandated by Section 953(b) would not be 
significantly diminished by covering only individuals employed on a 
specific date at year-end, rather than covering every individual who 
was employed at any time during the year. Although we believe that this 
approach could help contain compliance costs for registrants, we 
acknowledge that it could have other costs. For example, this approach 
would not capture seasonal or temporary employees that are not employed 
at year-end. This would enable a registrant with a significant amount 
of such workers to calculate a median that does not fully reflect the 
workforce that is required to run its business. It could also cause the 
proposed requirements to be costlier for, and thereby have an anti-
competitive impact on, registrants whose temporary or seasonal workers 
are employed at year-end as opposed to other times during the year. 
Finally, it is possible, although commenters have asserted that it is 
remote, that registrants could try to structure their employment 
arrangements to reduce the number of workers employed on the 
calculation date.\62\
---------------------------------------------------------------------------

    \62\ See AFL-CIO I (``The disclosure of compensation data under 
Section 953(b) will not have unintended consequences on public 
company employment decisions.'').
---------------------------------------------------------------------------

Request for Comment
    16. Is the proposed calculation date workable for registrants? If 
not, what date should be used (e.g., the last day of the registrant's 
second (or third) fiscal quarter) and why?
    17. In the alternative, should registrants be permitted the 
flexibility to choose a calculation date for this purpose? Why or why 
not? If so, should we require the registrant to disclose why a 
particular date was chosen? Should such flexibility be limited to 
certain circumstances? If so, what principles should apply in 
identifying those circumstances?
    18. Is it appropriate to limit the scope of covered employees to 
those who were employed on the last day of the registrant's fiscal 
year, as proposed? Why or why not? Is consistency with other Item 402 
disclosure important in this context? Would this approach ease 
compliance costs for registrants? What impact would this calculation 
date have on registrants that employ seasonal workers and would the 
exclusion of seasonal workers not employed on the calculation date 
likely have an impact on the median or the ratio? Please provide data, 
such as an estimate of the number of registrants that employ seasonal 
workers and the average percentage of seasonal employees that would 
likely be excluded. Is it likely that registrants might structure their 
employment arrangements to reduce the number of workers employed on the 
calculation date? Are there other costs that would be incurred using 
this approach that we should consider? Would the proposed calculation 
date have a meaningful impact on the potential usefulness of the 
disclosure for investors? Are there other ways to deal with defining 
the scope of covered employees that are more effective at reducing 
costs and providing meaningful disclosure?
    19. Should registrants be required to include any individual who 
was employed at any time during the year, or for some minimum amount of 
time (and if so, what amount of time) during the year?
    20. Should the rule only apply to employees employed for the full 
fiscal year? Why or why not?
c. Adjustments for Certain Employees
    Some commenters raised questions about how to treat employees who 
were not employed during the entire fiscal year and recommended that 
companies be permitted to annualize the compensation for these 
employees in order to more accurately reflect the employment 
relationship.\63\ We agree that in instances where the employment 
relationship is permanent, and not temporary or seasonal, registrants 
should be permitted to annualize the total compensation for an employee 
who did not work for the entire year, such as a new hire or an employee 
who took an unpaid leave of absence during the period.\64\
---------------------------------------------------------------------------

    \63\ See, e.g., letters from Davis Polk; Frederick W. Cook & 
Co.; Social Investment Forum; RILA, Walden Asset Management; and 
Trillium Asset Management.
    \64\ RILA noted employees on leave under the Family and Medical 
Leave Act of 1993 [29 U.S.C. 2601 et seq.] and employees called for 
active military duty as common examples.
---------------------------------------------------------------------------

    Accordingly, the proposed requirements include an instruction that 
states that total compensation may be annualized for all permanent 
employees (other than those in temporary or seasonal positions) who 
were employed for less than the full fiscal year.\65\ We are not 
proposing to require registrants to perform this type of adjustment, 
however, because we do not believe that the costs of requiring 
companies to make an extra calculation would be justified.
---------------------------------------------------------------------------

    \65\ By use of the term ``employee,'' this proposed instruction 
would apply to individuals who were employed on the last day of the 
fiscal year (the calculation date).
---------------------------------------------------------------------------

    The proposed instruction is limited to permanent employees. In 
addition, as proposed, the instruction would not permit a registrant to 
annualize some eligible employees and not others. As discussed below, 
this instruction also would not permit adjustments that would cause the 
ratio to not reflect the actual composition of the workforce, such as 
annualizing the compensation of seasonal or temporary workers. 
Depending on the facts and circumstances, it could be appropriate for a 
registrant to annualize the compensation for a permanent part-time 
worker who has only worked a portion of the year (such as an employee 
who is permanently employed for three days a week and who took an 
unpaid leave

[[Page 60569]]

of absence under the Family and Medical Leave Act). In such a case, the 
adjustment should reflect compensation for the employee's part-time 
schedule over the entire year, but should not adjust the part-time 
schedule to a full-time equivalent schedule.
    In proposing this approach, we have assumed that this annualizing 
adjustment would not significantly diminish the potential usefulness of 
the disclosure mandated by Section 953(b). For example, we would not 
expect that annualizing the salary of a permanent new hire would impact 
the potential ability of an investor to use the pay ratio disclosure as 
an indicator of employee morale or to gain an understanding of a 
registrant's investment in human capital, which some commenters have 
identified as potential benefits of the disclosure under Section 
953(b).\66\ We also note that some of the commenters that support 
Section 953(b) disclosure were also supportive of allowing annualizing 
adjustments for employees employed for less than the full year.\67\
---------------------------------------------------------------------------

    \66\ See AFL-CIO I and letters from; Calvert Investment 
Management; CtW Investment Group; Group of International Investors; 
Americans for Financial Reform; Drucker Institute; Institute for 
Policy Studies; Social Investment Forum; Trillium Asset Management; 
and UAW Retiree Medical Benefits Trust.
    \67\ See letters from Social Investment Forum and Trillium Asset 
Management.
---------------------------------------------------------------------------

    By permitting but not requiring registrants to annualize 
compensation for these employees, the comparability of disclosure 
across companies could be reduced. As discussed elsewhere in this 
release,\68\ we do not believe that precise comparability or conformity 
of disclosure from registrant to registrant is necessarily achievable 
due to the variety of factors that could cause the ratio to differ, 
and, accordingly, we do not believe that the costs associated with 
attempting to promote precise comparability in this respect would be 
justified.
---------------------------------------------------------------------------

    \68\ See Section IV of this release.
---------------------------------------------------------------------------

    Although we are proposing to permit the annualizing adjustments 
described above, we believe that some of the assumptions or adjustments 
suggested by commenters for calculating the annual total compensation 
of employees might present a distorted picture of the actual 
composition of a registrant's workforce or compensation practices. We 
believe that certain adjustments or assumptions, such as full-time 
equivalent adjustments for part-time workers, annualizing adjustments 
for temporary or seasonal employees, and cost-of-living adjustments for 
non-U.S. workers, would cause the median to not be reasonably 
representative of the registrant's actual employment and compensation 
arrangements for its workforce during the period and could, therefore, 
diminish the potential usefulness of the disclosure. Therefore, the 
proposed disclosure requirements would not permit such adjustments.
    For example, under the proposed rules, a retailer that hires a 
seasonal worker at minimum wage for three months during the holiday 
season would need to calculate annual total compensation for that 
employee as three months at $7.25/hour ($3,480) and could not 
``annualize'' the wages as if the seasonal worker was paid for a full 
12 months of work ($13,920). In this example, if the seasonal worker 
was not still employed by the registrant on the last day of the 
registrant's fiscal year, the registrant would exclude that worker from 
the calculation of the median.\69\
---------------------------------------------------------------------------

    \69\ See proposed Item 402(u)(3).
---------------------------------------------------------------------------

    We understand that some commenters believe that these types of 
adjustments could allow for a more meaningful comparison between the 
compensation of the PEO and that of the registrant's employees, 
especially where those employees are not full-time, U.S. employees.\70\ 
We are concerned, however, that adjusting for these variables could 
distort an understanding of the registrant's compensation practices. 
For example, if a registrant with a workforce primarily located in 
jurisdictions with a lower cost of living than the United States 
adjusted the annual total compensation of those employees using 
purchasing power parity statistics, the median of the annual total 
compensation of all its employees would likely increase. Likewise, if a 
registrant with a workforce that is primarily part-time or seasonal 
adjusted the annual total compensation of those employees using full-
time equivalent adjustments, the median of the annual total 
compensation of all its employees would likely increase. In these 
scenarios, the registrant's pay ratio would show less of a disparity in 
compensation levels, while its labor costs would appear to be higher 
than they actually were. We believe that, rather than making the 
disclosure more meaningful, such a result could diminish the potential 
usefulness of the disclosure because the ratio would show a less 
accurate reflection of actual workforce compensation and could permit a 
registrant to alter the reported ratio to achieve a particular 
objective with the ratio disclosure.
---------------------------------------------------------------------------

    \70\ See letters from American Benefits Council; Americans for 
Financial Reform; Davis Polk; Frederick W. Cook & Co., Inc.; RILA; 
Social Investment Forum; Trillium Asset Management; and Walden Asset 
Management.
---------------------------------------------------------------------------

Request for Comment
    21. Is it appropriate to allow registrants to annualize the 
compensation for non-seasonal, non-temporary employees that have only 
worked part of the year, as proposed? Why or why not? Would allowing 
annualizing the compensation for these employees likely impact the 
median or the pay ratio?
    22. In the alternative, should registrants be required to annualize 
the compensation for these employees? Why or why not?
    23. Should we require all registrants that rely on the proposed 
instruction to annualize compensation for these employees to disclose 
that they have done so (or only when the adjustment is material, as 
would be required under the proposed instruction for disclosure of 
material assumptions, adjustments and estimates)? Why or why not? If 
so, what should the disclosure entail? For example, should the 
registrant only be required to state that it has relied on the 
instruction, or should it also be required to discuss the number or 
percentage of employees for which compensation was annualized?
    24. Should we allow full-time equivalent adjustments for part-time 
employees and temporary or seasonal employees, as recommended by some 
commenters? \71\ Should we allow cost-of-living adjustments for non-
U.S. employees as recommended by some commenters? \72\ If so in either 
case, please explain why. In particular, please address the potential 
concern that these kinds of adjustments could cause the ratio to be a 
less accurate reflection of actual workforce compensation. Is there an 
alternative way to mitigate this concern?
---------------------------------------------------------------------------

    \71\ See letters from Americans for Financial Reform; Frederick 
W. Cook & Co., Inc.; and RILA.
    \72\ See generally letter from CtW Investment Group.
---------------------------------------------------------------------------

3. Identifying the Median
    Commenters have suggested that a potential purpose of the pay ratio 
disclosure is to allow investors to evaluate the annual total 
compensation of the PEO within the context of the registrant's internal 
compensation practices.\73\ We note that Congress

[[Page 60570]]

specifically chose ``median'' as the point of comparison for Section 
953(b), rather than the average,\74\ and, therefore, the proposed pay 
ratio requirements also require the median to be used.
---------------------------------------------------------------------------

    \73\ See letter from Senator Menendez (``I wrote this provision 
so that investors and the general public know whether public 
companies' pay practices are fair to their average employees, 
especially compared to their highly compensated CEOs.'').
    See also Representative Keith Ellison, et al. (``House Letter'') 
and Senator Robert Menendez et al. (``Senate Letter'') (noting that 
Section 953(b) ``requires disclosure by public companies of the 
ratio between the compensation of their CEO and the typical worker 
at that company . . . and while comprehensive data will not be 
available until this provision takes effect, there is no question 
that CEO pay is soaring compared to that of average workers.'').
    \74\ Some commenters raised the possibility of using an average 
rather than a median, which they believed would reduce the costs of 
compliance. See, e.g., letters from American Benefits Council and 
Brian Foley & Co.
---------------------------------------------------------------------------

    Section 953(b) does not expressly set forth a methodology that must 
be used to identify the median, nor does it mandate that the Commission 
must do so in its rules. In order to allow the greatest degree of 
flexibility while remaining consistent with the statutory provision, 
the proposed requirements do not specify any required calculation 
methodologies for identifying the median. Instead, we are providing 
instructions and guidance designed to allow registrants to choose from 
several alternative methods to identify the median, so that they may 
use the method that works best for their own facts and circumstances. 
As discussed in detail below, we believe that even a registrant with a 
large number of employees should be able to provide the proposed 
disclosure in a relatively cost-efficient manner based on statistical 
sampling, estimates and the use of any consistently applied 
compensation measure to identify the median. For instance, an employer 
with a large number of employees could take a random sample of 
employees (as discussed further below, the size of the sample needed 
would typically depend on the overall distribution of compensation 
across employees) and determine the annual cash compensation, or any 
other consistently applied compensation measure, for those employees. 
Identifying the median employee would not necessarily require a 
determination of exact compensation amounts for each employee in the 
sample. The registrant could exclude the employees in the sample that 
have extremely low or extremely high pay because they would fall on 
either end of the spectrum of pay and, therefore, not be the median 
employee. Once the registrant identifies the median employee based on 
the selected compensation measure applied to each remaining employee in 
the sample, the registrant would calculate that employee's annual total 
compensation in accordance with Item 402(c)(2)(x) and disclose that 
amount as part of the pay ratio disclosure.
    We believe that allowing a registrant to choose a method that works 
best for its particular facts and circumstances should help registrants 
to comply with the disclosure requirements in a relatively cost-
efficient manner while still achieving the purpose of Section 953(b). 
As such, the proposed requirements permit registrants to identify the 
median by using a number of different methods, such as calculating 
total compensation for each employee using Item 402(c)(2)(x), using 
reasonable estimates, and/or statistical sampling.\75\ We are not 
prescribing what a reasonable estimate would entail because we believe 
that would necessarily depend on the registrant's particular facts and 
circumstances. In addition, the proposed rules do not prescribe 
specific estimation techniques or confidence levels for an estimated 
median because we believe that companies would be in the best position 
to determine what is reasonable in light of their own employee 
population and access to compensation data. As discussed in Section 
II.C.5. below, we are proposing to require that the methodology and any 
material assumptions, adjustments or estimates used to identify the 
median be briefly disclosed and consistently used, and any estimated 
amounts be clearly identified as such. We are proposing this approach 
because we believe that the appropriate and most cost effective 
methodology would necessarily depend on a registrant's particular facts 
and circumstances, including, among others, such variables as:
---------------------------------------------------------------------------

    \75\ We discuss the specific recommendations of commenters 
regarding the use of statistical sampling techniques below in this 
section.
---------------------------------------------------------------------------

     The size and nature of the workforce;
     the complexity of the organization;
     the stratification of pay levels across the workforce;
     the types of compensation the employees receive;
     the extent that different currencies are involved;
     the number of tax and accounting regimes involved;
     the number of payroll systems the registrant has and the 
degree of difficulty involved in integrating payroll systems to readily 
compile total compensation information for all employees.


We believe that these likely are the same factors that would cause 
substantial variation in the costs of compliance. By not prescribing 
specific methodologies that must be used, the proposed requirements 
would allow registrants to choose a method for identifying the median 
that is appropriate to the size, structure and compensation practices 
of their own businesses, including identifying the median employee 
based on any consistently applied compensation measure. In addition, 
this flexibility could enable registrants to manage compliance costs 
more effectively. We also believe that, by allowing registrants to 
better manage costs, a flexible approach could mitigate, to some 
extent, any potential negative effects on competition arising from the 
mandated requirements.\76\ We recognize, however, that a flexible 
approach could increase uncertainty for registrants that prefer more 
specificity on how to comply with the proposed rules, particularly for 
those registrants that do not use statistical analysis in the ordinary 
course of managing their businesses.
---------------------------------------------------------------------------

    \76\ See the discussion in Section IV of this release.
---------------------------------------------------------------------------

    We acknowledge that commenters provided a variety of 
recommendations for identifying the median aimed at reducing compliance 
costs or providing a roadmap for registrants to use to ensure 
compliance. For example, one commenter suggested that the Commission 
should establish safe harbor methodologies that authorize registrants 
to identify the median using a sampling method that is reasonably 
representative of its workforce, that could be certified by an 
independent expert or that exceeds a minimum number or percentage of 
the issuer's total employees.\77\ Another commenter suggested that the 
Commission prescribe a ``menu of alternatives'' from which a registrant 
may select the calculation method that works best in its situation to 
facilitate disclosure that is meaningful while minimizing data 
collection costs; registrants would then be required to explain the 
method and assumptions used.\78\ Several commenters recommended that 
registrants be permitted to use reasonable estimation techniques to 
identify median compensation for all employees and to determine all 
forms of compensation, including annual changes in pension value.\79\ 
In considering these alternatives, we favored the recommendations that 
did not call for prescriptive requirements in order to avoid the 
additional costs that a less flexible approach could impose. In 
particular, we believe that the use of reasonable estimates could 
afford

[[Page 60571]]

registrants flexibility without imposing prescriptive requirements that 
may not be workable for all types of registrants. In addition, we 
highlight below two alternatives recommended by commenters that would 
be permitted under the proposal.
---------------------------------------------------------------------------

    \77\ See American Benefits Council.
    \78\ See letter from Group of Exec. Comp. Lawyers.
    \79\ See COEC I and letters from Meridian Compensation Partners, 
LLC and SCSGP.
---------------------------------------------------------------------------

    Use of Statistical Sampling. Two commenters suggested that 
companies should be permitted to identify the median through a sampling 
technique or other statistically reasonable method.\80\ Two other 
commenters also provided views on statistical sampling. One commenter, 
based on a survey of 95 registrants, disagreed that statistical 
sampling methodology would reduce the compliance burden for companies 
because of the wide variability in pay practices and recordkeeping and 
asserted that requiring statistical sampling would introduce further 
complexity.\81\ Another commenter supported the use of statistical 
sampling and described a random sampling technique that could yield an 
accurate and unbiased estimate of a registrant's actual median 
compensation using a relatively small sample size.\82\ This commenter 
asserted that more complicated procedures, such as stratified sampling, 
would be unnecessary, regardless of company size, how many countries it 
operates in or how many subsidiaries it has.\83\
---------------------------------------------------------------------------

    \80\ See AFL-CIO II (``The SEC can minimize issuer compliance 
costs by permitting the use of random statistical sampling to 
calculate the median. . . . Because the median is a statistical term 
that is frequently used to describe a set of observations randomly 
drawn from a larger population, it is reasonable for the SEC to 
permit issuers to sample their employee populations to calculate the 
median.'') and letter from Davis Polk (``We recommend that the 
Commission permit companies to identify a single employee, via a 
sampling technique or other statistically reasonable method, among 
its employee base as the representative for median compensation.'').
    \81\ See COEC II (noting that sampling ``would introduce 
additional complexity by requiring the development of a methodology 
to determine the appropriate stratification of the sample 
population, develop and assess the appropriate confidence intervals 
to enhance the reliability of the data collected and ensure that 
comparable forms of compensation are included across the varying pay 
practices that are common in different regions of the world.'').
    \82\ See letter from M. Ohlrogge.
    \83\ The commenter assumed that any compensation distribution is 
lognormal and that the variance of compensation distribution within 
a company is given as a constant number. We believe, however, that 
this may not be a practical assumption because, as described in 
detail in Section IV of this release, each registrant would have a 
company-specific compensation variance, which is impossible to be 
generally assumed. In addition, registrants that have multiple 
business or geographical segments may not necessarily have lognormal 
distribution of wages.
---------------------------------------------------------------------------

    As we discuss in more detail in the economic analysis section of 
this release, the variance of underlying compensation distributions 
(that is, how widely employee compensation is spread out or distributed 
around the mean) can materially affect the sample size needed for 
reasonable statistical sampling.\84\ Variation in the types of 
employees at a registrant across business units and geographical 
regions can also add complexity to the sampling procedure. While we 
generally agree that a relatively small sample size would be 
appropriate in certain situations, a reasonable determination of sample 
size would ultimately depend on the underlying distribution of 
compensation data.\85\ As a result, compliance costs would vary across 
registrants according to the characteristics of their compensation 
distributions. Nevertheless, we believe that permitting registrants to 
use statistical sampling may lead to a reduction in compliance costs as 
compared to other methods of identifying the median.
---------------------------------------------------------------------------

    \84\ Our analysis, further discussed in Section IV of this 
release, uses mean and median wage estimates from the Bureau of 
Labor Statistics (BLS) at the 4-digit NAICS industry level (290 
industries) and assumes a lognormal wage distribution, a 95% 
confidence interval with 0.5% margin of error. The analysis focuses 
on the registrants that have a single business or geographical unit. 
The analysis also assumes that when the sampling is implemented, the 
sampling method would be a true random sampling, i.e., it would not 
be biased by region, occupation, rank, or other factor. In our 
analysis, the appropriate sample size for the registrants with a 
single business or geographical unit varies between 81 and 1,065 
across industries, with the average estimated sample size close to 
560.
    \85\ We believe that reasonable estimates of the median for 
registrants with multiple business lines or geographical units could 
be arrived at through more than one statistical sampling approach. 
All approaches, however, require drawing observations from each 
business or geographical unit with a reasonable assumption on each 
unit's compensation distribution and inferring the registrant's 
overall median based on the observations drawn. Certain cases may 
not easily generate confidence intervals around the estimates or 
prescribe the appropriate minimum sample size. See Section IV of 
this release for further discussion.
---------------------------------------------------------------------------

    We note that the identification of a median employee does not 
necessarily require a determination of exact compensation amounts for 
every single employee included in the sample. A registrant could, 
rather than calculating exact compensation, identify the employees in 
the sample that have extremely low or extremely high pay and that would 
therefore fall on either end of the spectrum of pay. Since identifying 
the median involves finding the employee in the middle, it may not be 
necessary to determine the exact compensation amounts for every 
employee paid more or less than that employee in the middle. Instead, 
just noting that the employees are above or below the median would be 
sufficient for finding the employee in the middle of the pay spectrum.
    Use of a Consistently Applied Compensation Measure. Several 
commenters raised concerns about expected compliance costs arising from 
the complexity of the ``total compensation'' calculation under Item 
402(c)(2)(x) and, in particular, the determination of total 
compensation in accordance with Item 402(c)(2)(x) for employees when 
identifying the median.\86\ To address these concerns, several 
commenters recommended allowing companies to use total direct 
compensation (such as annual salary, hourly wages and any other 
performance-based pay) or cash compensation to first identify a median 
employee and then calculate that median employee's annual total 
compensation in accordance with Item 402(c)(2)(x).\87\ We agree that 
this approach would provide a workable identification of the median for 
many registrants, and we expect that the costs of compliance would be 
reduced if registrants were permitted to identify the median using a 
less complex, more readily available figure, such as salary and wages, 
rather than total compensation as determined in accordance with Item 
402(c)(2)(x). This approach could also help reduce costs for 
registrants that are not able to reduce costs using statistical 
sampling techniques.\88\ Because some commenters have indicated that 
using cash compensation could be just as burdensome to calculate for 
registrants with multiple payroll systems in various countries,\89\ we 
are not proposing to require companies to use a specific compensation 
measure, like cash compensation or total direct compensation, when they 
are identifying the median employee. Instead, we believe that 
registrants would be in the best position to select a compensation 
measure that is appropriate to their own facts and

[[Page 60572]]

circumstances and that a consistently applied compensation measure 
would result in a reasonable estimate of a median employee at a 
substantially reduced cost. Therefore, the proposed instructions would 
permit a registrant to identify a median employee based on any 
consistently applied compensation measure, such as compensation amounts 
reported in its payroll or tax records, as long as the registrant 
briefly discloses the measure that it used (e.g. ``We found the median 
using salary, wages and tips as reported to the U.S. Internal Revenue 
Service on Form W-2 and the equivalent for our non-U.S. 
employees.'').\90\
---------------------------------------------------------------------------

    \86\ See, e.g., COEC I and II and letters from American Benefits 
Council; Brian Foley & Co.; Group of Exec. Comp. Lawyers; Group of 
Trade Associations; Protective Life Corporation; SCSGP; and Towers 
Watson.
    \87\ See AFL-CIO II and letters from ABA; American Benefits 
Council; Americans for Financial Reform; CtW Investment Group; 
Protective Life Corporation; RILA; and SCSGP.
    \88\ Registrants would be permitted to use a consistently-
applied compensation measure to identify the median employee 
regardless of whether they use statistical sampling.
    \89\ See COEC II (asserting that cash compensation is not an 
appropriate substitute since non-cash remuneration makes up a 
substantial part of compensation in certain parts of the world, and 
cash compensation would still need to be gathered manually for many 
registrants due to variances in payroll systems and tax regimes).
    \90\ As discussed in Section II.C.4 below, a registrant using a 
consistently applied compensation measure for purposes of 
identifying the median would be required to calculate and disclose 
the annual total compensation for that median employee using the 
definition of total compensation in Item 402(c)(2)(x).
---------------------------------------------------------------------------

    We also understand from commenters that the annual period used for 
payroll or tax recordkeeping can sometimes differ from the registrant's 
fiscal year, and, therefore, for purposes of determining the annual 
compensation amounts when using a consistently applied compensation 
measure, the proposed instructions also permit the registrant to use 
the same annual period that is used in the payroll or tax records from 
which the compensation amounts are derived. We are not proposing to 
define or limit what would qualify as payroll or tax records. We note, 
however, that this proposed accommodation is intended to be construed 
broadly enough to allow registrants to use information that they 
already track and compile for payroll or tax purposes. We are persuaded 
by commenters who asserted that permitting companies to use 
compensation information in the form that it is maintained in their own 
books and records would reduce compliance costs without appreciably 
affecting the quality of the disclosure.
    Two commenters suggested that registrants should be permitted to 
calculate the ratio using employee earnings estimates available through 
the U.S. Department of Labor's Bureau of Labor Statistics (``BLS''), 
which they believed would reduce costs for registrants and promote 
comparability across companies.\91\ Although we agree that such an 
approach would greatly reduce the compliance burden for registrants, we 
do not believe it would be consistent with Section 953(b). In addition, 
we do not believe it would be useful for the Commission to require 
registrants to compile and disclose information that investors are 
already able to calculate using publicly available information.
---------------------------------------------------------------------------

    \91\ See COEC II and letter from Group of Exec. Comp. Lawyers. 
One of these commenters asserts that using BLS statistics would 
likely result in ratio with a higher disparity than comparing PEO 
compensation to median employee compensation, and, ``if a company 
decides to avoid the cost and other burdens of an actual median 
computation by publishing a statistic that shows a higher disparity, 
it should be allowed to do so.'' See letter from Group of Exec. 
Comp. Lawyers.
---------------------------------------------------------------------------

    Although the proposed flexible approach could reduce the 
comparability of disclosure across registrants, we do not believe that 
precise conformity or comparability of the ratio across companies is 
necessary. Some commenters believe that a primary benefit of the pay 
ratio disclosure would be providing a company-specific metric that 
investors could use to evaluate the PEO's compensation within the 
context of his or her own company,\92\ rather than a benchmark for 
compensation arrangements across companies. Accordingly, we do not 
believe that improving the comparability of the disclosure across 
companies by mandating a specific method for identifying the median 
would be justified in light of the costs that would be imposed on 
registrants by a more prescriptive rule. We do not believe that 
mandating a particular methodology would necessarily improve the 
comparability across companies because of the numerous other factors 
that could also cause the ratios to be less meaningful for company-to-
company comparison.\93\ We believe that greater comparability across 
companies could increase the likelihood that a registrant's competitors 
could infer proprietary or sensitive information about the registrant's 
business,\94\ which could increase the costs to registrants of the 
proposed requirements.
---------------------------------------------------------------------------

    \92\ See, e.g., Senate Letter; House Letter; and AFL-CIO I; and 
letters from CtW Investment Group and UAW Retiree Medical Benefits 
Trust.
    \93\ These factors could include, among others, variations in 
the way companies organize their workforces to accomplish similar 
tasks; variations in pay between companies for identical tasks; 
differences in the geographical distribution of employees (domestic 
or international, as well as in high- or low-cost areas); degree of 
vertical integration; reliance on contract and outsourced workers; 
ownership structure; and differences in industry and business type.
    \94\ Where pay ratio information is more ``precisely'' 
comparable between companies in the same industry, information about 
median pay could allow inferences about the business, such as how a 
company and its workforce is structured, what its compensation 
practices are, its labor costs and use of outsourcing.
---------------------------------------------------------------------------

    Finally, we recognize that allowing registrants to select a 
methodology for identifying the median, including identifying the 
median employee based on any consistently applied compensation measure 
and allowing the use of reasonable estimates, rather than prescribing a 
methodology or set of methodologies, could permit a registrant to alter 
the reported ratio to achieve a particular objective with the ratio 
disclosure, thereby potentially reducing the usefulness of the 
information. We believe that requiring the use of a consistently 
applied compensation measure should lessen this concern. We request 
comment on whether the flexibility of the proposed requirements would 
allow a registrant to distort its pay ratio in material respects.
Request for Comment
    25. Should registrants be permitted, as proposed, to choose a 
method to identify the median that is workable for the company based on 
its particular facts and circumstances? Will registrants be able to use 
the proposed approach to identify the median? Do registrants need 
additional guidance or instructions to be able to use the proposed 
approach to identify the median? If so, what additional guidance is 
needed?
    26. Do registrants need further guidance on the permitted use of 
reasonable estimates in identifying the median? If so, what should that 
guidance be? In the alternative, should the proposed requirement 
expressly disallow the use of reasonable estimates? Please explain how 
the usefulness of the pay ratio disclosure would be affected by the use 
of reasonable estimates. Should the rule specify requirements for 
statistical sampling or any other estimation methods, such as 
appropriate sample sizes for reasonable estimates or requiring the 
results to meet specified confidence levels? Why or why not? If so, 
what should the requirements be? For example, should the estimate have 
at least a 90% (or 85%, or some other percentage) confidence level?
    27. Are registrants likely to use statistical sampling to identify 
the median? How would registrants conduct the sampling? Would it be 
outsourced or conducted by internal personnel? How much would 
statistical sampling cost? Would the use of statistical sampling 
address costs relating to the inclusion of non-U.S. employees in the 
calculation?
    28. Should registrants be permitted, as proposed, to identify the 
median employee using a consistently applied compensation measure? Why 
or why not? How would this impact compliance costs? Would this address 
costs arising from having employees in multiple jurisdictions and 
payroll systems? Should there be any limitations on the

[[Page 60573]]

types of compensation measures that can be used? What compensation 
measure would registrants likely use for this purpose? How would that 
measure compare to total compensation calculated under Item 
402(c)(2)(x)? How would the use of that measure affect the median (e.g. 
would it likely generate a median that is a reasonable approximation of 
the median of Item 402(c)(2)(x) total compensation)? What impact, if 
any, would the use of a consistently applied compensation measure have 
on the usefulness of the pay ratio disclosure? How could the proposed 
rules be changed to address any such impact? Are there any 
circumstances where it would be inappropriate to permit a registrant to 
use a consistently applied compensation measure to identify the median 
employee?
    29. Should we, as proposed, permit registrants to use the time 
period that is used for payroll or tax recordkeeping when identifying 
the median employee based on consistently applied compensation 
measures, whether or not the time periods correspond with the last 
completed fiscal year or the tax year? Why or why not? Are there any 
parameters that should be set, such as requiring the period to end 
within a designated amount of time before the filing of the proxy or 
information statement relating to the annual meeting of shareholders or 
written consents in lieu of such meeting or annual report, as 
applicable, in which updated pay ratio information is required (such as 
3 months, 6 months, 9 months or 12 months) or, alternatively, a period 
ending no more than 9 months (or 12 months or another amount of time) 
following the last annual meeting of shareholders? Should such 
flexibility only be permitted where the registrant's fiscal year-end is 
different from calendar year-end? Are we correct that this 
accommodation would decrease costs for registrants? Would the use of 
different time periods for different employees have an adverse impact 
on the disclosure? Would such flexibility meaningfully reduce the 
comparability of the median of the annual total compensation of all 
employees to the annual total compensation of the PEO, or otherwise 
impair the potential usefulness to investors of the pay ratio 
disclosure?
    30. Could the flexibility of the proposed requirements allow a 
registrant to distort its pay ratio in material respects? If so, 
explain how.
    31. Is our belief correct that allowing flexibility in identifying 
the median could minimize the potential anti-competitive impact of the 
costs of compliance? Would the proposed flexibility address other 
impacts on competition that could arise from the proposed requirements? 
Could a registrant's competitors infer proprietary or sensitive 
information about a company's business operations, strategy or labor 
cost-structure from the disclosure of the median of the annual total 
compensation of all employees? If so, how can this impact be addressed?
    32. Are there alternative ways to satisfy the statutory mandate? 
Please be specific.
4. Determination of Total Compensation
    As mandated by Section 953(b), the proposed requirements would 
define ``total compensation'' by reference to Item 402(c)(2)(x). We 
note that Section 953(b) refers to Item 402(c)(2)(x) as in effect on 
the day before the date of enactment of the Dodd-Frank Act, or July 20, 
2010. No substantive amendments have been made to Item 402(c) since 
that date.\95\ Therefore, the proposed requirements would refer to Item 
402(c)(2)(x), without reference to the rules in effect on July 20, 
2010. We expect to address the impact on the proposed rules of any 
future amendments to Item 402(c)(2)(x) if and when such future 
amendments are considered.
---------------------------------------------------------------------------

    \95\ There have been technical amendments since that date. In 
August 2011, certain references to U.S. GAAP requirements in the 
instructions to Item 402 were updated to reflect the FASB's 
Accounting Standards Codification. See Technical Amendments to 
Commission Rules and Forms Related to the FASB's Accounting 
Standards Codification, Release No. 33-9250 (Aug. 8, 2011) [76 FR 
50117].
---------------------------------------------------------------------------

    Commenters have observed that, because of the complexity of the 
requirements of Item 402(c)(2)(x), registrants typically compile 
information required by Item 402(c) manually for the named executive 
officers, which they have stated takes significant time and 
resources.\96\ To address this issue, some of these commenters made 
various recommendations to simplify the total compensation definition, 
such as including only cash compensation, only cash compensation and 
equity-based compensation, or only compensation that is reported to the 
U.S. Internal Revenue Service on Form W-2.\97\ As discussed above, we 
are proposing to allow registrants to identify the median in a variety 
of ways, including by identifying the median employee using any 
consistently applied compensation measure and then determining and 
disclosing the Item 402(c)(2)(x) total compensation for that median 
employee. As proposed, a registrant would be permitted to calculate 
total compensation for all employees in accordance with Item 
402(c)(2)(x), but would only be required to calculate and disclose such 
information for the median employee.\98\ Because the total compensation 
calculation using Item 402(c)(2)(x) would only be required for one 
additional employee (the median employee), we are not proposing to 
simplify the total compensation definition that is required to be used 
to disclose the median employee compensation and the ratio.
---------------------------------------------------------------------------

    \96\ See letter from Davis Polk. See also letter from R. 
Morrison.
    \97\ See COEC I and letters from American Benefits Council; 
Brian Foley; Group of Exec. Comp. Lawyers; Protective Life 
Corporation; SCSGP; and Towers Watson.
    \98\ Given the specificity of the definition used in Section 
953(b), the proposed requirements incorporate the Item 402(c)(2)(x) 
definition of total compensation as it is set forth in Section 
953(b) for purposes of disclosing the median of the annual total 
compensation of employees and the pay ratio.
---------------------------------------------------------------------------

    Some commenters have recommended that registrants be permitted to 
use reasonable estimates to determine the value of the various elements 
of total compensation for employees in accordance with Item 
402(c)(2)(x).\99\ We believe that the use of reasonable estimates would 
not diminish the potential usefulness of the pay ratio disclosure as a 
general point of comparison of PEO pay to employee pay within a 
company, and we believe that the use of reasonable estimates would be 
consistent with Section 953(b). Furthermore, we expect that 
requirements that allow registrants to use reasonable estimates in 
these calculations would impose lower compliance costs than 
requirements that prohibit the use of estimates. Accordingly, the 
proposed pay ratio requirements permit the use of reasonable estimates 
in determining any elements of total compensation of employees other 
than the PEO under Item 402(c)(2)(x), including when disclosing the 
annual total compensation of the median employee identified using a 
consistently applied compensation measure. If a registrant uses 
estimates, instructions to the proposed rule require that the resulting 
disclosure would need to be clearly identified as an estimated amount 
and include a brief description of the estimation methods used by the 
registrant.\100\ In using an estimate for annual total compensation (or 
for a particular element of total compensation), a registrant should 
have a reasonable basis to conclude that the estimate approximates the 
actual amount of compensation under Item

[[Page 60574]]

402(c)(2)(x) (or for a particular element of compensation under Item 
402(c)(2)(iv)-(ix)) awarded to, earned by or paid to those employees. 
We are not prescribing what a reasonable basis would entail because we 
believe that would necessarily depend on the registrant's particular 
facts and circumstances.
---------------------------------------------------------------------------

    \99\ See COEC I and letters from ABA and SCSGP.
    \100\ See proposed Instruction 2 to Item 402(u).
---------------------------------------------------------------------------

    Because the requirements of Item 402(c)(2)(x) were promulgated to 
address executive officer compensation, rather than compensation for 
all employees, we have considered the difficulties that registrants 
could face in applying the requirements of Item 402(c)(2)(x) to 
employees that are not executive officers.\101\ First, to assist 
registrants in applying the definition of ``total compensation'' to an 
employee that is not an executive officer, the proposed requirements 
state that, in determining the total compensation of employees in 
accordance with Item 402(c)(2)(x), references to ``named executive 
officer'' in Item 402 and the related instructions may be deemed to 
refer instead, as applicable, to ``employee.'' Also, the proposed 
requirements clarify that, for non-salaried employees, references to 
``base salary'' and ``salary'' in Item 402 may be deemed to refer 
instead, as applicable, to ``wages plus overtime.'' \102\
---------------------------------------------------------------------------

    \101\ See letter from RILA (``From a practical prospective, Item 
402 raises a host of complexities when applied to an issuer's 
overall employee population for purposes of calculating the [pay 
ratio].'').
    One commenter drew an analogy to the U.S. Treasury regulations 
[31 CFR Part 30] that required TARP recipients to identify their 100 
most highly compensated employees using the definition of total 
compensation under Item 402; however, the Treasury regulations 
notably permitted the exclusion of actuarial increases in pension 
plans and above market earnings on deferred compensation. See letter 
from ABA (``In our experience, TARP companies found that calculating 
`total compensation' to identify their 100 highest paid employees 
required weeks of work, and presented numerous interpretive issues 
that do not typically arise when calculating total compensation of 
executive officers.'').
    \102\ Letter from RILA (noting `` `salary' and `bonus' 
presumably would translate into total hourly wages plus overtime for 
non-salaried employees'').
---------------------------------------------------------------------------

    In addition, we understand that certain elements of total 
compensation may raise particular valuation issues that do not 
typically arise in the context of compensation for named executive 
officers. For example, in the case of pension benefits provided to 
union members in connection with a multi-employer defined benefit 
pension plan,\103\ commenters have noted that the participating 
employers typically do not have access to information (or do not have 
access in the timeframe needed to compile pay ratio disclosure) from 
the plan administrator that would be needed to calculate the aggregate 
change in actuarial present value of the accumulated benefit of a 
particular individual under the plan.\104\ In such circumstances, we 
believe it would be appropriate for a registrant to use reasonable 
estimates as described above in determining an amount that reasonably 
approximates the aggregate change in actuarial present value of an 
employee's defined pension benefit for purposes of Item 
402(c)(2)(viii).
---------------------------------------------------------------------------

    \103\ See letter from RILA (noting ``in cases involving multi-
employer plans for union employees, the availability of the required 
information may be a significant issue when the plan is not required 
to provide such data on each beneficiary''). See also, J. Goldstein, 
Cost Benefit Analysis of Pay Disparity Disclosure, Oct. 16, 2010, 
available at http://blogs.law.harvard.edu/corpgov/2010/10/16/cost-benefit-analysis-of-pay-disparity-disclosure/.
    \104\ Section 101(k) and related regulations under the Employee 
Retirement Income Security Act of 1974, as amended [21 U.S.C. 
1021(k)], govern the requirements for plan administrators to provide 
actuarial reports relating to the plan. Under the rules, a plan 
administrator has thirty days to respond to a request for an 
actuarial report, and it is not required to provide access to any 
reports that have not been its possession for more than thirty days. 
In addition, the rules prohibit the disclosure of reports that 
include information that the plan administrator reasonably 
determines to be ``personally identifiable information regarding a 
plan participant, beneficiary . . . or contributing employer.'' See 
29 CFR 2520.101-6.
---------------------------------------------------------------------------

    Commenters have also mentioned that interpretive questions will 
likely arise for registrants with non-U.S. employees in terms of how to 
value certain unique types of employee compensation given only in 
certain countries,\105\ including personal benefits such as housing. 
Because we understand that compensation arrangements vary significantly 
both in the United States and globally, we do not believe it would be 
practicable for purposes of the proposed requirements to provide 
detailed, prescriptive rules on valuing particular types of employee 
compensation. We note, however, that the instructions to Item 
402(c)(2)(ix) would permit the exclusion of personal benefits as long 
as the total value for the employee is less than $10,000 and that 
personal benefits should be valued on the basis of the aggregate 
incremental cost to the registrant.\106\ In calculating any such 
amounts for purposes of determining the total compensation of employees 
other than the PEO, we are proposing that a registrant could use 
reasonable estimates in the manner described above.
---------------------------------------------------------------------------

    \105\ See letters from SCSGP and Group of Exec. Comp. Lawyers. 
We discuss comments relating to non-U.S. employees in more detail in 
Section II.C.2 of this release.
    \106\ See Instruction 4 to Item 402(c)(2)(ix). This instruction 
applies to perquisites and personal benefits. Accordingly, 
perquisites provided to executive officers who are included in the 
identification of the median should be treated as set forth in 
Instruction 4. For this purpose, however, benefits that are provided 
to all employees or all salaried employees would not be considered 
``perquisites.''
---------------------------------------------------------------------------

    In addition, questions have been raised involving the valuation of 
government-mandated pension plans,\107\ and at least one commenter has 
noted that the valuation of these plans can be difficult.\108\ Another 
commenter has noted that cross-border differences in government-
mandated pension plans raise additional complexity for registrants 
calculating total compensation for employees located outside the United 
States.\109\ In light of these comments, we acknowledge that some 
registrants may need clarity as to how to treat government-mandated 
pension plans for purposes of calculating an employee's total 
compensation and, specifically, for purposes of determining the 
aggregate change in actuarial present value of defined pension benefits 
under Item 402(c)(2)(viii).
---------------------------------------------------------------------------

    \107\ See J. Goldstein, supra note 103.
    \108\ See letter from Group of Exec. Comp. Lawyers. This 
commenter raised the issue in the context of a discussion of cross-
border differences in the availability of government-mandated 
retirement benefits, which this commenter believed would cause 
comparisons of employees across jurisdictions to be distorted. This 
commenter further suggested that the difficulty in valuing 
government-mandated pension benefits for individual employees would 
make it difficult for registrants to adjust the ratio for these 
differences. As described above in Section II.C.3., we believe that 
such an adjustment would not comply with the proposed requirements.
    \109\ See letter from Davis Polk (``The information for non-U.S. 
employees is complicated by local severance benefits and pension 
rights and related accounting outside the U.S.'').
---------------------------------------------------------------------------

    In most cases, amounts relating to a government-mandated pension 
plan would not be included in an employee's total compensation, just as 
these amounts would not be included under current rules applicable to 
named executive officers. We note, in particular, that Item 
402(c)(2)(viii) applies to a defined benefit plan, which, as explained 
in the 2006 Adopting Release, is a retirement plan in which the company 
pays the executive specified amounts at retirement that are not tied to 
the investment performance of the contributions that fund the 
plan.\110\ The 2006 Adopting Release states that the disclosure 
required by Item 402(c)(2)(viii) is intended to permit a full 
understanding of the company's compensation obligations to named 
executive officers, given that defined

[[Page 60575]]

benefit plans guarantee what can be a lifetime stream of payments and 
allocate risk of investment performance to the company and its 
shareholders.\111\ In contrast, under many government-mandated pension 
plans, the employee ultimately receives the pension benefit payment 
from the government, not the employer, and the purpose of the mandated 
pension benefit is not to provide compensation to the employee from the 
employer.\112\ Notwithstanding any amounts that an employer may be 
obligated to pay (typically as a tax) to the government in respect of 
an employee or amounts the employee may be obligated to have withheld 
from wages and paid to the government,\113\ where the pension benefit 
is being provided to the employee from the government and not by the 
registrant, a government-mandated defined benefit pension plan would 
not be considered a ``defined benefit plan'' for purposes of Item 
402(c)(2)(viii) and any accrued pension benefit under such a plan would 
not be considered compensation for purposes of Item 402(c)(2)(x).
---------------------------------------------------------------------------

    \110\ See 2006 Adopting Release, supra note 14, at 53175. This 
definition serves to distinguish defined benefit pension plans from 
defined contribution plans, in which the amount payable at 
retirement is tied to the performance of the contributions that fund 
the plan.
    \111\ Id.
    \112\ Although Item 402(a)(2) includes in compensation 
transactions between a registrant and a third party where the 
purpose of the transaction is to furnish compensation to the 
employee, we generally would not consider a government-mandated 
pension plan to be such a transaction.
    \113\ As under current rules, amounts an employer pays to the 
government in respect of an employee are obligations of the 
registrant to that government and would not be ``compensation'' for 
purposes of Item 402(c)(2)(x).
    Note, however, pursuant to Item 402(c)(2)(ix), tax gross-ups are 
included in total compensation. Therefore, if a registrant pays an 
employee's required contribution to the government (i.e., the 
registrant satisfies the employee's obligation to the government), 
the amount of the employee's contribution that is paid by the 
registrant would be includable in total compensation as a tax gross-
up.
---------------------------------------------------------------------------

    Finally, we acknowledge the concern from some commenters that the 
application of the definition of total compensation under Item 
402(c)(2)(x) to employees that are not executive officers could 
understate the overall compensation paid to such employees.\114\ One of 
these commenters explains that ``[b]y design, Item 402 captures all of 
the various compensation components received by a named executive 
officer, excluding certain limited items like benefits under non-
discriminatory plans (e.g., healthcare) and perquisites and personal 
benefits that aggregate less than $10,000. . . . Applied to an average 
worker, however, these rules will work in the opposite direction. By 
excluding certain benefit plans and perquisites (e.g., employee 
discounts, transportation/parking benefits, education assistance) that 
do not exceed the $10,000 threshold, the rules understate the average 
employee's real total compensation. Relative to wages, benefits like 
healthcare and employee discounts both add significant economic value 
for an employee and are a prime motivator for the average employee when 
applying for and maintaining employment.'' \115\ From this perspective, 
the omission of these components from the annual total compensation of 
employees, could render the ratio less meaningful, particularly for the 
purpose, suggested by some commenters, of evaluating employee morale. 
We note, however, that these exclusions are permissive, rather than 
mandatory.\116\ Therefore, registrants would be permitted, at their 
discretion, to include personal benefits (and perquisites in the case 
of employees that are executive officers) that aggregate less than 
$10,000 and compensation under non-discriminatory benefit plans in 
calculating the annual total compensation of employees. In order to be 
consistent, the PEO total compensation used in the related pay ratio 
disclosure would also need to reflect the same approach to these items 
as is used for employees, and the registrant should explain any 
difference between the PEO total compensation used in the pay ratio 
disclosure and the total compensation amounts reflected in the summary 
compensation table.
---------------------------------------------------------------------------

    \114\ See letters from RILA and Protective Life Corporation.
    \115\ See letter from RILA; however, as discussed above, by 
definition, benefits provided on a non-discriminatory basis to all 
employees would not be considered perquisites.
    \116\ See Item 402(c)(ix)(A) and Item 402(a)(6)(ii).
---------------------------------------------------------------------------

Request for Comment
    33. Are there other alternatives to calculating total compensation 
in accordance with Item 402(c)(2)(x) that would be consistent with 
Section 953(b)?
    34. Should the requirements provide instructions or should we 
provide additional guidance about how to apply the definition of total 
compensation under Item 402(c)(2)(x) (or any particular elements of 
total compensation under Item 402(c)(2)) to employees that are not 
executive officers? If so, what specific instructions or guidance would 
be useful to registrants? Please also address whether specific 
instructions or guidance would limit flexibility and thereby raise 
costs for registrants.
    35. Do registrants need further guidance on the permitted use of 
reasonable estimates in determining total compensation (or specific 
elements of total compensation) for employees other than the PEO in 
accordance with Item 402(c)(2)(x)? If so, what should that guidance 
entail? Would the use of reasonable estimates ever be inappropriate? 
Please also address whether specific instructions or guidance would 
limit flexibility and thereby raise costs for registrants.
    36. Instead of allowing the use of reasonable estimates in 
determining total compensation (or any elements of total compensation) 
as described in this proposal, should the rules prohibit the use of 
reasonable estimates for that purpose? If so, why? Please include an 
explanation of how the potential usefulness of the pay ratio disclosure 
would be affected by a registrant's use of reasonable estimates in this 
context. Are there alternative ways to address this impact, such as 
requiring an explanation describing the use of estimates, rather than 
prohibiting the use of estimates?
    37. Is it likely that the proposed requirements would affect the 
types of compensation that registrants provide to employees, and if so, 
what would that impact be? For example, one commenter suggested that 
registrants could decide to discontinue pension and incentive plans for 
employees or eliminate 401(k) plan matching contributions in order to 
facilitate their calculation of the pay ratio.\117\ If so, how should 
the proposed requirements address that impact?
---------------------------------------------------------------------------

    \117\ See letter from RILA.
---------------------------------------------------------------------------

5. Disclosure of Methodology, Assumptions and Estimates
    We are proposing instructions for the disclosure of the methodology 
and material assumptions, adjustments and estimates used in the 
calculation of the median or the annual total compensation of 
employees.\118\ The proposed instruction provides that registrants must 
briefly disclose and consistently apply any methodology used to 
identify the median and any material assumptions, adjustments or 
estimates used to identify the median or to determine total 
compensation or any elements of total compensation, and registrants 
must clearly identify any estimated amount as such. Registrants' 
disclosure of the methodology and material assumptions, adjustments and 
estimates used should provide sufficient information for a reader to be 
able to evaluate the appropriateness of the estimates. For example, 
when statistical sampling is used, registrants should

[[Page 60576]]

disclose the size of both the sample and the estimated whole 
population, any material assumptions used in determining the sample 
size, which sampling method (or methods) is used, and, if applicable, 
how the sampling method deals with separate payrolls such as 
geographically separated employee populations or other issues arising 
from multiple business or geographic segments. In order to promote 
comparability from year to year, the instruction also provides that, if 
a registrant changes methodology or material assumptions, adjustments 
or estimates from those used in the previous period, and if the effects 
of any such change are material, the registrant must briefly describe 
the change, the reasons for the change, and must provide an estimate of 
the impact of the change on the median and the ratio.
---------------------------------------------------------------------------

    \118\ We note that other Commission rules require such 
disclosures, particularly where registrants are given the 
flexibility to choose a methodology. See, e.g., Instructions to Item 
402(h)(2), requiring registrants to disclose the valuation method 
and all material assumptions applied in quantifying the present 
value of accrued pension benefits for purposes of the Pension 
Benefit Table.
---------------------------------------------------------------------------

    Because we are concerned that disclosure about methodology, 
assumptions, adjustments and estimates could become dense and overly 
technical, the instruction asks for a brief overview and makes clear 
that it is not necessary to provide technical analyses or formulas. In 
addition, we do not believe that a detailed, technical discussion (such 
as statistical formulas, confidence levels or the steps used in data 
analysis) would enhance the potential usefulness, as suggested by some 
commenters,\119\ of the ratio as a metric to evaluate the level of PEO 
compensation. We expect that a succinct description of the methodology 
and material assumptions, adjustments or estimates would not be overly 
burdensome for registrants and would be more informative for investors. 
We expect that the costs of the additional disclosure on registrants 
would be marginal, as these additional disclosures are intended to 
simply describe what has already been done or assumed in the 
calculations and, therefore, will not require additional actions for 
registrants. It is likely that some costs may be incurred in developing 
and reviewing the appropriate language to describe the approach taken.
---------------------------------------------------------------------------

    \119\ See, e.g., Senate Letter; House Letter; and AFL-CIO I; and 
letters from CtW Investment Group and UAW Retiree Medical Benefits 
Trust.
---------------------------------------------------------------------------

    The instruction also provides that the methodology and any material 
assumptions, adjustments and estimates should be consistently applied 
by the registrant in identifying the median. Likewise, where a 
registrant uses estimates in calculating the annual total compensation 
(or elements thereof) of employees, the methodology and any material 
assumptions, adjustments and estimates used in the calculation (such as 
currency translations \120\ or annualizing newly hired, non-temporary 
employees) should be used consistently by a registrant. Similarly, when 
using a compensation measure to identify the median employee, that 
compensation measure should be consistently applied to each employee 
included in the calculation. We believe that requiring consistent use 
of methodology, and particularly material assumptions, adjustments and 
estimates, could reduce incentives for registrants to use methodology 
to affect the outcome of the identification of the median or the ratio.
---------------------------------------------------------------------------

    \120\ Some commenters requested guidance on converting wages to 
U.S. dollars for purposes of pay ratio disclosure. Instruction 2 to 
Item 402(c) requires registrants to identify by footnote the 
currency, exchange rate and conversion methodology used in 
connection with compensation that is paid to or received by an 
executive officer in a different currency than U.S. dollars. In 
connection with the proposed requirements, registrants generally 
would not be required to disclose the currencies, exchange rates and 
conversion methodologies used in determining the annual total 
compensation of employees, but, where applicable, the rates and 
conversion methodologies used should be consistent with those used 
for the named executive officers in the summary compensation table.
---------------------------------------------------------------------------

    Several commenters recommended that registrants be required to 
describe the methodology, assumptions and estimates used in identifying 
the median.\121\ Some commenters further suggested that a narrative 
discussion of the ratio and its components (including methodology and 
assumptions used), together with supplemental information about 
employee compensation structures and policies, be required, in order to 
provide additional context for the ratio.\122\ Other than the brief 
description of methodology described above, the proposed requirements 
do not include a specific requirement for narrative discussion of the 
ratio, the median or any supplemental information. Section 953(b) 
requires disclosure of the pay ratio, but it does not require any 
additional information to provide context for or to explain the ratio 
or its components, therefore, we are not proposing to require 
additional information. We are sensitive to the costs of the mandated 
disclosure, and we believe that additional narrative disclosure about 
the ratio would not, for many registrants, provide useful information 
for investors that would justify the costs associated with providing 
that additional disclosure. The types of additional information that 
may be relevant to further understanding the ratio in a particular 
period would necessarily vary from company to company and could also 
vary from time to time as a registrant's business evolves or due to 
external factors, such as changes in the global economic environment or 
the labor marketplace. While some investors and other market 
participants could find supplemental information about a registrant's 
employment practices, the composition of its workforce and similar 
topics (such as employment policies, use of part-time workers, use of 
seasonal workers, outsourcing and off-shoring strategies) useful or 
informative, we do not believe that the cost of prescribing additional 
disclosure would be justified. Therefore, we are not proposing 
requirements for a narrative discussion beyond the proposed brief 
description of the calculation methodology where estimation techniques 
have been used.
---------------------------------------------------------------------------

    \121\ See AFL-CIO II and COEC I; and letters from ABA; Group of 
Exec. Comp. Lawyers; Meridian Compensation Partners, LLC; and SCSGP.
    \122\ See AFL-CIO I (recommending a required discussion and 
analysis ``including their use of outsourcing and off-shoring 
strategies, use of part-time and temporary employees, and use of 
efficiency wages to boost productivity'') and letter from Americans 
for Financial Reform.
---------------------------------------------------------------------------

    Finally, one commenter suggested that the rule expressly permit 
additional disclosure to accompany the pay ratio.\123\ Although we do 
not believe that it is necessary to include instructions in the 
proposed requirements for this purpose, we emphasize that, as with 
other mandated disclosure under our rules, registrants would be 
permitted to supplement the required disclosure with a narrative 
discussion if they choose to do so. Likewise, we note that registrants 
may, at their discretion, present additional ratios to supplement the 
required ratio. As with other disclosure under our rules, however, any 
additional ratios should be clearly identified and not misleading, and 
should not be presented with greater prominence than the required 
ratio.\124\
---------------------------------------------------------------------------

    \123\ See letter from Towers Watson.
    \124\ See, e.g., Exchange Act Rule 12b-20; and Commission's 
Guidance Regarding Management's Discussion and Analysis or Financial 
Condition and Results of Operations, Release No. 33-8350 (Dec. 19, 
2003) [68 FR 75056], at 75060.
---------------------------------------------------------------------------

Request for Comment
    38. Should we require registrants to disclose information about the 
methodology and material assumptions, adjustments or estimates used in 
identifying the median or calculating annual total compensation for 
employees, as proposed? Why or why not? Would this information assist 
investors in understanding the pay ratio? Are there changes we could 
make to the requirement to avoid boilerplate disclosure? Should we 
require a more technical discussion, such as requiring the disclosure 
of statistical formulas,

[[Page 60577]]

confidence levels or the steps used in the data analysis?
    39. Should we require disclosure when a registrant changes its 
methodology (or material assumptions, adjustments or estimates) from 
previous periods, where such change has a material effect, as proposed? 
Should registrants be required to describe the reasons for the change, 
as proposed? Should registrants be required to provide an estimate of 
the impact of the change on the median and the ratio, as proposed? Is 
the proposed information useful? Is there other information that should 
be required?
    40. Should we require registrants to disclose additional narrative 
information about the pay ratio or its components, or factors that give 
context for the median, such as employment policies, use of part-time 
workers, use of seasonal workers, outsourcing and off-shoring 
strategies? If so, what additional information should be required? 
Please be specific as to how this information would assist investors in 
understanding the pay ratio or in using the pay ratio disclosure. 
Please also be specific about the costs of providing such disclosure. 
How could such a requirement be designed to avoid boilerplate 
disclosure? Would such a requirement raise competition concerns?
    41. Should we require registrants to disclose additional metrics 
about the total compensation of all employees (or of the statistical 
sample if one is used), such as the mean and the standard deviation, as 
a supplement to the required disclosure? Would additional metrics be 
useful to investors? We assume that these metrics could be provided 
without additional cost or at a low cost once the median has been 
identified. Is this assumption correct? If not, please identify the 
costs and benefits of such additional disclosure. Would such a 
requirement raise competition concerns?
6. Clarification of the Meaning of ``Annual''
    In order to provide clarity, the proposed requirement defines 
``annual total compensation'' to mean total compensation for the last 
completed fiscal year, consistent with the time period used for the 
other Item 402 disclosure requirements. This clarification is intended 
to address questions from commenters about the need to update the pay 
ratio disclosure throughout the year and make clear that the disclosure 
does not need to be updated more than once a year.\125\ One commenter 
expressly supported this approach.\126\
---------------------------------------------------------------------------

    \125\ See, e.g., letters from American Benefits Council and ABA.
    \126\ See letter from RILA (noting ``we recommend that the 
Compensation Ratio be based on the issuer's last completed fiscal 
year, which would make it consistent with the executive compensation 
disclosure under Item 402 and reduce the compliance costs and 
burdens at least in so far as the information required for the 
Summary Compensation Table could be used for purposes of the 
Compensation Ratio as well.'').
---------------------------------------------------------------------------

    Two commenters suggested other possible alternatives for the 
calculation of ``annual'' total compensation. One of these commenters 
recommended that registrants should have flexibility to select a time 
period for calculating the annual total compensation of employees, 
noting that registrants without a calendar year fiscal year-end might 
benefit from the flexibility to use the calendar year period since that 
would be consistent with the registrant's tax reporting 
obligations.\127\ Another commenter suggested two timing rules that 
would grant registrants further flexibility to use the 12-month time 
periods that their payroll systems use.\128\ We understand that these 
suggestions are intended to reduce compliance costs for registrants by 
giving registrants the ability to use information in the form that it 
is currently compiled for other purposes, such as tax and payroll 
recordkeeping. We believe, however, that it is appropriate for the time 
period for the pay ratio disclosure to be the same as the time period 
used for the registrant's other executive compensation disclosures, 
and, therefore, a registrant would be required to calculate the total 
compensation for the median employee for the last completed fiscal 
year. As discussed above, for purposes of estimating the median 
employee, we propose to allow a registrant to use compensation amounts 
derived from its payroll or tax records for the same annual period that 
is used in the payroll or tax records. We believe that permitting 
companies to identify the median employee using compensation 
information in the form that it is maintained in their own books and 
records would reduce compliance costs and that the proposed flexibility 
in estimating the median employee could address the concerns raised by 
these commenters. Registrants using payroll or tax records to identify 
the median employee would be required to calculate the Item 
402(c)(2)(x) total compensation for that median employee for the last 
completed fiscal year, rather than the annual period used in the 
payroll or tax records.
---------------------------------------------------------------------------

    \127\ See letter from American Benefits Council.
    \128\ See letter from Group of Exec. Comp. Lawyers 
(recommending: ``Rule One--the registrant can select any date as of 
which to calculate median compensation, provided the date is within 
12 months of the proxy filing, and is the most recent practicable 
date, and Rule Two--if different payroll systems are involved, the 
12-month period for computing compensation data for each payroll 
system's data will be acceptable so long as the period ends within 
12 months of the date chosen under Rule One.'').
---------------------------------------------------------------------------

Request for Comment
    42. For purposes of the disclosure of the median of the annual 
total compensation of employees and the pay ratio, should we, as 
proposed, require total compensation to be calculated for the last 
completed fiscal year, rather than some other annual period? Why or why 
not? How does this impact the ability of a registrant to compile the 
disclosure in time to include it in a proxy or information statement 
relating to an annual meeting of shareholders (or written consents in 
lieu of such meeting)?
7. Timing of Disclosure
a. Updating Pay Ratio Disclosure for the Last Completed Fiscal Year
    We are proposing instructions to clarify the timing for updating 
pay ratio disclosure after the end of a registrant's fiscal year.\129\ 
As discussed above, proposed Item 402(u) would require annual total 
compensation amounts used in the ratio to be calculated for the 
registrant's last completed fiscal year. In addition, pay ratio 
disclosure would be required in any filing by the registrant that 
requires Item 402 disclosure. Accordingly, without the proposed 
instructions, a registrant could be required to include pay ratio 
disclosure in an annual report or registration statement filed after 
the end of the fiscal year, but before it has compiled the executive 
compensation information for that fiscal year for inclusion in its 
proxy statement relating to its annual meeting of shareholders,\130\ 
which could raise additional incremental costs for registrants that 
elect to provide executive compensation disclosure in their annual 
proxy statement rather than their annual report and for registrants 
that are conducting registered offerings at the beginning of their 
fiscal year.
---------------------------------------------------------------------------

    \129\ See letter from ABA (noting ``the Commission should 
clarify when information for the most recently completed fiscal year 
is required to first be disclosed'').
    \130\ Many registrants typically satisfy their disclosure 
obligations under Part III of Form 10-K (which includes Item 402 
requirements) by incorporating the required information by reference 
from their proxy or information statement that is filed after their 
annual report on Form 10-K. See General Instruction G(3). We discuss 
the mechanics of General Instruction G(3) in more detail below.
---------------------------------------------------------------------------

    To address this issue, some commenters recommended that pay ratio 
disclosure not be required to be

[[Page 60578]]

updated for the most recently completed fiscal year until the 
registrant files its proxy statement for its annual meeting of 
shareholders.\131\ We agree with this suggested approach, and we 
believe that such an approach would not diminish the potential 
usefulness of the disclosure. At least one commenter who supported 
Section 953(b) disclosure also recommended a similar approach.\132\ We 
also believe that this approach could hold down additional costs for 
registrants in connection with filings made or required to be made 
before the filing of the proxy or information statement for the annual 
meeting of shareholders (or written consents in lieu of such a meeting) 
that would typically contain the registrant's other Item 402 disclosure 
covering the most recently completed fiscal year. For example, under 
the proposed approach, updating the pay ratio disclosure would not be 
an additional hurdle for a registrant that requests effectiveness of a 
registration statement after the end of its fiscal year and before the 
filing of the proxy statement for its annual meeting of shareholders. 
We believe that the proposed instruction would provide certainty to 
registrants as to when the updated information is required and would 
allow sufficient time after the end of the fiscal year to identify the 
median.
---------------------------------------------------------------------------

    \131\ See letters from ABA and Compensia, Inc.
    \132\ See AFL-CIO II (asserting that pay ratio disclosure will 
be useful to investors and recommending that the disclosure be 
limited to annual proxy statements).
---------------------------------------------------------------------------

    Although we agree with the recommendation of commenters to not 
require updated annual pay ratio disclosure until a registrant files 
its annual proxy or information statement, we note that not all 
registrants that would be subject to the proposed pay ratio disclosure 
file proxy or information statements in connection with annual meetings 
of shareholders. For example, reporting companies that do not have 
securities registered under Section 12 of the Exchange Act are not 
required to file proxy or information statements for their annual 
meeting of shareholders and therefore typically provide Item 402 
information updated for the most recently completed fiscal year in 
their annual report on Form 10-K. In addition, some registrants are not 
required to file annual proxy or information statements because they 
are not required to hold annual meetings (such as registrants that are 
organized as master limited partnerships) or because the securities 
that are registered under Section 12 of the Exchange Act have limited 
voting rights (such as common units representing limited liability 
company interests). Accordingly, we are proposing a modified version of 
the recommendation of commenters in order to provide a similar 
accommodation for registrants that do not file annual proxy statements 
and to align the proposed requirement to the timing rules for providing 
Item 402 disclosure in annual reports and proxy and information 
statements.
    As noted above, registrants typically disclose Item 402 information 
for the most recently completed fiscal year in their proxy or 
information statement relating to their annual meeting of shareholders, 
in reliance on General Instruction G(3) of Form 10-K. This instruction 
allows the information required by Part III of Form 10-K (including 
Item 402 information) to be incorporated by reference from the 
registrant's definitive proxy statement (filed or required to be filed 
pursuant to Regulation 14A) or definitive information statement (filed 
or required to be filed pursuant to Regulation 14C) if that statement 
involves the election of directors and is filed not later than 120 days 
after the end of the fiscal year covered by the annual report. If a 
definitive proxy statement or information statement is not filed in the 
120-day period (or is not required to be filed by virtue of Rule 3a12-
3(b) under the Exchange Act), the Part III information must be filed as 
part of the Form 10-K, or as an amendment to the Form 10-K, not later 
than the end of the 120-day period.
    In order to align with this timeframe, the proposed instruction 
would state that a registrant is not required to include pay ratio 
disclosure with respect to its last completed fiscal year until the 
filing of its annual report for that last completed fiscal year or the 
filing of a definitive proxy or information statement relating to an 
annual meeting of shareholders (or written consents in lieu of such a 
meeting), provided that updated pay ratio information must, in any 
event, be filed as provided in General Instruction G(3) of Form 10-K 
not later than 120 days after the end of such fiscal year. As an 
example, a registrant would not be required to disclose pay ratio 
information relating to compensation for fiscal year 2014 until its 
definitive proxy or information statement for its 2015 annual meeting 
of shareholders.\133\ Consistent with the treatment of other 
information required by Part III of Form 10-K, if that registrant does 
not file its definitive proxy or information statement within 120 days 
of the end of 2014 (i.e., April 30, 2015), it would need to file 
updated pay ratio disclosure in its Form 10-K for 2014 or an amendment 
to that Form 10-K. In contrast, a registrant that is not subject to the 
proxy rules or does not file a proxy or information statement in 
connection with an annual meeting of shareholders would be required to 
update its pay ratio disclosure for fiscal year 2014 in its annual 
report on Form 10-K for that year.
---------------------------------------------------------------------------

    \133\ Consistent with the proposed instructions, we note that a 
registration statement that incorporates by reference a Form 10-K 
(or amended Form 10-K) containing all Part III information other 
than updated pay ratio information could be declared effective 
before the registrant's definitive proxy or information statement 
containing updated pay ratio information is filed in accordance with 
General Instruction G(3).
---------------------------------------------------------------------------

    In order to provide guidance to registrants in connection with 
filings made before the annual update is triggered, the proposed 
instruction would also state that, in any filing made by a registrant 
after the end of its last completed fiscal year and before the filing 
of such Form 10-K or proxy or information statement, as applicable, a 
registrant must include or incorporate by reference its pay ratio 
disclosure (if such disclosure had been required) for the fiscal year 
prior to the last completed fiscal year.
    Although the annual update is not required to be disclosed until 
the filing of an annual report for the last completed fiscal year, or 
if later, the filing of a definitive proxy statement or information 
statement relating to the registrant's annual meeting of shareholders, 
this updating provision does not alter the requirements for Item 402 
disclosure under Item 8 of Schedule 14A in other proxy or information 
statement filings. For example, if a registrant files a proxy statement 
(other than the definitive proxy statement for its annual meeting) that 
requires Item 402 information pursuant to Item 8 of Schedule 14A, the 
registrant would be required to include or incorporate by reference pay 
ratio disclosure for the most recent period that had been filed in its 
Form 10-K or definitive proxy statement for its annual meeting.
Request for Comment
    43. Should we, as proposed, require the pay ratio disclosure to be 
updated no earlier than the filing of a registrant's annual report on 
Form 10-K or, if later, the filing of a proxy or information statement 
for the registrant's annual meeting of shareholders (or written 
consents in lieu of such a meeting), and in any event not later than 
120 days after the end of its fiscal year? Are we correct that the 
proposed timing rule

[[Page 60579]]

would not affect the potential usefulness of the pay ratio disclosure 
for investors? If not, how should the requirements be changed to 
address that impact? Are we correct that the proposed timing rule would 
help to keep costs down for registrants by providing certainty as to 
the timing for annual updates and by allowing registrants to compile 
the disclosure at the same time as other executive compensation 
disclosure under Item 402? Are we correct that the proposed timing rule 
would help keep down costs for registrants that request effectiveness 
of registration statements after the end of the last fiscal year but 
before the filing of their annual proxy statement?
    44. Is the proposed timing workable for registrants? Does it 
provide enough time after the end of the fiscal year for companies to 
identify the median of the total compensation of all employees for that 
year? We note that one commenter asserted that it could take 
registrants three months or more each year to calculate pay ratio 
disclosure, and, accordingly, that the disclosure would not be 
available in time to be included in the annual proxy statement or 
annual report.\134\ Would the ability to use reasonable estimates, 
consistently applied compensation measures, or statistical sampling be 
sufficient to alleviate this issue? For example, if a registrant is 
unable to calculate its employees' incentive compensation before such 
time, would it be able to reasonably estimate such compensation? 
Instead, should the proposed rules provide an accommodation for a 
company that cannot compile compensation information in time to be 
included in its proxy statement for the annual meeting of shareholders 
or Form 10-K, as applicable? For example, should registrants be 
permitted to delay the pay ratio disclosure until it is calculable and 
then file the disclosure under Item 5.02(f) of Form 8-K? \135\ If so, 
under what circumstances should registrants be permitted to do so? Or, 
if we were to allow for such a delay, should we specify when the 
disclosure should be required to be made? If so, what deadline should 
we impose? Would such a delay impact the usefulness to investors of the 
disclosure, particularly if the disclosure would not be available in 
time for inclusion in proxy or information statements for the annual 
meeting of shareholders?
---------------------------------------------------------------------------

    \134\ See COEC II.
    \135\ Item 5.02(f) of Form 8-K sets forth the requirements for 
the filing of information that was omitted from Item 402 disclosure 
in accordance with Instruction 1 to Items 402(c)(2)(iii) and (iv). 
These are described in more detail in the next subsection of this 
release.
---------------------------------------------------------------------------

b. Proposed Instruction for Pay Ratio Disclosure When the Registrant 
Omits Salary or Bonus Information for the PEO in Reliance on 
Instruction 1 to Item 402(c)(2)(iii) and (iv), and Proposed Technical 
Amendment to Item 5.02(f) of Form 8-K
    In accordance with Instruction 1 to Items 402(c)(2)(iii) and (iv) 
of Regulation S-K, a registrant is permitted to omit disclosure in the 
summary compensation table of the salary or bonus of a named executive 
officer if it is not calculable as of the latest practicable date. In 
that circumstance, a registrant must include a footnote disclosing that 
fact and providing the date that the amount is expected to be 
determined, and the amount must be disclosed at that time by filing a 
Form 8-K. Item 5.02(f) of Form 8-K sets forth the requirements for the 
filing of information that was omitted from Item 402 disclosure in 
accordance with Instruction 1 to Items 402(c)(2)(iii) and (iv), 
including the requirement to include a new total compensation figure 
for the named executive officer.
    In cases where a registrant is relying on this instruction because 
the salary or bonus of the PEO is not calculable until a later date, we 
believe that it is also appropriate for a registrant to omit pay ratio 
disclosure until those elements of the PEO's total compensation are 
determined and provide its pay ratio disclosure in the same filing 
under Item 5.02(f) of Form 8-K in which the PEO's salary or bonus is 
disclosed. Accordingly, the proposed rule would include an instruction 
that provides that a registrant relying on Instruction 1 to Items 
402(c)(2)(iii) and (iv) with respect to the salary or bonus of the PEO 
would be required to disclose that the pay ratio disclosure is being 
omitted because the PEO's total compensation is not available and to 
disclose the expected date that the total compensation for the PEO will 
be determined.\136\ The instruction would then require the registrant 
to include its pay ratio disclosure in the filing on Form 8-K that 
includes the omitted salary or bonus information as contemplated by 
Instruction 1 to Items 402(c)(2)(iii) and (iv). We are also proposing a 
conforming amendment to Item 5.02(f) of Form 8-K to reflect the 
addition of this pay ratio disclosure requirement. In addition, 
although a filing is triggered under Item 5.02(f) when the omitted 
salary or bonus becomes calculable in whole or in part, under the 
proposed amendments to Form 8-K, the pay ratio information would be 
required only when the salary or bonus becomes calculable in whole, 
which would avoid the need for multiple updates to the pay ratio 
disclosure until the final total compensation amount for the PEO is 
known.
---------------------------------------------------------------------------

    \136\ See Proposed Instruction 4 to Item 402(u).
---------------------------------------------------------------------------

    In proposing this instruction, we have assumed that the potential 
benefits of the disclosure could be diminished if the pay ratio were to 
be calculated using less than the entire amount of the PEO's total 
compensation for the period and that these potential benefits could 
justify the potential costs to investors of a delay in the timing of 
the disclosure. For example, in some cases, the amount of compensation 
that is omitted under Instruction 1 to Items 402(c)(2)(iii) and (iv) 
could be significant, and, therefore, the pay ratio would be lower if 
it were presented using that incomplete compensation amount. Based on 
the number of registrants that have historically relied on Instruction 
1 to Items 402(c)(2)(iii) and (iv),\137\ we do not expect that the 
proposed instruction would impact a significant number of registrants 
each year.
---------------------------------------------------------------------------

    \137\ For example, based on a review of EDGAR filings in 2012, 
only 22 registrants relied on Instruction 1 to Items 402(c)(2)(iii) 
and (iv) in connection with the total compensation of their PEO.
---------------------------------------------------------------------------

Request for Comment
    45. Is the proposed instruction appropriate in instances where 
registrants are relying on Instruction 1 to Items 402(c)(2)(iii) and 
(iv) with respect to the salary or bonus of the PEO?
    46. Instead of the proposed approach, should these registrants be 
required to calculate pay ratio disclosure using only the amounts of 
total compensation of the PEO that are available at the time of the 
filing, or in the alternative, make a reasonable estimate of the 
omitted total compensation amounts? Would such disclosure be useful or 
meaningful? In that case, should the registrant be required to update 
(by Form 8-K or otherwise) its pay ratio disclosure to reflect the 
PEO's recalculated total compensation?
    47. Is the proposed instruction clear? If not, what changes should 
be made to clarify it?
    48. Should we require any additional or supplemental disclosure 
when a registrant relies on the proposed instruction? If so, what would 
that disclosure entail? For example, should the proposed instruction 
require registrants to report the median annual total compensation of 
employees, even if the PEO total compensation and pay

[[Page 60580]]

ratio are not available? Should registrants relying on the proposed 
instruction be required to disclose the pay ratio for the prior year in 
the Form 10-K or proxy or information statement?
    49. Would the proposed instruction cause registrants to change 
their compensation practices? Alternatively, would the proposed 
instruction have an adverse impact on the usefulness to investors of 
the proposed pay ratio disclosure? How should we change the proposed 
requirements to address such impacts?
8. Status as ``Filed'' Not ``Furnished''
    Some commenters suggested that pay ratio information be deemed 
``furnished'' and not ``filed'' for purposes of the Securities Act and 
Exchange Act.\138\ We note that Section 953(b) refers to the pay ratio 
information being disclosed in the registrant's ``filings'' with the 
Commission. We believe that the use of the word ``filing'' in Section 
953(b) is consistent with the disclosure being filed and not furnished. 
Accordingly, we are not proposing to permit the pay ratio information 
to be deemed ``furnished.'' Like other Item 402 information, the pay 
ratio disclosure would be considered ``filed'' for purposes of the 
Securities Act and Exchange Act and, accordingly, would be subject to 
potential liabilities thereunder.
---------------------------------------------------------------------------

    \138\ See COEC I and letters from ABA; Protective Life 
Corporation; and RILA. In contrast, no commenters have asserted that 
the disclosure should be filed.
---------------------------------------------------------------------------

    We note that one of the reasons that commenters recommended 
treating the information as furnished and not filed is because of the 
difficulty that some companies may have in determining and verifying 
the information, which must be covered by the certifications required 
for Exchange Act filings under the Sarbanes-Oxley Act of 2002.\139\ We 
also recognize that some registrants could have more difficulty in 
gathering and verifying the information than others. Nevertheless, we 
believe that the flexibility afforded to registrants in connection with 
identifying the median could reduce some of the difficulties of 
compiling the required information, because registrants would be able 
to tailor the methodology to reflect their own facts and circumstances. 
The ability to use reasonable estimates in connection with the 
calculation of annual total compensation for employees other than the 
PEO could also alleviate some of these concerns. In addition, we 
believe that the proposed transition periods discussed below, which are 
designed to give registrants sufficient time to develop and implement 
compliance procedures, could mitigate some concerns about compiling and 
verifying the information.
---------------------------------------------------------------------------

    \139\ See, e.g., COEC I.
---------------------------------------------------------------------------

Request for Comment
    50. Should the Section 953(b) information be filed rather than 
furnished? What weight should we give to the use of the word ``filing'' 
in the statute?
    51. Are there other ways to address commenters' concerns about the 
ability to compile and verify the pay ratio information that still 
fulfills the statutory mandate?

D. Transition Matters

1. Proposed Compliance Date
    Section 953(b) does not specify a date when registrants must begin 
to comply with the requirements that we implement. We are proposing to 
require that a registrant must begin to comply with proposed Item 
402(u) with respect to compensation for the registrant's first fiscal 
year commencing on or after the effective date of the rule, and, as 
proposed, a registrant would be permitted to omit this initial pay 
ratio disclosure from its filings until the filing of its annual report 
on Form 10-K for that fiscal year or, if later, the filing of a proxy 
or information statement for its next annual meeting of shareholders 
(or written consents in lieu of a meeting) following the end of such 
year. Similar to the proposed instructions for updating pay ratio 
disclosure, this initial pay ratio disclosure would be required, in any 
event, to be filed as provided in connection with General Instruction 
G(3) of Form 10-K not later than 120 days after the end of such fiscal 
year. Thus, if the final requirements were to become effective in 2014, 
a registrant with a fiscal year ending on December 31 would be first 
required to include pay ratio information relating to compensation for 
fiscal year 2015 in its proxy or information statement for its 2016 
annual meeting of shareholders (or written consents in lieu of such a 
meeting). Consistent with the treatment of other information required 
by Part III of Form 10-K, if that registrant does not file its proxy or 
information statement within 120 days of the end of 2015 (i.e., April 
30, 2016), it would need to file its initial pay ratio disclosure in 
its Form 10-K for 2015 or an amendment to that Form 10-K. Similarly, a 
registrant with a fiscal year ending on December 31 that is not subject 
to the proxy rules or does not file a proxy or information statement in 
connection with an annual meeting of shareholders would be required to 
include pay ratio information relating to compensation for fiscal year 
2015 in its Form 10-K covering fiscal year 2015, which would be due in 
the first quarter of 2016. Registrants would be permitted to begin 
compliance earlier on a voluntary basis.
    Several commenters noted that companies will need a long transition 
period before they can implement systems to compile the disclosure and 
verify its accuracy.\140\ We understand that this time would likely be 
needed by large, multinational registrants and any registrants that 
currently do not have a centralized, consolidated payroll, benefits and 
pension system that captures the information necessary to identify the 
median.\141\ We expect that it will take registrants one full reporting 
cycle to implement and test any necessary systems,\142\ and we believe 
that the proposal provides that time for transition and implementation.
---------------------------------------------------------------------------

    \140\ See letters from ABA; American Benefits Council; Brian 
Foley & Co.; Group of Exec. Comp. Lawyers; Davis Polk; NACD; SCSGP; 
RILA; and Towers Watson.
    \141\ See letters from ABA; American Benefits Council; Brian 
Foley & Co.; Group of Exec. Comp. Lawyers; Davis Polk; NACD; SCSGP; 
RILA; and Towers Watson.
    \142\ See, e.g., letters from American Benefits Council and 
Group of Exec. Comp. Lawyers.
---------------------------------------------------------------------------

    We believe it is appropriate to allow a registrant to omit its 
initial pay ratio disclosure from filings that would otherwise require 
Item 402 information for its first fiscal year commencing on or after 
the effective date of the final rule until the filing of its annual 
report on Form 10-K or, if later, a proxy or information statement 
relating to its next annual meeting of shareholders (and in any event 
not later than 120 days after the end of such fiscal year), for the 
same reasons described in Section II.C.7.a. above.
Request for Comment
    52. Should the proposed requirements have a transition period, as 
proposed? Is the period too long? Too short? If so, how long should the 
transition period be and why? Please be specific (for example, instead 
of the proposed period, should compliance be delayed until the first 
fiscal year beginning on or after six months following the effective 
date of the final rules?).
    53. In the alternative, should the transition periods be different 
for different types of registrants? If so, what transition periods 
should apply to which registrants? For example, should registrants with 
a workforce below a certain size (e.g., fewer than 1,000 employees) 
have a shorter phase-in

[[Page 60581]]

period than others? Should there be a longer phase-in for multinational 
registrants? Please provide specific information about how to define 
the categories of registrants that should be subject to any recommended 
phase-in.
    54. Are there any other accommodations that we should consider for 
particular types of companies or circumstances (other than the proposed 
transition period for new registrants described below in this release)?
     Should we provide a transition period for business 
combinations? If so, what should the transition be? For example, should 
a registrant be permitted to omit the employees of a newly acquired 
entity until a period of time (e.g., six months, 12 months) has passed 
following the closing of the business combination transaction? Instead 
of a specific transition period, would guidance about when the 
employees of a newly acquired entity need to be covered in the pay 
ratio provide sufficient direction for registrants? What should that 
guidance entail?
     Should we permit a registrant that is not subject to the 
proxy rules to amend its Form 10-K no later than 120 days after the end 
of the fiscal year covered by the report to provide the pay ratio 
disclosure? Should we permit such a registrant to provide the 
disclosure by filing a Form 8-K instead of an amendment to Form 10-K?
     Should we provide a transition period for registrants that 
cease to be smaller reporting companies? If so, what should the 
transition be?
     Does the fact that Title I of the JOBS Act provides 
transition periods for provisions other than Section 953(b) for 
registrants that cease to be emerging growth companies suggest that we 
should not provide a transition period for such registrants? Should we 
provide a transition for registrants that cease to be emerging growth 
companies? If so, what should the transition be? If not, would these 
registrants have the information available to compile the disclosure in 
time for their first proxy statement or annual report, as applicable, 
following the date they exit emerging growth company status? Should a 
transition period depend on the disqualifying event that occurs, on the 
basis that the registrant may have more advance notice of the 
occurrence for some types of events? \143\ For example, should a 
company that exits emerging growth company status because it reaches 
the fifth anniversary of its first sale of common equity be required to 
first disclose pay ratio information relating to the fiscal year in 
which its fifth anniversary occurred? Alternatively, should the amount 
of transition time provided depend on how long a company has enjoyed 
emerging growth company status, such as a longer transition for 
registrants that lose that status after one year or less?
---------------------------------------------------------------------------

    \143\ The definition of emerging growth company provides that an 
issuer continues to be deemed an emerging growth company until the 
earliest of: (1) The last day of the fiscal year during which it had 
total annual gross revenues of $1 billion; (2) the last day of the 
fiscal year following the fifth anniversary of the first sale of its 
common equity securities; (3) the date on which it has issued more 
than $1 billion in non-convertible date during the previous three 
years; or (4) the date on which it is deemed a large accelerated 
filer. See Exchange Act Section 3(a)(80) [15 U.S.C. 78c(a)(80)] and 
Securities Act Section 2(a)(19)[15 U.S.C. 77b(a)(19)].
---------------------------------------------------------------------------

2. Proposed Transition for New Registrants
    New registrants that do not qualify as emerging growth companies 
are not exempted from the application of Section 953(b). The proposed 
requirements include instructions that would permit new registrants to 
delay compliance, so that pay ratio disclosure would not be required in 
a registration statement on Form S-1 or S-11 for an initial public 
offering or a registration statement on Form 10.\144\ Instead, such a 
registrant would be required to first comply with proposed Item 402(u) 
with respect to compensation for the first fiscal year commencing on or 
after the date the registrant becomes subject to the requirements of 
Section 13(a) or Section 15(d) of the Exchange Act, and, as proposed, 
the registrant would be permitted to omit this initial pay ratio 
disclosure from its filings until the filing of its Form 10-K for such 
fiscal year or, if later, the filing of a proxy or information 
statement for its next annual meeting of shareholders (or written 
consents in lieu of a meeting) following the end of such fiscal year. 
Similar to the proposed instructions for updating pay ratio disclosure, 
these proposed instructions also require that this initial pay ratio 
disclosure must, in any event, be filed as provided in connection with 
General Instruction G(3) of Form 10-K not later than 120 days after the 
end of such fiscal year.
---------------------------------------------------------------------------

    \144\ See proposed Instruction 5 to paragraph (u).
---------------------------------------------------------------------------

    For example, assuming the proposed requirements become effective in 
2014, a company with a fiscal year ending on December 31 that completes 
its initial public offering in October 2016 would not be required to 
include any pay ratio information in its registration statement on Form 
S-1. The company would then not be required to include pay ratio 
disclosure in any filing until it files its definitive proxy or 
information statement for its 2018 annual meeting of shareholders (or 
written consents in lieu of such a meeting), which would include pay 
ratio disclosure relating to 2017 compensation amounts. Consistent with 
the treatment of other information required by Part III of Form 10-K, 
if the company does not file its definitive proxy or information 
statement within 120 days of the end of its fiscal year (i.e., April 
30, 2018), it would need to file its initial pay ratio disclosure in 
its Form 10-K for 2017 or an amendment to that Form 10-K. If that 
company were not required to file a proxy statement relating to its 
annual meeting of shareholders, the first filing that would be required 
to include pay ratio disclosure would be its Form 10-K covering fiscal 
year 2017, which would include pay ratio disclosure relating to 2017 
compensation amounts.
    Commenters did not address the impact of pay ratio disclosure 
requirements on newly public companies. Although investors might 
benefit from pay ratio information in connection with an initial public 
offering or Exchange Act registration, we believe it is appropriate to 
give companies time to develop any needed systems to compile the 
disclosure and verify its accuracy. The transition period for new 
registrants is similar to the proposed time frame provided for other 
registrants to comply with pay ratio disclosure requirements following 
the effective date of the final rules. The proposed approach is also 
similar to the current phase-in for newly public companies in 
connection with Item 308 of Regulation S-K, for management's report on 
the registrant's internal control over financial reporting.\145\
---------------------------------------------------------------------------

    \145\ See Instruction 1 to Item 308 of Regulation S-K.
---------------------------------------------------------------------------

    We are sensitive to the impact that the proposed rules could have 
on capital formation. We note that the requirements of Section 953(b), 
as amended by the JOBS Act, distinguish between certain newly public 
companies and all other issuers by providing an exemption for emerging 
growth companies. We note that the incremental time needed to compile 
pay ratio disclosure could cause companies that are not emerging growth 
companies to delay an initial public offering, which could have a 
negative impact on capital formation. In this regard, we assume that, 
in order to be disqualified for emerging growth company status, these 
companies are likely to be businesses with more extensive operations or 
a greater number of employees than many emerging growth companies, 
which

[[Page 60582]]

could increase the initial efforts needed to comply with the proposed 
requirements. We believe that providing a transition period for these 
newly public companies could mitigate this potential impact on capital 
formation.
Request for Comment
    55. Instead of the proposed transition period, should we require 
new registrants that are not emerging growth companies to comply with 
pay ratio disclosure requirements in registration statements on Form S-
1, Form S-11 or Form 10? Are we correct that the incremental time 
needed to compile pay ratio disclosure could cause companies that are 
not emerging growth companies to delay an initial public offering? What 
costs would be imposed on these companies if we did not provide the 
transition? Does the potential importance of the information to 
investors justify the burden on these companies of complying with the 
requirements in their Form S-1, Form S-11 or Form 10?
    56. Does the proposed transition period for compliance by new 
registrants provide sufficient time (or, alternatively, too much time) 
for these companies to be able to comply? Why or why not?
    57. Are there any alternatives to the proposed transition period 
that we should consider? For example, should we permit new registrants 
to omit pay ratio disclosure from Form S-1 and Form 10 (as proposed), 
but require them to comply with the proposed pay ratio disclosure 
requirements in their first proxy statement or annual report, as 
applicable?
    58. Are there other accommodations we should consider for new 
registrants?

III. General Request for Comment

    We request and encourage any interested person to submit comments 
on any aspect of the proposals, other matters that might have an impact 
on the amendments and any suggestions for additional changes. With 
respect to any comments, we note that they are of greatest assistance 
to our rulemaking initiative if accompanied by supporting data and 
analysis of the issues addressed in those comments, particularly 
quantitative information as to the costs and benefits, and by 
alternatives to the proposals where appropriate. Where alternatives to 
the proposals are suggested, please include information as to the costs 
and benefits of those alternatives.
    59. Have we struck the appropriate balance between prescribing 
rules to satisfy the mandate of Section 953(b) and allowing a 
registrant flexibility to identify the median in a manner that is 
appropriate to its own facts and circumstances?
    60. Are there alternatives to the proposals we should consider that 
would satisfy the requirements of Section 953(b) of the Dodd-Frank Act?

IV. Economic Analysis

A. Background

    As discussed in detail above, Section 953(b) directs the Commission 
to amend Item 402 of Regulation S-K to add the pay ratio disclosure 
requirements prescribed by the Dodd-Frank Act. Section 953(b) imposes a 
new requirement on registrants to disclose the median of the annual 
total compensation of all employees and the ratio of that median to the 
annual total compensation of the chief executive officer. In doing so, 
Section 953(b) requires registrants to determine total compensation in 
accordance with Item 402(c)(2)(x). The Commission's rules for 
compensation disclosure have traditionally focused on compensation 
matters that relate to executive officers and directors. Although 
registrants subject to Item 402 are required to provide extensive 
information about the compensation of the principal executive officer 
and other named executive officers identified pursuant to Item 402(a), 
current disclosure rules generally do not require registrants to 
disclose detailed compensation information for other employees in their 
filings with the Commission. In addition, the Commission's executive 
compensation disclosure rules differ from tax accounting and reporting 
standards.\146\ Therefore, Section 953(b) requires registrants to 
disclose specific information about non-executive employee compensation 
that is not currently required for disclosure, accounting or tax 
purposes. We do not expect that many registrants, if any, currently 
disclose or track total compensation as determined pursuant to Item 402 
for their workforce.\147\
---------------------------------------------------------------------------

    \146\ ``Total compensation'' as determined pursuant to Item 402 
is not an amount that is reported or calculated in connection with a 
registrant's financial statements. The elements of compensation that 
are required to be calculated and reported for U.S. tax purposes are 
not the same as those covered by Item 402 requirements, and the 
reported amounts relate to the relevant calendar year for tax 
purposes, rather than the registrant's fiscal year.
    \147\ See supra note 17.
---------------------------------------------------------------------------

    We are proposing these amendments to Item 402 in order to satisfy 
the statutory mandate of Section 953(b). We note that neither the 
statute nor the related legislative history directly states the 
objectives or intended benefits of the provision or a specific market 
failure, if any, that is intended to be remedied; \148\ however, 
commenters supporting Section 953(b) have emphasized that potential 
benefits could arise from adding pay ratio-type information to the 
total mix of executive compensation information.\149\
---------------------------------------------------------------------------

    \148\ See supra note 23.
    \149\ See supra note 24.
---------------------------------------------------------------------------

    As discussed throughout this release, in proposing amendments to 
implement Section 953(b), we have considered the statutory language and 
exercised our discretion to develop rules designed to lower the cost of 
compliance while remaining consistent with Section 953(b). In doing so, 
we have considered a variety of issues, including, among others, the 
specificity of the statute, whether the rules should specify a 
methodology for determining the median, the use of estimates and 
assumptions, whether and how to define certain terminology used in the 
statute, the form of the disclosure, how often the disclosure should be 
updated in the required filings, and compliance and transition matters.
    We are sensitive to the costs and benefits imposed by the statutory 
requirements and the proposed pay ratio disclosure requirements, and 
our analysis of these costs and benefits is discussed below. Some of 
the costs and benefits stem directly from the statutory mandate in 
Section 953(b), while others are affected by the discretion we exercise 
in implementing that mandate. Our economic analysis of the proposed pay 
ratio disclosure requirements addresses both the costs and benefits 
that stem directly from Section 953(b) and those arising from the 
policy choices under the Commission's discretion, recognizing that it 
may be difficult to separate the discretionary aspects of the rules 
from those elements required by statute. The economic analysis that 
follows focuses first on the benefits and costs arising from the new 
mandatory disclosure requirements prescribed by the Dodd-Frank Act and 
then focuses on those that arise from the choices we have made in 
exercising our discretion.
    We request comment throughout this release on alternative means of 
meeting the statutory mandate of Section 953(b) and on all aspects of 
the costs and benefits of the proposals and possible alternatives. We 
also request comment on any effect the proposed pay ratio disclosure 
requirements may have on efficiency, competition and capital 
formation.\150\ We particularly appreciate

[[Page 60583]]

comments that distinguish between costs and benefits that are 
attributed to the statute and costs and benefits that are a result of 
policy choices made by the Commission in implementing the statutory 
requirements, as well as comments that include both qualitative 
information and data quantifying the costs and the benefits identified.
---------------------------------------------------------------------------

    \150\ Section 2(b) of the Securities Act [15 U.S.C. 77b(b)] and 
Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)] require us, when 
engaging in rulemaking under those Acts where we are required to 
consider or determine whether an action is necessary or appropriate 
in the public interest, to consider, in addition to the protection 
of investors, whether the action will promote efficiency, 
competition and capital formation.
    Section 23(a)(2) of the Exchange Act [15 U.S.C. 78w(a)(2)] 
requires us, when adopting rules under the Exchange Act, to consider 
the impact that any new rule would have on competition. In addition, 
Section 23(a)(2) prohibits us from adopting any rule that would 
impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

B. Baseline

    To assess the economic impact of the proposed rules, we are using 
as our baseline the current state of the market without a requirement 
for registrants to disclose pay ratio information. At present, the 
registrants subject to Item 402(c)(2)(x) already provide disclosure of 
their executive officer compensation as Section 953(b) requires. Other 
registrants, such as emerging growth companies, smaller reporting 
companies and foreign private issuers, are not required to comply with 
to Item 402(c)(2)(x) and provide disclosure of executive compensation 
different from Item 402(c)(2)(x). We do not expect that many 
registrants, if any, currently maintain payroll and information systems 
that track total compensation as determined pursuant to Item 402 for 
their employees, or make that information publicly available. 
Therefore, investors cannot calculate registrant-specific median 
employee compensation because there are no existing or publicly 
available sources for this data. Correspondingly, they cannot currently 
calculate the annual pay ratio in accordance with Section 953(b). 
Statistics on the earnings of U.S. workers in various ``industries'' 
are publicly available from the Bureau of Labor Statistics. Therefore, 
investors may be able to approximate the ratio using the industry 
median employee compensation and the information about PEO compensation 
for the registrants subject to Item 402(c). For example, the 
distribution of the ratios of PEO to industry median employee 
compensation for a sample of large reporting companies is reported by 
North American Industry Classification System (``NAICS'') industry 
sectors in the figure below for fiscal year 2011.\151\
---------------------------------------------------------------------------

    \151\ The ratios in the figure are calculated for each 
registrant with executive total compensation data from the Standard 
and Poor's Compustat Executive Compensation database which tracks 
compensation for the companies currently or previously in the S&P 
1500 index and industry median employee wage information at each 3-
digit NAICS level from the U.S. Department of Labor's Bureau of 
Labor Statistics (available at http://www.bls.gov/bls/wages.htm). 
The distribution of the registrant-level ratios within each NAICS 
industry sector (2-digit) is represented using horizontal box plots 
that show the minimum and maximum, and 25th, 50th (median) and 75th 
percentiles.
[GRAPHIC] [TIFF OMITTED] TP01OC13.001

    The pay ratio compiled with currently available information as in 
the above example is different from the ratio that Section 953(b) 
requires issuers to disclose; the above example uses the median wage 
information of U.S. workers within the same 3-digit NAICS industries, 
while Section 953(b) mandates registrants to use company-specific 
information about median employee compensation for ``all employees'' 
which would include employees in workplaces outside the United States. 
Also, the example is based on only wages and does not consider other 
forms of compensation for employees other than PEOs because the Bureau 
of Labor Statistics does not report those components. In contrast, 
Section 953(b) requires registrants to present the ratio using total 
compensation including all forms of compensation in Item 402(c)(2)(x).

[[Page 60584]]

    Although the ratio described in the above example does not 
represent the ratio mandated by Section 953(b), it shows that there is 
considerable disparity in the compensation differentials between 
industries. It is not clear how the distribution of ratios by industry 
would change if company-specific median employee wage and other 
compensation components for employees were used. In the example above, 
the variation in ratios within the same industry group at the 3-digit 
NAICS level is determined only by the variation in PEO pay between 
companies. The Section 953(b) disclosure of median pay at the company 
level would introduce an additional factor for the variation, which is 
the company-specific median employee compensation. This could widen or 
narrow the distribution of ratios depending on how median pay 
corresponds to PEO pay at each company.
    To assess the effects of the proposed rule, we consider the impact 
of the rule on investors, registrants subject to the pay ratio 
disclosure and all their employees including executive officers. The 
proposed disclosure requirement would apply to all registrants that are 
not emerging growth companies, smaller reporting companies and foreign 
private issuers, which we estimate to be approximately 3,830 
registrants.\152\ We estimate that there are approximately 900 emerging 
growth companies, approximately 3,750 smaller reporting companies, 
approximately 750 foreign private issuers filing on Form 20-F and 
approximately 144 MJDS filers.\153\
---------------------------------------------------------------------------

    \152\ Based on a review of EDGAR filings in 2011, we estimate 
that of the approximately 8,870 annual reports on Form 10-K filed in 
that year, approximately 3,750 annual reports were filed by smaller 
reporting companies, approximately 290 were filed by ABS issuers and 
approximately 100 were filed by wholly-owned subsidiaries of other 
registrants. We have also reduced the total number affected 
registrants by 900 to reflect the approximate number of emerging 
growth companies that have identified themselves as such in their 
EDGAR filings as of May 2013.
    \153\ We estimate that approximately 900 SEC registrants have 
identified themselves as emerging growth companies in their EDGAR 
filings as of May 2013. The estimates for smaller reporting 
companies and foreign private issuers including MJDS filers are 
based on a review of EDGAR filings for calendar year 2011. Based on 
a review of EDGAR filings in 2012, there approximately 8,154 
registrants filing on Form 10-K, approximately 3,640 smaller 
reporting companies, approximately 715 foreign private issuers 
filing on Form 20-F and approximately 152 MJDS filers. Registrants 
can fall into multiple categories among emerging growth companies, 
smaller reporting companies and foreign private issuers.
---------------------------------------------------------------------------

    An important factor to consider when analyzing the competitive 
effects of the proposed pay ratio disclosure requirements on the 
affected registrants is the difference in size and nature of the 
workforce, complexity of the organization and the degree of integration 
of payroll systems that are likely to exist among these registrants. 
The average number of business and geographical segments and employees 
of each segment disclosed by some of the potentially affected 
registrants in the calendar year 2011 are reported in the table 
below.\154\
---------------------------------------------------------------------------

    \154\ The corporate segments data used in the table come from 
the Standard and Poor's Compustat Segment database and the 
information is self-reported by the companies. As such, it is not 
based on standardized definitions of lines-of-business and 
geographic areas. Segment information of approximately 65% of the 
potentially affected registrants is available from the database.

                      Table 1--Registrants With Multiple Business or Geographical Segments
----------------------------------------------------------------------------------------------------------------
                                                                                                     Number of
                                      Average           Min           Median            Max         registrants
----------------------------------------------------------------------------------------------------------------
No. of Geographic Segments......            2.92               1               2              28           2,691
No. of Business Segments........            2.36               1               1              11           2,947
Total Assets ($ millions).......          10,472               0           1,287       3,211,484           2,691
Geographic Segment Assets ($               8,833               0             905       3,211,484           1,411
 millions)......................
No. of Employees per Registrant.          12,681               0           2,300       2,100,000           2,652
No. of Employees per Geographic            7,096               0           1,155         338,000           1,433
 Segment........................
----------------------------------------------------------------------------------------------------------------

    The above table shows that the average number of segments among 
potentially affected registrants was about three in 2011. Also, the 
approximate number of average employees per registrant and per 
geographic segment was 13,000 and 7,000 respectively. Although we do 
not have information on how the registrants maintained their payroll 
systems across the multiple segments, the number of segments for the 
registrants serves as one indication of the potential complexity of 
trying to comply with the proposed rules (whether by sampling at each 
segment and aggregating the samples across the segments, or aggregating 
the payroll observations and sampling from the aggregated pool).
    Another important factor in analyzing the competitive effects of 
the proposed disclosure requirement is the current level of competition 
in the labor market for PEOs. Unfortunately, we do not have data that 
would allow us to assess the degree of competitiveness of the current 
market for PEOs.

C. Discussion of Benefits and Costs Arising From the Mandated 
Disclosure Requirements

1. Benefits
    We have considered the impact that the requirements prescribed by 
Section 953(b) could have on the efficiency of the U.S. capital 
markets, particularly the informational efficiency. The following 
discussions of potential informational benefits are mainly intended to 
address benefits of the mandated disclosure to investors and 
shareholders and the employees (other than executive officers) of the 
registrants that are subject to Section 953(b).
    As noted above, there is limited legislative history to inform our 
understanding of the legislative intent behind Section 953(b) or the 
specific benefits the provision is intended to secure. In particular, 
the lack of a specific market failure identified as motivating the 
enactment of this provision poses significant challenges in quantifying 
potential economic benefits, if any, from the pay ratio disclosure. 
Some commenters have noted that there is an information gap between 
registrants and investors with regard to internal pay parity at 
companies.\155\ Although investors are able to compare compensation 
arrangements for the PEO across companies, registrants are not required 
to provide, and investors may not have access to, information that 
would allow them to assess the level of a PEO's compensation as it 
compares to

[[Page 60585]]

that of employees at the same company.\156\ Some investors have 
suggested that this type of comparison would assist in their ability to 
evaluate the PEO's compensation in the context of the company's overall 
business,\157\ and could provide insight into the effectiveness of 
board oversight.\158\ Other commenters have suggested that a comparison 
of PEO compensation to employee compensation could be used by investors 
to approximate employee morale and productivity,\159\ or analyzed as a 
measure of a particular company's investment in human capital.\160\
---------------------------------------------------------------------------

    \155\ See letter from Social Investment Forum (noting ``a number 
of investors, including several of our members, have been active in 
submitting shareholder resolutions in recent years supporting 
corporate disclosure of similar pay disparity data.''). See 
generally House Letter and Senate Letter; and letters from Americans 
for Financial Reform; Group of International Investors; Calvert 
Investment Management; K. Burgoyne; Institute for Policy Studies; 
and Trillium Asset Management. See also Form Letter A.
    \156\ See, e.g., Senate Letter; House Letter; and AFL-CIO I 
(noting ``few companies provide meaningful disclosure of how 
employee compensation is allocated over their workforce'').
    \157\ See, e.g., letter from UAW Retiree Medical Benefits Trust 
(``Disclosure of internal pay equity, whether the ratio between 
median employee wages and those of the CEO or the ratio between 
compensation awarded to the CEO and to other top executives, will 
ultimately help investors evaluate executive pay practices by better 
contextualizing the information provided to the shareholders through 
the proxy statement and other corporate filings.'') and letter from 
CtW Investment Group (``The new [pay ratio] disclosure offers an 
insight into compensation within the entire organization, and 
provides a different way for boards and shareholders to evaluate the 
relative worth of a CEO.'').
    \158\ See letter from CtW Investment Group (noting that 
``compensation disclosure is important, not only in its own right, 
but the ability it offers shareholders to evaluate and hold 
accountable board members''); and letter from UAW Retiree Medical 
Benefits Trust (noting ``we view Section 953(b) as an essential tool 
that will increase corporate board accountability to investors'').
    \159\ See AFL-CIO I and letters from Americans for Financial 
Reform; Calvert Investment Management; Drucker Institute; and 
Institute for Policy Studies. See also Form Letter A.
    \160\ See AFL-CIO I and letter from CtW Investment Group.
---------------------------------------------------------------------------

    These commenters did not quantify the magnitude or value of these 
potential benefits. Statistics on the average earnings of U.S. workers 
in various industries are already publicly available to investors.\161\ 
Company-specific information about median employee pay would be new 
information generated pursuant to the Section 953(b) requirements, and 
thus the potential incremental benefits identified by commenters 
primarily derive from this company-specific information. Commenters 
have not specified whether this type of company-specific information 
would be equally useful in connection with all types of companies or 
whether the potential benefits are more relevant to certain types of 
businesses, industries, business structure or size of registrant. One 
commenter asserted that the impact of pay disparity on employee 
performance and morale is ``particularly strong in industries based on 
technology, creativity and innovation,'' \162\ which suggests that a 
measure of employee morale could be more potentially useful in 
evaluating those businesses or that this pay ratio may be a more 
sensitive indicator of that effect in those industries.
---------------------------------------------------------------------------

    \161\ See U.S. Department of Labor's Bureau of Labor Statistics, 
available at http://www.bls.gov/bls/wages.htm.
    \162\ See AFL-CIO II (``These sectors . . . depend significantly 
on the ability of employees to collaborate, share ideas, and 
function effectively as teams, all of which are damaged by extreme 
differentials in compensation amongst employees.'').
---------------------------------------------------------------------------

    Furthermore, commenters have not specified what an optimal pay 
ratio is or what a proper benchmark should be. They also have not 
specified what effect a pay ratio has on employee morale and 
productivity relative to other environment-specific and company-
specific factors. To the extent that factors exist that could cause the 
ratios to differ, precise comparability across companies may not be 
relevant and could generate potentially misleading interpretations or 
conclusions. In particular, the ratio may significantly depend on how a 
company structures its business. For example, one company might 
outsource the labor-related (manufacturing) aspects of its business to 
a third-party to focus on product innovation, while another company 
competing in the same industry might choose to retain the labor aspect 
of its business. To the extent that product innovation requires higher 
pay than manufacturing, the outsourcing company will have a lower pay 
ratio for the same PEO pay. If pay ratio parity between these two 
companies were pursued, and a lower ratio sought, this could create 
incentive for the manufacturing company to outsource jobs. Therefore, 
the potential value of this disclosure for assessing issues related to 
employee morale, productivity and investment in human capital may be 
diminished by the indirect costs of creating incentives for registrants 
to change their business structure.
    Some commenters have asserted that the intended purpose of the 
provision is to address a broader public policy concern relating to 
income inequality, which they suggest is exacerbated by increasingly 
high levels of PEO compensation relative to other workers.\163\ More 
specifically, some of these commenters have suggested that the mandated 
disclosure requirement will encourage the boards of public companies to 
consider the relationship between the PEO's compensation and the 
compensation of other employees, which, these commenters suggest could, 
in turn, curb excessive PEO compensation.\164\ It has also been 
suggested that shareholders of public companies could use pay ratio 
information, together with pay-for-performance disclosure, to help 
inform their say-on-pay votes, which could also serve to limit PEO 
compensation.\165\
---------------------------------------------------------------------------

    \163\ See Letter from Americans for Financial Reform (``[T]his 
information clearly bears directly on the important public policy 
issues of pay equity and income inequality''). See also House Letter 
and Senate Letter (each stating ``income inequality is a growing 
concern among many Americans . . . by 2010 large company CEO pay had 
skyrocketed to $10.8 million, or 319 times the median worker's pay. 
Section 953(b) was intended to shine a light on figures like this at 
every company.'').
    \164\ See, e.g., AFL-CIO I and letters from Americans for 
Financial Reform; Group of International Investors; Institute for 
Policy Studies. In contrast, the National Association of Corporate 
Directors asserted that pay ratio information would not be useful 
for this purpose. See letter from NACD.
    \165\ See letters from CtW Investment Group and S. Towns.
---------------------------------------------------------------------------

    Commenters have also suggested \166\ that comparing PEO pay to the 
compensation of the median worker may help offset an upward bias in 
executive pay resulting from the practice of benchmarking PEO 
compensation solely against the compensation of other PEOs.\167\ To the 
extent that pay ratio disclosure diminishes the focus of benchmarking 
executive compensation exclusively to the level of peer-PEO pay, the 
mandate of Section 953(b) may provide indirect economic benefits to 
registrants and their shareholders by reducing the frequency of pay 
increases that are tied to a benchmarking process that is not based on 
performance. It is also possible, however, that pay ratio disclosure 
could exacerbate any upward bias in executive pay by providing another 
benchmark that could be used in certain situations to increase PEO 
compensation (i.e., for a PEO whose company's pay ratio is lower than 
its peers' pay ratios). In addition to these possibilities, there is 
also evidence that setting executive compensation through benchmarking 
practices is practical and efficient,\168\ particularly when the

[[Page 60586]]

market can observe the method used.\169\ To the extent that current 
benchmarking practices and disclosure requirements are efficient, 
additional pay ratio disclosure would not provide additional benefits.
---------------------------------------------------------------------------

    \166\ See AFL-CIO II and letter from Americans for Financial 
Reform.
    \167\ See, e.g., M. Faulkender and J. Yang, Inside the Black 
box: the Role and Composition of Compensation Peer Groups, J. of 
Financial Economics. 96, 257-270 (2010); C. Elson and C. Ferrere, 
Executive Superstars, Peer Groups and Overcompensation: Cause, 
Effect and Solution, J. of Corporation Law. Forthcoming (2013) for 
one view that benchmarking is inefficient because it can lead to 
increases in executive compensation not tied to firm performance.
    \168\ See, e.g. J. Bizjak, M. Lemmon, and L. Naveen, Does the 
use of peer groups contribute to higher pay and less efficient 
compensation? J. of Financial Economics. 90, 152-168 (2008). This 
study shows that benchmarking is a practical and efficient mechanism 
used to gauge the market wage necessary to retain valuable human 
capital.
    \169\ See, e.g., J. Bizjak, M. Lemmon, and T. Nguyen, Are all 
CEOs Above Average? An Empirical analysis of compensation Peer 
Groups and Pay Design. J. of Financial Economics. 100, 538-555 
(2011). This study finds that disclosure of peer groups mandated in 
the 2006 Adopting Release has reduced the bias in peer group choice.
---------------------------------------------------------------------------

    Similar benefits to the potential benefits cited by commenters may 
be achieved using the currently available information on PEO 
compensation and the industry median or average wages of U.S. workers, 
although currently available data do not provide company-specific 
information. Also, these commenters did not provide details about the 
causes of compensation disparity within particular companies or 
industries and did not address whether there are alternative means to 
effect an overall reduction in PEO compensation, or, alternatively, an 
overall improvement in the wages and benefits for workers. The evidence 
that the current PEO compensation practice is not efficient or that the 
benchmarking process causes the upward bias in executive compensation 
is not sufficiently clear to establish that the purpose of the 
provision is a remedy for a specific market failure in the current 
compensation practice.\170\
---------------------------------------------------------------------------

    \170\ See, e.g., J. Core, W. Guay, and R. Thomas, Is U.S. CEO 
Compensation Broken? J. of Applied Corporate Finance. 12, 97-104 
(2005); C. Fryman and D. Jenter, CEO Compensation, Annual Review of 
Financial Economics. 2, 75-102 (2010).
---------------------------------------------------------------------------

    In contrast, other commenters believe that the disclosure mandated 
by Section 953(b) would not have any benefit, or, at most, would not 
have benefits sufficient to justify the compliance costs, which many of 
such commentators anticipate would be substantial.\171\ Some of these 
commenters questioned the materiality of pay ratio information to an 
investment decision and specifically questioned the meaningfulness of 
the information in the form expressly required by Section 953(b).\172\ 
This view was also asserted by the minority in the Senate Report 
accompanying the legislation.\173\ In light of these comments, we are 
particularly interested in receiving information relating to material, 
direct economic benefits to investors or shareholders of the affected 
registrants derived from the pay ratio disclosure.
---------------------------------------------------------------------------

    \171\ See, e.g., letter from Meridian Compensation Partners LLC 
(stating that ``disclosure of the CEO pay ratio will provide 
investors with little or no meaningful information about an issuer's 
executive or employee pay practices. We further believe that what 
value this information may have to investors is far outweighed by 
the administrative burden and associated costs borne by issuers in 
accumulating the compensation data necessary to make the CEO pay 
ratio disclosure.''); COEC I (opposing Section 953(b) because it 
``does not believe that [the ratio] will provide any meaningful or 
material information that will be used by investors.''); Brian Foley 
& Co. (asserting that Section 953(b) disclosure ``realistically 
provides little serious added analytical value, and presents, in its 
current form, a variety of practical issues and potentially 
significant calculation costs.''); letter from NACD (stating that 
``it would take global companies months and thousands of hours to 
come up with a completely useless number'').
    \172\ See, e.g., letters from Group of Exec. Comp. Lawyers (``We 
are unaware of any evidence correlating corporate performance to the 
ratio of CEO pay to median employee pay.'') and Group of Trade 
Associations (``While it may be of general interest to some 
investors for different purposes, it is unclear how the pay ratio 
disclosure will be material for the reasonable investor when making 
investment decisions.''). See also, letter from RILA (noting 
``current Item 402 requirements if applied to the overall employee 
population of an issuer will only serve to distort the already 
questionable meaning of the Compensation Ratio'').
    \173\ See Senate Report, supra note 23 (``Although provisions 
like this appeal to popular notions that chief executive officer 
salaries are too high, they do not provide material information to 
investors who are trying to make a reasoned assessment of how 
executive compensation levels are set. Existing SEC disclosures 
already do this.'').
---------------------------------------------------------------------------

    We note that some commenters asserted that certain investors 
incorporate social and governance issues, like pay equity, as part of 
their investment decisions.\174\ These investors may realize non-
economic benefits associated with their investment decisions based on 
this type of information. These commenters, however, did not quantify 
the extent to which investors would value pay ratio information or 
would incorporate the disclosure required by Section 953(b) into their 
investment or voting decision, if at all.\175\ We also note that many 
commenters disagreed with the assertion that this type of disclosure is 
material to investors or would be useful to an investment or voting 
decision, particularly in the form required by the Dodd-Frank Act.\176\ 
As mentioned above, currently it is not possible to quantify the 
usefulness to investors of company-specific pay ratio information as 
required by Section 953(b) as compared to the usefulness of publicly 
available statistics on average salaries, or the usefulness of any 
other company-specific metric of employee compensation or satisfaction. 
We understand from some commenters that the proposed pay ratio 
disclosure could be used by some investors in allocating capital and 
from that perspective would be perceived by such investors as a 
benefit, although not necessarily an economic benefit measured by a 
financial return. It is uncertain whether the investment decisions by 
these investors would impact the overall efficiency of U.S. capital 
markets, or if there would be an impact, whether the impact would be 
net positive or negative.
---------------------------------------------------------------------------

    \174\ See letters from Americans for Financial Reform; Group of 
International Investors; and Social Investment Forum.
    \175\ We are not aware of any empirical studies that address the 
value of pay disparity disclosure specifically. We are aware of 
research that has studied whether there is a correlation between 
information about employee satisfaction and long-term equity returns 
in an effort to understand how the market values a public company's 
intangible assets. This research was based on the equity prices of 
companies that were identified on Fortune Magazine's list of the 
``100 Best Companies to Work For in America.'' See A. Edmans, Does 
the stock market fully value intangibles? Employee satisfaction and 
equity prices, J. of Financial Economics 101, 621-640 (2011) 
(finding evidence implying that the market fails to incorporate 
intangible assets, like employee satisfaction, fully into stock 
valuations until the intangible subsequently manifests in tangibles, 
such as earnings, that are valued by the market; and finding 
evidence suggesting that the non-incorporation of intangibles into 
stock prices is not simply due to the lack of salient information 
about them).
    \176\ See, e.g., COEC I and letters from Brian Foley & Co.; 
Group of Trade Associations; Meridian Compensation Partners, LLC; 
NACD; and RILA.
---------------------------------------------------------------------------

    Nevertheless, as discussed above, in designing the proposed 
requirements, we have sought to preserve what we believe to be the 
potential benefits, as articulated by commenters, of the mandated 
requirement. To the extent that some investors and other stakeholders 
may seek the disclosure of pay ratio information, both those investors 
and the registrants who have already disclosed similar information 
voluntarily may benefit from mandated, rather than voluntary, 
disclosure of pay ratio information. Given that some registrants have 
already disclosed information similar to the pay ratio 
voluntarily,\177\ those registrants may benefit from the mandated 
disclosure requirement to the extent that standardized pay ratio 
information may decrease uncertainty around, or increase the relevance 
of, the voluntarily disclosed information.\178\ To the extent that the 
voluntarily disclosed information and the manner in which it

[[Page 60587]]

is calculated differs from the disclosure that would be required under 
the proposed rules, those companies may incur costs. We request comment 
throughout this release about the potential benefits of the disclosure 
mandated by the Dodd-Frank Act and the proposed rules and any 
alternative ways of achieving these benefits in a manner consistent 
with the Dodd-Frank Act. We seek further comment on the impact of the 
proposed requirements on the efficiency of the U.S. capital markets.
---------------------------------------------------------------------------

    \177\ We are not aware of any registrants that currently provide 
pay ratio disclosure in the form contemplated by the proposed rules 
in their filings with the Commission. However, several registrants 
provide (or in the past have provided) voluntary disclosures that 
provide a comparison of CEO compensation with worker pay.
    \178\ See, e.g., B. Bushee and C. Leuz, Economic consequences of 
SEC disclosure regulation: evidence from the OTC bulletin board, J. 
of Accounting and Economics. 39, 233-264 (2005); R. Lambert, C. 
Leuz, and R Verrecchia, Accounting Information, Disclosure, and the 
Cost of Capital, J. of Accounting Research. 45, 385-420 (2007).
---------------------------------------------------------------------------

2. Costs
    The following discussions are mainly intended to address costs to 
registrants that are subject to the pay ratio disclosure, investors who 
invest their capital in those registrants and employees of the 
registrants who invest their human capital in those registrants. As 
noted above, the provision does not identify a specific objective and 
therefore, the appropriateness of the costs in relation to the 
statutory objective is not readily assessable. Therefore, the following 
analysis on costs focuses on direct compliance costs on registrants and 
possible second-order effects on efficiencies and competition. We 
expect that the effects of the pay ratio disclosure requirement on 
capital formation would be minimal.
    Many commenters raised concerns about the significant compliance 
costs that would arise from requiring the use of ``total compensation'' 
as defined in Item 402(c)(2)(x) to calculate employee pay and requiring 
registrants to identify the median instead of the average.\179\ 
According to these commenters, the primary driver of the significant 
compliance costs is that many registrants, whether large multinationals 
or companies of modest revenue size and market capitalization, maintain 
multiple and complex payroll, benefits and pension systems (including 
systems maintained by third party administrators) that are not 
structured to easily accumulate and analyze all the types of data that 
would be required to calculate the annual total compensation for all 
employees in accordance with Item 402(c)(2)(x). Thus, in order to 
compile such disclosure, registrants would either need to integrate 
these data systems or consolidate the data manually, which, in both 
cases, these commenters have stated would be highly costly and time 
consuming.\180\
---------------------------------------------------------------------------

    \179\ See, e.g., letters from Davis Polk (noting that compliance 
will be ``highly costly and burdensome, with tremendous uncertainty 
as to accuracy. Companies are justifiably concerned about the costs 
and burdens to accomplish the formidable data collection and 
calculation tasks for employees worldwide between the end of the 
year and the first required filing.''); Frederick W. Cook & Co., 
Inc. (stating ``the calculation of median total pay for all 
employees other than the CEO is problematic, burdensome and perhaps 
impossible for many issuers'') and Protective Life Corporation (``It 
is difficult to overemphasize how burdensome this requirement could 
be for large employers. Calculating annual total compensation is 
much more complicated than simply adding up numbers that companies 
already have available . . . . Since many large companies use 
outside accounting, actuarial and compensation and pension 
administration firms to perform these calculations, the costs of 
disclosure will increase accordingly.'') See also COEC I and letters 
from ABA; Group of Exec. Comp. Lawyers; Group of Trade Associations; 
Meridian Compensation Partners, LLC; NACD; and R. Morrison.
    \180\ See, e.g., COEC II and letters from Meridian Compensation 
Partners, LLC; R. Morrison; and Group of Trade Associations (``There 
is a widespread misconception that this information is readily 
available at the touch of a button.'').
    For example, one commenter submitted a survey demonstrating 
that, of the 95 companies surveyed, 10.9% maintained a centralized 
payroll computer system that could be used to calculate cash 
compensation of each employee (or a sample of employees); 28.3% had 
payroll systems in each location or regionally that could be used to 
aggregate the data; 47.8% expected to compile the data manually and 
13% expected to be able to use some combination of information 
technology and manual data gathering. See COEC II.
---------------------------------------------------------------------------

    In addition, several commenters raised concerns about expected 
compliance costs arising from the complexity of the ``total 
compensation'' calculation under Item 402(c)(2)(x).\181\ These 
commenters made various recommendations to simplify the total 
compensation definition, such as including only cash compensation, 
including only cash compensation and equity-based compensation, 
including only compensation that is reported to the U.S. Internal 
Revenue Service on Form W-2 or other relevant tax authority, or 
including only compensation that is required to be recorded in the 
payroll system of a particular jurisdiction and its overseas 
equivalents.\182\
---------------------------------------------------------------------------

    \181\ See, e.g., COEC I and II; and letters from American 
Benefits Council; Brian Foley & Co.; Group of Exec. Comp. Lawyers; 
Group of Trade Associations; Protective Life Corporation; SCSGP; and 
Towers Watson.
    \182\ See COEC I and letters from American Benefits Council; 
Brian Foley & Co; Group of Exec. Comp. Lawyers; Group of Trade 
Associations; Protective Life Corporation; SCSGP; and Towers Watson.
---------------------------------------------------------------------------

    As discussed elsewhere in this release, registrants would be able 
to choose from several options in order to identify the median and 
provide the required disclosure. Registrants may choose to calculate 
the annual total compensation for each employee and the PEO using Item 
402(c)(2)(x) and to identify the median using this method. In addition, 
the proposed requirements would allow registrants to choose a 
statistical method to identify the median that is appropriate to the 
size and structure of their own businesses and the way in which they 
compensate employees, rather than prescribing a particular methodology 
or specific computation parameters. The proposed rules also would 
permit registrants to use a consistently applied compensation measure 
to identify the median employee and calculate and disclose that median 
employee's total compensation in accordance with Item 402(c)(2)(x). The 
proposed requirements also would permit registrants to use reasonable 
estimates in calculating the annual total compensation for employees 
other than the PEO, including when disclosing the annual total 
compensation of the median employee identified using a consistently 
applied compensation measure. We believe that this flexible approach is 
consistent with Section 953(b) and could ease commenters' concerns 
about the potential burdens of complying with the disclosure 
requirement. Also, allowing these specific alternatives could reduce 
the potential uncertainty for registrants as to how to comply with the 
proposed rules.
    Although some commenters have estimated the cost of compliance for 
certain registrants,\183\ the estimates we have received vary 
significantly. The estimates provided by commenters are also based on 
the commenters' initial reading and interpretation of the statute and 
not the proposed means of implementation. One commenter reported that a 
registrant estimated that compliance would cost approximately $7.6 
million and take approximately 26 weeks,\184\ while another registrant 
estimated approximately $2.0 million annually solely for computing the 
actuarial change in accrued pension benefit.\185\ We have also received 
cost information from discussions with registrants and industry groups, 
including the following estimates:
---------------------------------------------------------------------------

    \183\ See COEC II and letter from Group of Trade Associations.
    \184\ See letter from Group of Trade Associations (the commenter 
does not clarify whether these estimates reflect a one-time or 
ongoing annual burden).
    \185\ See letter from Group of Trade Associations.
---------------------------------------------------------------------------

     Approximately 201 to 500 hours per year, plus significant 
costs;
     $3 to $6.5 million for a multinational manufacturing 
company with 90 separate payrolls;
     $4.725 million for a multinational consumer products 
company (including an estimated 50 hours per country for employees 
located in 80 countries);
     $100 million dollars for a multinational company; and

[[Page 60588]]

     $350,000 to implement plus $100,000 a year for ongoing 
compliance for a global technology company.

We are, however, unable to quantify with any precision the compliance 
costs at this time.\186\ Although these estimates are a useful starting 
point for our analysis, we do not believe the aggregate of these 
estimates necessarily represents an accurate indication of the expected 
compliance costs because they do not take into account the flexibility 
allowed under the proposed requirements.\187\ Also, these estimates, 
although providing potentially useful data points, do not reflect costs 
incurred across the breadth of the registrant population subject to the 
requirement. Commenters did not provide sufficient information on the 
factors used to produce these estimates to enable us to evaluate these 
cost estimates, such as, among others, how separate payrolls are 
maintained within a company across divisions or subsidiaries, how the 
compensation components that the current payroll systems record compare 
to the ``total compensation'' as defined in Item 402(c)(2)(x), whether 
the estimated costs reflect internal personnel costs, technology costs 
or the costs of third-party service providers and outside 
professionals, and any assumptions used in deriving the estimates. 
Accordingly, we could not quantify differential costs from these 
estimates when the flexibility allowed under the proposed requirements 
is applied to each of those inputs. Also, these estimates do not 
precisely distinguish between initial and ongoing costs, while we 
expect that, for many registrants, the overall compliance burden will 
diminish after systems are in place to gather and verify the underlying 
data. We request comment throughout this release for additional 
information about the costs of compliance, including, where applicable, 
estimates or data that differentiate between categories of registrants 
facing relatively harder or easier burdens that could better inform our 
understanding of the direct and indirect costs of the proposed rules.
---------------------------------------------------------------------------

    \186\ In light of the limitations of these estimates, we were 
not able to use these estimates to inform the hour and cost burden 
estimates that are required by the Paperwork Reduction Act of 1995 
(the ``PRA''). See Section V of this release. Our discussion and 
analysis in that section describes the assumptions we made for 
purposes of deriving our PRA estimates. We request comment on our 
PRA estimates in Section V. We expect to review and revise those PRA 
estimates in light of any further information we receive on 
estimated costs.
    \187\ We expect that the flexibility allowed under the proposed 
requirements could, at least for some registrants, substantially 
reduce the overall compliance burden, and we request estimates or 
data that quantifies this impact.
---------------------------------------------------------------------------

    We are particularly sensitive to the competitive effects that could 
impact registrants subject to the requirements of Section 953(b). In 
this regard, we have assumed that these registrants would incur direct 
costs to compile the information and may incur indirect costs arising 
from revealing information about the cost structure of their workforce 
that registrants not covered by Section 953(b) would not have to 
reveal. Such costs are potentially significant, although as described 
elsewhere in this release we have sought to exercise our discretion to 
reduce such costs. Any material costs resulting from Section 953(b), 
however, could result in differential pressures from and treatment by 
market participants for companies competing in the same industry that 
are similar except for whether they are covered by Section 953(b). 
Accordingly, registrants covered by Section 953(b) could be at a 
competitive disadvantage to registrants (including private companies, 
foreign private issuers, smaller reporting companies and emerging 
growth companies) that are outside the scope of Section 953(b). This 
disadvantage could be greater for registrants that have already 
completed an initial public offering but that would otherwise have 
qualified for emerging growth company status.\188\ In addition, we 
understand from commenters that some registrants covered by Section 
953(b) would likely incur higher costs of compliance based on size, 
business type and level of integration of payroll and benefits 
systems--such as large, multinational companies that do not maintain 
integrated employee compensation information on a global basis. 
Therefore, the competitive impact of compliance with the disclosure 
requirements prescribed by Section 953(b) could disproportionately fall 
on U.S. companies with large workforces and global operations, although 
the incremental impact of the fixed cost components of compliance will 
be proportionally smaller for large, multinational companies compared 
to smaller companies.
---------------------------------------------------------------------------

    \188\ Registrants that completed their first sale of common 
equity in a registered offering before December 8, 2011 do not 
qualify as emerging growth companies, regardless of the level of 
their annual total revenues or public float. See Section 101(d) of 
the JOBS Act. These registrants could be at a competitive 
disadvantage to companies with similar levels of revenue and public 
float that do qualify as emerging growth companies.
---------------------------------------------------------------------------

    We also acknowledge that there could be competitive impacts that 
result from indirect costs of disclosure. Registrants subject to 
Section 953(b) could be subject to competitive harm if their 
competitors are able to infer proprietary or sensitive information from 
the disclosure of the median of the annual total compensation of all 
employees. For example, it could be possible for a competitor to infer 
sensitive information about a registrant's cost structure based on 
information about median levels of employee compensation. This could 
also have an impact on labor markets if competitors use the disclosure 
to target and hire away a registrant's employees. We have sought to use 
our discretion to reduce the potential for such indirect costs, by 
permitting flexibility in the manner in which issuers may determine 
median compensation. We request comment on whether the flexibility 
provided by the proposed rule would make it more difficult for 
competitors to infer a registrant's cost structure from such 
disclosure. Alternatively, a registrant subject to Section 953(b) could 
be at a competitive disadvantage when hiring or retaining a PEO if 
there is pressure to limit PEO wages based on the pay ratio disclosure 
while non-covered registrants are not subject to the same pressure.
    Finally, a registrant subject to Section 953(b) could face pressure 
from its PEO or from employees to increase compensation in light of the 
pay ratio disclosure of the registrant's competitors. Alternatively, 
there could be incentives to alter the median employee compensation 
either by increasing all employee compensation or by reducing the 
number of lowest wage employees or groups of employees, such as a 
specific office or division of a company. One method of doing this, as 
previously mentioned, is through outsourcing operations to third 
parties, including through the use of independent contractors, 
``leased'' workers or other temporary employees. In some instances this 
might not harm and could even improve the profit margin of the 
registrant, but it could also result in changes to the business 
structure that are inefficient. Pressure for a registrant to maintain a 
low pay ratio could also curtail the expansion of business operations 
into lower cost geographies. This could adversely affect states and 
municipalities in lower wage geographies seeking to generate jobs for 
their communities. We do not have data that can be used to analyze the 
likelihood or potential magnitude of these impacts. We request comment 
on these and any other potential uses of the disclosure that could 
result in costs for registrants or that could impact competition.

[[Page 60589]]

D. Discussion of Benefits and Costs Arising From the Exercise of Our 
Discretion

1. General
    In addition to the statutory benefits and costs described above, we 
believe that the use of our discretion in implementing the statutory 
requirements could result in benefits and costs to registrants and 
users of the pay ratio disclosure. We discuss below the choices we made 
in implementing the statute and the associated benefits and costs. We 
are unable, in most cases, to provide quantified estimates of these 
benefits and costs because we lack particularized data on the potential 
effects of these policy choices. Specifically, we expect that most 
registrants do not currently track total compensation as determined 
pursuant to Item 402 for their employees, thus we would not be able to 
acquire sufficiently analogous data.
    In general, the proposed rules implementing Section 953(b) are 
designed to comply with the statutory mandate. Because commenters 
supporting Section 953(b) have emphasized the potential benefits that 
could arise from adding pay ratio information to the total mix of 
executive compensation information,\189\ we have sought to make the 
mandated disclosure of Section 953(b) work with the existing executive 
compensation disclosure regime. In light of the significant potential 
costs that commenters attribute to the requirements of Section 
953(b),\190\ we believe that it is appropriate for the proposed rules 
to allow registrants flexibility, which we believe should help lower 
the costs of compliance generally. The proposal seeks to implement 
Section 953(b) without imposing additional requirements that are not 
mandated by the Dodd-Frank Act. In this respect, the proposed 
requirements reflect our consideration of the relative costs and 
benefits of a more flexible approach as opposed to a more prescriptive 
approach.
---------------------------------------------------------------------------

    \189\ See, e.g., letters from Americans for Financial Reform; 
Group of International Investors; Calvert Investment Management; CtW 
Investment Group; K. Burgoyne; House Letter; Institute for Policy 
Studies; Senate Letter; Social Investment Forum; Trillium Asset 
Management; UAW Retiree Medical Benefits Trust; and S. Towns.
    \190\ See, e.g., letter from Group of Trade Associations.
---------------------------------------------------------------------------

    In weighing alternatives, we considered the potential costs and 
benefits of comparability of disclosure across registrants. Although a 
flexible approach could reduce the comparability of disclosure across 
registrants, we do not believe that precise conformity or comparability 
of the ratio across companies is necessarily achievable, due to the 
variety of factors that could influence the ratio,\191\ or justifiable, 
in light of the substantial additional costs that such an approach 
would impose on registrants. In addition, we believe that a flexible 
approach would not significantly diminish the potential benefits of the 
mandated disclosure. In this respect, we note that some commenters 
suggest that the expected benefits of pay ratio disclosure derive from 
its ability to offer an internal comparison, by providing a metric by 
which a PEO's compensation can be evaluated within the context of his 
or her own company.\192\ We also acknowledge that some commenters that 
support Section 953(b) disclosures suggest that the mandated disclosure 
could be used to compare compensation practices between companies and 
registrants,\193\ and our flexible approach could impose costs on 
investors seeking to use the pay ratio disclosure to compare 
registrants. We note, however, that using the ratios to compare 
compensation practices between registrants without taking into account 
inherent differences in business models, which may not be readily 
available information, could possibly lead to potentially misleading 
conclusions and to unintended consequences.
---------------------------------------------------------------------------

    \191\ We note that some commenters raised the issue of 
comparability in their letters. For example, Towers Watson noted, 
``Among other issues, there's no way (without significantly more 
information) to reliably compare ratios between companies. For 
example, companies in different industries will pay their employees 
at different levels. And even within the same industry, companies 
located in different geographical areas will pay their employees at 
different levels. As a result, this disclosure does not provide much 
meaningful information regarding differences in executive to 
employee pay ratios from company to company.'' See letter from 
Towers Watson. See also letter from RILA (noting that pay ratio 
disclosure ``is more likely to result in confusion and erroneous 
comparisons between companies because of inherent differences in 
business models, staffing and compensation practices . . . these 
disparate results are only magnified if the ratio is used to compare 
publicly traded companies across industry sectors.'').
    \192\ See letters from CtW Investment Group; and letter from 
Senator Menendez.
    \193\ See, e.g., AFL-CIO I and letter from Americans for 
Financial Reform.
---------------------------------------------------------------------------

2. Implementation Choices and Alternatives
a. Filings Subject to the Proposed Disclosure Requirements
    Although some commenters raised questions as to whether Section 
953(b)(1) could be read to require pay ratio disclosure in every 
Commission filing,\194\ other commenters suggested that the statute, by 
referring to filings described in Item 10(a) of Regulation S-K, is 
better read as applying only to those filings for which the applicable 
form requires Item 402 disclosure.\195\ The proposed requirements 
follow the latter approach. We believe that requiring pay ratio 
disclosure in filings that do not contain other executive compensation 
information would not present this information in a meaningful context. 
Because some commenters have asserted that the pay ratio disclosure 
would provide another metric to evaluate executive compensation 
disclosure,\196\ we believe that the proposed pay ratio disclosure 
would be less useful for this purpose if it were provided on a stand-
alone basis, unaccompanied by other Item 402 information, such as the 
summary compensation table required by Item 402(c) and the compensation 
discussion and analysis required by Item 402(b). Therefore, we believe 
it is appropriate to read Section 953(b) as requiring pay ratio 
disclosure in only those filings that are required to include other 
Item 402 information. We seek information from commenters regarding how 
to quantify the costs or the benefits of this approach.
---------------------------------------------------------------------------

    \194\ See, e.g., COEC I and letters from American Benefits 
Council; Davis Polk; Compensia, Inc.; SCSGP; and Towers Watson.
    \195\ See, e.g., letters from ABA and RILA.
    \196\ See, e.g., Senate Letter; House Letter; and AFL-CIO I; and 
letters from CtW Investment Group and UAW Retiree Medical Benefits 
Trust.
---------------------------------------------------------------------------

b. Registrants Subject to the Proposed Pay Ratio Disclosure 
Requirements
    The proposed requirements would apply to only those registrants 
that are required to provide summary compensation table disclosure 
pursuant to Item 402(c). We recognize that the reference to ``each 
issuer'' in Section 953(b) could be read to apply to all issuers that 
are not emerging growth companies, including smaller reporting 
companies and foreign private issuers. As a result of the specific 
reference in Section 953(b) to the definition of total compensation 
contained in Item 402(c)(2)(x), and the absence of Congressional 
direction to apply this requirement to companies not previously subject 
to Item 402(c) requirements, the proposals would not apply to 
registrants that are not subject to Item 402(c) requirements.
    As discussed in detail above in Section II.B.2.a., we considered 
whether a broader reading of the statute was warranted in the context 
of smaller reporting companies. Requiring smaller reporting companies 
to provide the pay

[[Page 60590]]

ratio disclosure consistent with the requirement for other registrants 
would require smaller reporting companies to collect data and calculate 
compensation for the PEO in a manner they otherwise would not be 
required to calculate compensation. Although quantifying the costs to 
smaller reporting companies of calculating PEO compensation under Item 
402(c)(2)(x) instead of under Item 402(n)(2)(x), or of complying with 
the requirements prescribed by Section 953(b), is not currently 
feasible, we assume that such costs could be significant. Based on a 
review of EDGAR filings for calendar year 2011, we estimate that there 
are approximately 3,750 smaller reporting companies that would benefit 
by not being required to comply with the proposed requirements.
    We also considered whether to expand the coverage of the proposed 
requirements to registrants, such as foreign private issuers and MJDS 
filers, that are not currently required to provide Item 402 disclosure. 
Foreign private issuers, for example, provide a modified version of 
executive compensation disclosure under Form 20-F, while MJDS filers 
follow the executive compensation requirements arising under Canadian 
law. Although quantifying the costs to these registrants of calculating 
PEO compensation under Item 402(c)(2)(x) or of complying with the 
requirements prescribed by Section 953(b) is not currently possible, we 
assume that such costs could be significant. Based on a review of EDGAR 
filings for calendar year 2011, we estimate that there are 
approximately 750 foreign private issuers filing on Form 20-F and 144 
MJDS filers that would benefit from the exclusion from the proposed 
requirements.
c. Employees Included in the Identification of the Median
    Section 953(b) expressly requires disclosure of the median of the 
annual total compensation of ``all employees.'' Consistent with that 
mandate, the proposed requirements state that ``employee'' or 
``employee of the registrant'' includes any full-time, part-time, 
seasonal or temporary worker employed by the registrant or any of its 
subsidiaries (including officers other than the PEO).\197\ Therefore, 
under the proposed requirements, ``all employees'' covers all such 
individuals. In contrast, workers who are not employed by the 
registrant or its subsidiaries, such as independent contractors or 
``leased'' workers or other temporary workers who are employed by a 
third party, would not be covered.
---------------------------------------------------------------------------

    \197\ Rule 405 under the Securities Act states that the term 
``employee'' does not include a director, trustee or officer. This 
parenthetical in the proposed rules is intended to clarify that 
officers, as that term is defined under Rule 405, are not excluded 
from the definition of employee for purposes of the proposed pay 
ratio disclosure requirements.
---------------------------------------------------------------------------

    We considered whether Section 953(b) is intended to cover employees 
of the registrant alone, or also cover employees of the registrant's 
subsidiaries. By directing the Commission to amend Item 402, we believe 
that Section 953(b) is intended to cover employees on an enterprise-
wide basis, including both the registrant and its subsidiaries, which 
is the same approach as that taken for other Item 402 information. This 
interpretation could raise compliance costs for registrants that are 
holding companies that have a significant portion of their workers 
employed by operating subsidiaries rather than by the holding company. 
We also note that allowing a holding company registrant to exclude 
employees from the identification of the median solely on the basis of 
its corporate structure could affect the potential meaningfulness of 
the disclosure. Further, allowing holding company registrants to 
exclude employees could provide a potential competitive advantage over 
non-holding company registrants due to lower compliance costs 
associated with having fewer workers covered by the rule.
    Because Section 953(b) directs the Commission to amend Item 402, we 
believe it is appropriate to apply the same definition of subsidiary 
that is used for other disclosure under Item 402. We acknowledge that 
compliance costs for some registrants potentially could be further 
reduced if we limited the application of the proposed rules to 
employees of wholly-owned subsidiaries, or some other definition of 
subsidiary. We request comment on whether using a different definition 
of subsidiary would reduce costs for registrants, or whether it would 
raise costs by causing registrants to make a new, separate 
determination of which entities are subsidiaries for purposes of pay 
ratio requirements. Comment is also requested on whether a different 
definition of subsidiary would affect any benefits expected to be 
derived from the proposed rule. Because registrants already make the 
determination of which entities are subsidiaries for purposes of Rule 
405 and Rule 12b-2 in connection with other required disclosure, we 
believe that using the same set of entities for purposes of the 
proposed requirements would simplify compliance for most registrants 
and make the information easier for users of the information to 
understand.
    We recognize that it is possible that a registrant could alter its 
corporate structure or its employment arrangements in order to reduce 
the number of employees covered by the rule, and, therefore, reduce its 
costs of compliance or to alter the reported ratio to achieve a 
particular objective with the ratio disclosure. For example, a 
registrant could choose to use only independent contractors or 
``leased'' workers instead of hiring its own employees. Or a registrant 
could choose to outsource or franchise some aspects of its business, 
either to lower compliance costs by having fewer employees subject to 
the proposed pay ratio requirements or in an effort to ``improve'' its 
pay ratio. One commenter has questioned the likelihood of this 
behavior.\198\ To the extent that there is an incentive for companies 
to change their business model to adjust their pay ratio, such an 
incentive would arise wherever a prescriptive standard is used. 
Therefore, we have sought to avoid adding prescriptive standards that 
are not mandated by the Dodd-Frank Act.
---------------------------------------------------------------------------

    \198\ See AFL-CIO I (``It is simply not credible to suggest that 
companies will dramatically restructure their operations to 
manipulate this [pay ratio] data. Moreover, such a business decision 
would be improper under state corporate laws that require boards of 
directors to put the interests of shareholders before the interests 
of company CEOs who may be potentially embarrassed by their 
companies' Section 953(b) disclosures.'').
---------------------------------------------------------------------------

    As discussed in Section II.C.2.a., we acknowledge the concerns of 
commenters that the inclusion of non-U.S. employees raises compliance 
costs for multinational companies and introduces cross-border 
compliance issues. We also recognize that these companies could suffer 
competitively if they compete with companies that have lower costs of 
compliance, due to, for example, fewer employees, fewer global 
locations, or data systems that are more centralized. We have weighed 
these considerations and are proposing that the requirement cover all 
employees without carve-outs for specific categories of employees.
    Although we believe that the inclusion of non-U.S. employees in the 
calculation of the median is consistent with the statute, we considered 
ways to address the costs of compliance that commenters attribute to 
the provision's coverage of a registrant's global workforce. In 
particular, we considered the concerns of commenters that data privacy 
regulations in various jurisdictions could impact the ability of 
registrants to gather and verify the data needed to identify the 
median. We believe that the proposed flexibility

[[Page 60591]]

afforded to registrants in selecting a methodology to identify the 
median, such as statistical sampling, the use of a consistently applied 
compensation measure to identify a median employee, as well as the 
ability of registrants to use reasonable estimates in the calculation 
of total compensation of employees other than the PEO and the 
identification of the median, could enable registrants to better manage 
the costs and burdens arising from local data privacy regulations. We 
specifically requested comment on these issues in order to gain more 
information about appropriate ways to address these potential issues in 
a way that is consistent with Section 953(b) and the costs and benefits 
of any alternatives.
    Section 953(b) does not prescribe a particular calculation date for 
the determination of who should be treated as an employee for purposes 
of the rule. We believe that a bright line calculation date for 
determining who is an employee would ease compliance for registrants by 
eliminating the need to monitor changing workforce composition during 
the year, while still providing a recent snapshot of the entire 
workforce. Accordingly, the proposed requirement includes a calculation 
date for determining who is an employee for purposes of identifying the 
median by defining ``employee'' as an individual employed as of the 
last day of the registrant's last completed fiscal year.\199\ This 
calculation date would be consistent with the one used for determining 
the named executive officers under current Item 402 requirements.
---------------------------------------------------------------------------

    \199\ Proposed Item 402(u)(4).
---------------------------------------------------------------------------

    We believe that the potential benefits of the disclosure mandated 
by Section 953(b) would not be significantly diminished by covering 
only individuals employed at year-end, rather than covering every 
individual employed during the year. Although we believe that this 
approach could help contain compliance costs for registrants, by not 
requiring registrants to monitor the composition of the workforce 
during the year, we note that it could have other economic effects. For 
example, this approach would not capture seasonal or temporary 
employees that are not employed at year-end. In the case of a 
registrant with a significant amount of such workers, the exclusion of 
such workers from the median calculation could reduce the potential 
benefits of the rule, as a median so calculated may not fully reflect 
the workforce required to run the registrant's business. It could also 
cause the proposed requirements to be costlier for, and thereby have an 
anti-competitive impact on, registrants whose temporary or seasonal 
workers are employed at year-end as opposed to at other times during 
the year. Finally, it is possible that registrants could try to 
structure their employment arrangements to reduce the number of workers 
employed on the calculation date or to alter the reported ratio to 
achieve a particular objective with the ratio disclosure, although it 
is not known whether registrants will do so. Currently, it is not 
possible to quantify whether any such restructuring of employee 
arrangements would have a material impact on a registrant's reported 
median annual total compensation. Comment is requested on this issue.
    The proposed requirements also include an instruction that permits 
a registrant to annualize the compensation for all permanent employees 
(other than those in temporary or seasonal positions) who were employed 
for less than the full fiscal year. We did not propose to require 
registrants to perform this type of adjustment, however, because we do 
not believe that the costs of requiring companies to make an extra 
calculation would be justified.
    We believe that this annualizing adjustment would not significantly 
diminish the potential usefulness of the disclosure mandated by Section 
953(b), particularly because the ratio uses median employee 
compensation, not average employee compensation. For example, we would 
not expect that annualizing the salary of a permanent new hire would 
impact the potential ability of an investor to use the pay ratio 
disclosure as an indicator of employee morale or to gain an 
understanding of a registrant's investment in human capital, which some 
commenters have identified as a benefit of the disclosure under Section 
953(b).\200\ For annualizing adjustments to have any significant impact 
on the reported pay ratio, both the fraction of permanent new hires to 
all employees of the registrant and their annualized compensation would 
have to be relatively large. We do not believe those factors are 
typical of employment arrangements of many registrants. We also note 
that some of the commenters that support Section 953(b) disclosure were 
also supportive of allowing annualizing adjustments.\201\
---------------------------------------------------------------------------

    \200\ See AFL-CIO I and letters from Calvert Investment 
Management; CtW Investment Group; Group of International Investors; 
Americans for Financial Reform; Drucker Institute; Institute for 
Policy Studies; Social Investment Forum; Trillium Asset Management; 
and UAW Retiree Medical Benefits Trust.
    \201\ See AFL-CIO II and letters from Social Investment Forum 
and Trillium Asset Management.
---------------------------------------------------------------------------

    By permitting, but not requiring, registrants to annualize 
compensation for these employees, the comparability of disclosure 
across companies could be reduced. We do not believe that precise 
comparability or conformity of disclosure from registrant to registrant 
is necessarily achievable due to the variety of factors that could 
cause the ratio to differ, and, accordingly, we do not believe that the 
costs associated with promoting precise comparability would be 
justified. We assume that comparability of disclosure would be promoted 
at a lower cost to registrants by proscribing all annualizing 
adjustments, rather than by prescribing rules for making such 
adjustments for employees who were employed for less than the full 
year.
d. Identifying the Median
    Section 953(b) does not expressly set forth a methodology that must 
be used to identify the median, nor does it mandate that the Commission 
must do so in its rules. In order to allow the greatest degree of 
flexibility while maintaining consistency with the statutory provision, 
the proposed requirements do not specify any required calculation 
methodologies for identifying the median.\202\
---------------------------------------------------------------------------

    \202\ One of the difficulties in identifying a median arises 
from the situation that a registrant with multiple business units, 
geographical operations, or subsidiaries maintains payroll data at 
each business unit or subsidiary. Calculating the average for the 
consolidated entity only requires each subsidiary or business unit 
to convey information on the total (or average) compensation and the 
number of its employees to its parent entity, whereas identifying 
the median requires transferring the entire set of compensation data 
from each subsidiary to the parent entity. We recognized that 
registrants with multiple operations are likely to maintain payroll 
data at the business unit or subsidiary level, and thus allowing 
them to use the average employee compensation could reduce their 
compliance costs. Nevertheless, we believe that Section 953(b) is 
clear in requiring the median rather than the average.
---------------------------------------------------------------------------

    Several commenters recommended allowing companies to use total 
direct compensation (such as annual salary, hourly wages and any other 
performance-based pay) or cash compensation to first identify a median 
employee.\203\ We agree that the costs of compliance could be reduced 
if registrants were permitted to identify the median of a less complex, 
more readily available figure, such as salary and wages, rather than 
total compensation as determined in

[[Page 60592]]

accordance with Item 402(c)(2)(x). This approach could also help reduce 
costs for registrants that are not able to reduce costs using 
statistical sampling techniques. We are proposing to permit registrants 
to use any consistently applied compensation measure to identify the 
median employee and then calculate that median employee's annual total 
compensation in accordance with Item 402(c)(2)(x). For purposes of 
estimating the median employee, registrants may use the same annual 
period that is used in the payroll or tax records from which the 
compensation amounts are derived. We believe that registrants would be 
in the best position to select a compensation measure that is 
appropriate to their own facts and circumstances and that a 
consistently applied compensation measure would result in a reasonable 
estimate of a median employee. After identifying the median employee, 
registrants would be required to calculate that employee's annual total 
compensation in accordance with Item 402(c)(2)(x) for the last 
completed fiscal year, which would provide comparability with the 
calculation of the PEO's total compensation without imposing 
significant costs.
---------------------------------------------------------------------------

    \203\ See AFL-CIO II and letters from ABA; American Benefits 
Council; Americans for Financial Reform; CtW Investment Group; 
Protective Life Corporation; RILA; and SCSGP.
---------------------------------------------------------------------------

    Allowing registrants to choose this alternative approach is likely 
to reduce registrants' compliance costs significantly, compared to 
requiring registrants to calculate total compensation in accordance 
with Item 402(c)(2)(x) for all employees and then identify the median. 
Registrants that choose this alternative approach would be able to 
identify a median employee from employee compensation data that they 
may already track or record or that may be less expensive for them to 
acquire than acquiring and computing all of the Item 402(c)(2)(x) 
compensation information for each employee. We acknowledge, however, 
that some registrants would still incur costs if they have to combine 
or sample from separately maintained payroll systems across segments 
and/or geographic locations. In addition, the proposal specifically 
permits registrants, in identifying a median employee, to use 
compensation amounts reported in payroll or tax records. This approach 
would reduce uncertainty for registrants and may also be less costly to 
them, compared to other alternatives that may use various sources of 
compensation data to generate reasonable estimates of total 
compensation in accordance with Item 402(c)(2)(x).
    We are proposing this flexible approach because we believe that the 
appropriate and most cost effective methodology would necessarily 
depend on a registrant's particular facts and circumstances, including, 
among others, such variables as size and nature of the workforce, 
complexity of the organization, the stratification of pay levels across 
the workforce, the types of compensation the employees receive, the 
extent that different currencies are involved, the number of tax and 
accounting regimes involved, the number of payroll systems the 
registrant has and the degree of difficulty involved in integrating 
payroll systems to readily compile total compensation information for 
all employees. We believe that these are likely the same factors that 
would cause substantial variation in the costs of compliance. By not 
prescribing specific methodologies that must be used, the proposed 
requirements would allow registrants to choose a method to identify the 
median that is appropriate to the size, structure and compensation 
practices of their own businesses, including permitting a registrant to 
identify the median employee using any consistently applied 
compensation measure. In addition, this flexibility could enable 
registrants to manage compliance costs more effectively than a more 
prescriptive approach would allow. We also believe that, by allowing 
registrants to minimize direct compliance costs, a flexible approach 
could mitigate, to some extent, any potential negative effects of the 
mandated requirements on competition. We recognize, however, that a 
flexible approach could increase uncertainty for registrants that 
prefer more specificity on how to comply with the proposed rules, 
particularly for registrants that do not use statistical analysis in 
the ordinary course of managing their businesses. In light of this 
potential uncertainty, we have provided clarity to registrants that the 
use of statistical sampling or other reasonable estimates in 
identifying the median would be permitted, as well as identifying the 
median employee based on any consistently applied compensation measure.
    The reduction in compliance costs by using statistical sampling or 
other reasonable estimates in determining median would ultimately 
depend on a registrant's particular facts and circumstances. For 
example, in the following figure and tables, we show that the variance 
of underlying wage distributions can materially affect the appropriate 
sample size for statistical sampling.\204\ Industries characterized by 
the Bureau of Labor Statistics as having low wage variances, such as 
Motor Vehicle Manufacturing, Electric Power Generation, Coal Mining, 
have estimated minimum appropriate sample sizes for an accurate median 
estimate of less than one hundred. In contrast, industries 
characterized by the high wage variances, such as Offices of 
Physicians, Spectator Sports, and Motion Picture and Video industries, 
have estimated minimum appropriate sample sizes of more than 1,000 
employees. Figure 2 shows the distribution of estimated minimum 
appropriate sample sizes for each of the 290 4-digit NAICS industries 
tracked by the BLS.
---------------------------------------------------------------------------

    \204\ The analysis uses mean and median wage estimates from the 
Bureau of Labor Statistics (BLS) at the 4-digit NAICS industry level 
(290 industries) and assumes a lognormal wage distribution, a 95% 
confidence interval with 0.5% margin of error in the estimate of the 
median of the logarithm of wage. The lognormal wage distribution 
assumption is supported by the following studies: F. Clementi, and 
M. Gallegati, Pareto's law of income distribution: evidence for 
Germany, the United Kingdom, and the United States. Econophysics of 
Wealth Distributions, New Economic Window. 3-14 (2005), and J. 
L[oacute]pez and L. Serv[eacute]n, A Normal Relationship? Poverty, 
Growth and Inequality. World Bank Policy Research Working Paper 3814 
(2006). Also, see M. Pinkovskiy and X. Sala-i-Martin, Parametric 
Estimations of the World Distribution of Income, NBER Working Paper 
15433, (2009). This analysis also assumes that when the sampling is 
implemented, the sampling method would be a true random sampling, 
i.e., it would not be biased by region, occupation, rank, or other 
factor.

[[Page 60593]]



                 Table 2--The Industries With the Largest and Smallest Appropriate Sample Sizes
----------------------------------------------------------------------------------------------------------------
                                                                                    Median wage     Appropriate
                            Industry                              Mean wage  ($)        ($)         sample size
----------------------------------------------------------------------------------------------------------------
10 industries with smallest variance in wage distribution:
    Electric Power Generation, Transmission and Distribution....          67,950          65,790              81
    Motor Vehicle Manufacturing.................................          56,160          54,430              81
    Coal Mining.................................................          53,560          51,610              97
    Support Activities for Water Transportation.................          57,220          55,080              99
    Other Pipeline Transportation...............................          67,240          64,180             117
    Metal Ore Mining............................................          56,540          53,900             124
    Natural Gas Distribution....................................          68,630          64,930             139
    Wired Telecommunications Carriers...........................          62,540          59,050             147
    Software Publishers.........................................          91,050          85,290             156
    Rail Transportation.........................................          56,020          52,560             166
10 industries with largest variance in wage distribution:
    Offices of Physicians.......................................          69,710          38,960           1,601
    Spectator Sports............................................          40,550          25,720           1,357
    Motion Picture and Video Industries.........................          61,280          38,580           1,276
    Health and Personal Care Stores.............................          40,860          26,790           1,248
    Home Health Care Services...................................          36,650          24,600           1,199
    Cut and Sew Apparel Manufacturing...........................          34,530          23,280           1,199
    Independent Artists, Writers, and Performers................          63,560          41,550           1,156
    Agents and Managers for Artists, Athletes, Entertainers, and          67,660          44,820           1,104
     Other Public Figures.......................................
    Other Professional, Scientific, and Technical Services......          45,860          31,470           1,079
    Electronic Shopping and Mail-Order Houses...................          43,710          30,230           1,065
----------------------------------------------------------------------------------------------------------------

                                                                                                  [GRAPHIC] [TIFF OMITTED] TP01OC13.002
                                                                                                  
    Because these estimated minimum appropriate sample sizes are based 
on wage distributions measured by the BLS in standardized industries, 
they may not correspond to the appropriate minimum sample size at 
registrants with an

[[Page 60594]]

employee base that does not correspond precisely to one of these 
industries. Even for registrants whose operations are wholly within one 
of these standardized industries, their appropriate sample size may 
also be different to the extent that their distribution of employee 
wages is different than that of the industry. In these instances, a 
registrant's appropriate sample size could be higher or lower than that 
estimated for its industry.
    Of the nearly 4,000 registrants that we believe will be subject to 
the rule, we estimate that approximately 50% have an organizational 
structure characterized by a compensation distribution that falls into 
a tractable statistical distribution category, which would allow the 
registrant use a simple random sampling method.\205\ Of these 
registrants for which we have industry classifications that match the 
BLS data, Table 3 shows estimated minimum appropriate sample sizes 
assuming that each registrant's wage distribution is similar to the 
BLS-measured industry distribution.
---------------------------------------------------------------------------

    \205\ This estimate is based on data from Standard and Poor's 
Compustat Segment database. Segment information is available for 
approximately 65% of the potentially affected registrants. Among 
these, 50% report having multiple business segments and 60% report 
having multiple geographical segments. Also, 25% of the potentially 
affected registrants self-report that they have both multiple 
business segments and geographical segments. Because the segment 
information is self-reported by the companies, it not based on 
standardized definitions of geographic areas such as states, 
countries or regions. Multiple geographical segments could represent 
different geographies with similar operations and thus similar wage 
distributions, for examples, different states within the United 
States.

                         Table 3--Number of Registrants According to Sample Size Ranges
----------------------------------------------------------------------------------------------------------------
                                                                     Number of                      Median wage
                     Sample size (n) ranges                         registrants   Mean wage  ($)        ($)
----------------------------------------------------------------------------------------------------------------
n < 100.........................................................              77          62,281          60,245
100 <= n < 250..................................................             149          50,269          46,298
250 <= n < 500..................................................             441          45,154          39,232
500 <= n < 750..................................................             682          41,736          33,410
750 <= n < 1000.................................................             119          46,997          34,897
n >= 1000.......................................................              29          61,221          37,906
                                                                 -----------------------------------------------
    Total.......................................................           1,497  ..............  ..............
----------------------------------------------------------------------------------------------------------------

    For the remaining 50% of the potentially affected registrants that 
have multiple business segments, and thus are likely to maintain their 
payroll systems separately for each segment, statistical sampling could 
involve more steps and other assumptions. This may be particularly true 
for approximately 25% of the potentially affected registrants that 
self-report that they have both multiple business segments and 
geographical segments.
    While we believe that there is more than one statistical sampling 
approach that could result in reasonable estimates of the median for 
these registrants, all would be more complicated than simple random 
sampling. The alternative approaches would require drawing observations 
from each business or geographical segment with a unique distribution 
of compensation and statistically inferring the registrant's overall 
median based on the observations drawn. For example, the statistical 
inference may involve a weighted sample median using a stratified 
cluster sampling,\206\ or a numerically solved median estimate based on 
their knowledge or assumptions on the size and distribution for each 
segment and pre-estimated mean and variance of each business or 
geographical segment. Some methods, however, may not easily generate 
confidence intervals around the estimates or prescribe a minimum sample 
size. As a result, generating reasonable estimates through statistical 
sampling could result in a disproportionally higher cost to registrants 
with more complicated payroll systems or organization structures. 
Nevertheless, we believe that permitting registrants to use statistical 
sampling may lead to a reduction in compliance costs as compared to 
other methods of identifying the median.
---------------------------------------------------------------------------

    \206\ See, e.g., S. Gross. Median estimation in sample surveys. 
In Proceedings of the Section on Survey Research Methods. American 
Statistical Association, 181-184. (1980).
---------------------------------------------------------------------------

    We believe that a flexible approach would not significantly 
diminish the potential benefits of the disclosure mandated by Section 
953(b). Although the proposed flexible approach could reduce the 
comparability of disclosure across registrants, we do not believe that 
precise conformity or comparability of the ratio across companies is 
necessary. As noted earlier in this release, some commenters believe 
that a primary benefit of the pay ratio disclosure would be providing a 
company-specific metric that investors could use to evaluate the PEO's 
compensation within the context of his or her own company, rather than 
a benchmark for compensation arrangements across companies. 
Accordingly, we do not believe that improving the comparability of the 
disclosure across companies by mandating a specific method for 
identifying the median would be justified in light of the costs that 
would be imposed on registrants by a more prescriptive rule. We do not 
believe that mandating a particular methodology would necessarily 
improve the comparability across companies because of the numerous 
other factors that could also cause the ratios to be less meaningful 
for company-to-company comparison. We also believe that greater 
comparability across companies could increase the likelihood that a 
registrant's competitors could infer proprietary or sensitive 
information about the registrant's business. This in turn could 
increase the indirect costs to registrants of the proposed 
requirements, such as competitive harms in labor markets discussed in 
the previous section or general costs arising from the mandated 
disclosure requirement.
    Finally, we recognize that allowing registrants to select a 
methodology to identify the median, including identifying the median 
employee using and allowing the use of reasonable estimates, rather 
than prescribing a methodology or set of methodologies, could reduce 
benefits for investors if that flexibility enables a registrant to make 
its pay ratio appear more ``favorable'' and thus results in a pay ratio 
that does not reflect a more precisely and consistently calculated 
ratio. We are not able to determine, however, the extent to which the 
flexibility allowed by the proposed requirements could actually enable 
a registrant to adjust its pay ratio in any material respects.

[[Page 60595]]

e. Determination of Total Compensation
    As mandated by Section 953(b), the proposed requirements would 
define ``total compensation'' by reference to Item 402(c)(2)(x) as in 
effect on the day before the date of enactment of the Dodd-Frank Act, 
or July 20, 2010. We note that several commenters raised concerns about 
the potential compliance costs that could arise from the complexity of 
the ``total compensation'' calculation under Item 402(c)(2)(x).\207\ 
Commenters have observed that, because of this complexity, registrants 
typically compile information required by Item 402(c) manually for the 
named executive officers, which they have stated takes significant time 
and resources.\208\ We also note that commenters have raised concerns 
about the ability of companies to compile and verify the data needed to 
calculate total compensation in accordance with Item 402(c)(2)(x) for 
every employee and have asserted that the costs of doing so would be 
significant and unwarranted in light of the potential benefits of the 
disclosure, which such commenters anticipate to be minimal.\209\ To 
address these concerns, some commenters recommended that registrants be 
permitted to use reasonable estimates to determine the value of the 
various elements of total compensation of employees in accordance with 
Item 402(c)(2)(x).\210\ We generally support this recommendation and we 
provided guidance about the use of estimates in this context.
---------------------------------------------------------------------------

    \207\ See, e.g., COEC I and II; and letters from American 
Benefits Council; Brian Foley & Co.; Group of Exec. Comp. Lawyers; 
Group of Trade Associations; Protective Life Corporation; SCSGP; and 
Towers Watson.
    \208\ See letter from Davis Polk.
    \209\ See, e.g., COEC I and II; and letters from ABA; American 
Benefits Council; Protective Life Corporation; and R. Morrison.
    \210\ See COEC I and letters from ABA and SCSGP.
---------------------------------------------------------------------------

    We do not believe that the use of reasonable estimates would 
diminish the potential usefulness of the pay ratio disclosure as a 
general point of comparison of PEO pay to employee pay within a 
company, and we do not believe that the use of reasonable estimates 
would be inconsistent with Section 953(b). Furthermore, we believe that 
requirements that allow registrants to use reasonable estimates in 
these calculations would impose lower compliance costs than 
requirements that prohibit the use of estimates. We acknowledge that, 
however, to the extent that the use of estimates causes the ratio to be 
an inaccurate reflection of the registrant's median compensation, it 
could diminish the potential usefulness of the disclosure.
    As discussed above, the proposal allows registrants to identify the 
median employee using any consistently applied compensation measure and 
then determine and disclose the Item 402(c)(2)(x) total compensation 
for that median employee. A registrant would be permitted to calculate 
compensation for all employees in accordance with Item 402(c)(2)(x), 
but would only be required to calculate and disclose such information 
for the median employee. The proposed rules also permit registrants to 
use reasonable estimates in the calculation of annual total 
compensation for the median employee that must be disclosed and used in 
the pay ratio.
f. Disclosure of Methodology, Assumptions and Estimates; Additional 
Disclosure
    We are proposing instructions for the disclosure of the methodology 
and material assumptions, adjustments and estimates used in the 
identification of the median or the calculation of the annual total 
compensation (or any elements of total compensation) of employees. The 
proposed instruction provides that registrants must briefly disclose 
and consistently apply any methodology used to identify the median and 
any material assumptions, adjustments or estimates used to identify the 
median or to determine total compensation or any elements of total 
compensation, and registrants must clearly identify any estimated 
amount as such. Registrants' disclosure of the methodology and material 
assumptions, adjustments and estimates used should be designed to 
provide information for a reader to be able to evaluate the 
appropriateness of the estimates. For example, when statistical 
sampling is used, registrants should disclose the size of both the 
sample and the estimated whole population, any material assumptions 
used in determining the sample size, which sampling method (or methods) 
is used, and, if applicable, how the sampling method deals with 
separate payrolls such as geographically separated employee populations 
or other issues arising from multiple business or geographic segments. 
In order to promote comparability from year to year, the instruction 
also provides that, if a registrant changes methodology or material 
assumptions, adjustments or estimates from those used in the previous 
period, and if the effects of any such change are material, the 
registrant must briefly describe the change, the reasons for the change 
and an estimate of the impact of the change on the median and the 
ratio. This approach is consistent with other Commission rules that 
allow registrants flexibility to choose a methodology, such as the 
valuation method for determining the present value of accrued pension 
benefits in Item 402(h)(2) or the description of models, assumptions 
and parameters in Item 305 of Regulation S-K (quantitative and 
qualitative disclosures about market risk). Five commenters recommended 
requiring this information in cases where the rules allowed registrants 
to use estimation techniques.\211\
---------------------------------------------------------------------------

    \211\ See AFL-CIO II and COEC I; and letters from Group of Exec. 
Comp. Lawyers, Meridian Compensation Partners, LLC; and SCSGP.
---------------------------------------------------------------------------

    Because we are concerned that disclosure about methodology, 
assumptions, adjustments and estimates could become dense and overly 
technical, which we believe would limit its usefulness, the instruction 
asks for a brief overview and makes clear that it is not necessary to 
provide technical analyses or formulas. We do not believe that a 
detailed, technical discussion (such as statistical formulas, 
confidence levels or the steps used in data analysis) would enhance the 
potential usefulness of the pay ratio, as suggested by some 
commenters,\212\ as a metric to evaluate the level of PEO compensation. 
We expect that a succinct description of the methodology and material 
assumptions, adjustments and estimates used would not be overly 
burdensome for registrants and would be more informative for investors. 
We expect that the costs of the additional disclosure on registrants 
would be marginal, as these additional disclosures are intended to 
simply describe what has already been done or assumed in the 
calculations, and therefore will not require additional actions for 
registrants. It is likely that some costs may be incurred in developing 
and reviewing the appropriate language to describe the approach taken.
---------------------------------------------------------------------------

    \212\ See, e.g., Senate Letter; House Letter; and AFL-CIO I; and 
letters from CtW Investment Group and UAW Retiree Medical Benefits 
Trust.
---------------------------------------------------------------------------

    We considered the recommendations of commenters relating to 
requirements for additional narrative discussion of the ratio and 
supplemental information about a registrant's employee compensation 
structures and policies.\213\ Section 953(b) does not mandate a 
narrative discussion to accompany the pay ratio disclosure, and the 
proposed requirements do not include a specific requirement for 
narrative discussion of the ratio, its components or any supplemental 
information that could provide context

[[Page 60596]]

for or explain the ratio. We believe that additional narrative 
disclosure about the ratio would not, for many registrants, provide 
useful information for investors that would justify the costs 
associated with providing that additional narrative disclosure. While 
some investors could find supplemental information about a registrant's 
employment practices, the composition of its workforce and similar 
topics (such as employment policies, use of part-time workers, use of 
seasonal workers, outsourcing and off-shoring strategies) useful or 
informative, we note that Section 953(b) does not call for that level 
of detail. We note too, that, as with other mandated disclosure under 
our rules, registrants would be permitted to supplement the required 
disclosure with a narrative discussion if they choose to do so.
---------------------------------------------------------------------------

    \213\ See AFL-CIO I and letter from Americans for Financial 
Reform.
---------------------------------------------------------------------------

g. Defining ``Annual''
    In order to provide clarity, the proposed requirement defines 
``annual total compensation'' to mean total compensation for the last 
completed fiscal year, consistent with the time period used for the 
other Item 402 disclosure requirements. This clarification is intended 
to address questions from commenters about the need to update the pay 
ratio disclosure throughout the year and make clear that the disclosure 
does not need to be updated more than once a year.
    Two commenters suggested other possible alternatives for the 
calculation of ``annual'' total compensation. One of these commenters 
recommended that registrants should have flexibility to select a time 
period for calculating the annual total compensation of employees, 
noting that registrants without a calendar year fiscal year-end might 
benefit from the flexibility to use the calendar year period since that 
would be consistent with the registrant's tax reporting 
obligations.\214\ Another commenter suggested two timing rules that 
would grant registrants further flexibility to use the 12-month time 
periods that their payroll systems use.\215\ We understand that these 
suggestions are intended to reduce compliance costs for registrants by 
giving registrants the ability to use information in the form that it 
is currently compiled for other purposes, such as tax and payroll 
recordkeeping. We believe, however, that it is appropriate for the time 
period for the pay ratio disclosure to be the same as the time period 
used for the registrant's other executive compensation disclosures, 
although the proposed flexibility in identifying the median employee 
could address the concerns raised by these commenters.
---------------------------------------------------------------------------

    \214\ See letter from American Benefits Council.
    \215\ See letter from Group of Exec. Comp. Lawyers 
(recommending: ``Rule One--the registrant can select any date as of 
which to calculate median compensation, provided the date is within 
12 months of the proxy filing, and is the most recent practicable 
date, and Rule Two--if different payroll systems are involved, the 
12-month period for computing compensation data for each payroll 
system's data will be acceptable so long as the period ends within 
12 months of the date chosen under Rule One.'').
---------------------------------------------------------------------------

    As discussed above, we propose to allow a registrant that is 
identifying the median employee by reference to compensation amounts 
derived from its payroll or tax records to use the same annual period 
that is used in the payroll or tax records from which the compensation 
amounts are derived. We also did not propose to define or limit what 
would qualify as payroll or tax records so that registrants would be 
able to use information that they already track and report for tax 
purposes. We believe that permitting companies to identify the median 
employee using compensation information in the form that it is 
maintained in their own books and records would reduce compliance 
costs, yet still yield a reasonable estimate of the median employee. 
Registrants using that approach to identify the median employee would 
be required to calculate the Item 402(c)(2)(x) total compensation for 
that median employee for the last completed fiscal year, in order to 
maintain consistency with other Item 402 information.
h. Updating the Pay Ratio Disclosure for the Last Completed Fiscal Year
    The proposed requirements include instructions to clarify the 
timing for updating pay ratio disclosure after the end of a 
registrant's fiscal year. Without the proposed instructions, a 
registrant could be required to include pay ratio disclosure in an 
annual report or registration statement filed after the end of the 
fiscal year, but before it has compiled the executive compensation 
information for that fiscal year for inclusion in its proxy statement 
relating to its annual meeting of shareholders, which could raise 
additional incremental costs for registrants that elect to provide 
executive compensation disclosure in their annual proxy statement 
rather than their annual report and for registrants that are conducting 
registered offerings at the beginning of their fiscal year.
    To address this, we considered the recommendation of commenters 
that pay ratio disclosure not be required to be updated for the most 
recently completed fiscal year until the registrant files its proxy 
statement for its annual meeting of shareholders. The proposed 
requirements generally follow this approach, but the proposed 
instructions provide a similar accommodation for registrants that do 
not file annual proxy statements \216\ and align the proposed 
requirement to the timing rules for providing Item 402 disclosure in 
annual reports and proxy and information statements. We believe that 
the proposed instruction would provide certainty to registrants as to 
when the updated information is required and would allow sufficient 
time after the end of the fiscal year to identify the median. We 
believe that such an approach would not diminish the potential 
usefulness of the disclosure.
---------------------------------------------------------------------------

    \216\ Based on a review of EDGAR filings in calendar year 2012, 
approximately 250 registrants that would be subject to the proposed 
requirements do not file proxy or information statements in 
connection with annual meetings of shareholders, including 15D 
filers (other than smaller reporting companies and ABS issuers) and 
registrants that are not corporate entities required to hold annual 
meetings of shareholders.
---------------------------------------------------------------------------

    We also believe that this approach could reduce additional costs 
for registrants in connection with filings made or required to be made 
before the filing of the proxy or information statement for the annual 
meeting of shareholders (or written consents in lieu of such a meeting) 
that would typically contain the registrant's other Item 402 disclosure 
covering the most recently completed fiscal year. In addition, under 
the proposed approach, updating the pay ratio disclosure would not be 
an additional hurdle for a registrant that requests effectiveness of a 
registration statement after the end of its fiscal year and before the 
filing of the proxy statement for its annual meeting of shareholders. 
In this regard, the proposed approach could alleviate some of the 
potential impact on capital formation from Section 953(b).
i. Instructions for Registrants Relying on Instruction 1 to Items 
402(c)(2)(iii) and (iv)
    We have also proposed instructions to provide consistency with 
current executive compensation disclosure rules in cases where a 
registrant cannot compute the total compensation of the PEO because the 
salary or bonus of the PEO is not calculable until a later date. 
Similar to existing requirements for the disclosure of PEO total 
compensation under those circumstances, the proposed requirements 
permit the registrant to omit pay ratio disclosure until those elements 
of the PEO's total compensation are determined and to provide the pay 
ratio disclosure in the same filing under Item 5.02(f) of Form

[[Page 60597]]

8-K in which the PEO's salary or bonus is disclosed. In taking the 
proposed approach, we have assumed that the potential benefits of the 
disclosure could be diminished if the pay ratio were to be calculated 
using less than the entire amount of the PEO's total compensation for 
the period, because the ratio would be lower than if it reflected the 
full PEO total compensation, and that this could justify the potential 
costs to investors of a delay in the timing of the disclosure.
    Instead of this approach, we considered whether to require 
registrants to report pay ratio disclosure using a reasonable estimate 
of the elements of PEO compensation that are not calculable. We also 
considered whether registrants should be permitted to use an incomplete 
amount, comprising only the elements of total compensation that are 
calculable at the time.
    In some cases, the amount of compensation that is omitted under the 
Instruction 1 to Items 402(c)(2)(iii) and (iv) could be significant. 
Therefore, the pay ratio could be lower if it were presented using an 
amount of PEO total compensation that fails to adequately account for 
the amounts of salary or bonus ultimately included in the PEO's actual 
total compensation, including the alternative approach of using 
estimated PEO compensation, and such an approach could incentivize 
registrants to give their PEOs more of these types of compensation in 
order to achieve a more favorable ratio at the time of the proxy 
statement or annual report. We believe that the potential incentive to 
change compensation practices could be exacerbated by an alternative 
approach that permitted or required calculation using incomplete total 
compensation amounts.
    Based on the number of registrants that have historically relied on 
Instruction 1 to Items 402(c)(2)(iii) and (iv),\217\ we do not expect 
that the proposed instruction would impact a significant number of 
registrants each year.
---------------------------------------------------------------------------

    \217\ For example, based on a review of EDGAR filings in 2012, 
only 22 registrants relied on Instruction 1 to Items 402(c)(2)(iii) 
and (iv) in connection with the total compensation of their PEO.
---------------------------------------------------------------------------

j. Status of Disclosure as Filed Not Furnished
    Some commenters suggested that pay ratio information be deemed 
``furnished'' and not ``filed'' for purposes of the Securities Act and 
the Exchange Act.\218\ We note that Section 953(b) states that the pay 
ratio information be disclosed in the registrant's ``filings'' with the 
Commission. We further note that one of the reasons that commenters 
recommended treating the information as furnished and not filed is 
because of the difficulty that some companies may have in determining 
and verifying the information, which must be covered by the 
certifications required for Exchange Act filings under the Sarbanes-
Oxley Act of 2002. We also recognize that some registrants could have 
more difficulty in gathering and verifying the information than others. 
Nevertheless, we believe that the flexibility afforded to registrants 
in connection with identifying the median could reduce some of the 
difficulties of compiling the required information, because registrants 
would be able to tailor the methodology to reflect their own facts and 
circumstances. The ability to use reasonable estimates in connection 
with the calculation of annual total compensation for employees other 
than the PEO could also alleviate some of these concerns. In addition, 
we believe that the proposed transition periods discussed below, which 
are designed to give registrants sufficient time to develop and 
implement compliance procedures, could mitigate some concerns about 
compiling and verifying the information.
---------------------------------------------------------------------------

    \218\ See COEC I and letters from ABA; Protective Life 
Corporation; and RILA.
---------------------------------------------------------------------------

k. Proposed Compliance Date
    Section 953(b) does not specify a date when registrants must begin 
to comply with the requirements that we implement under the provision. 
We are proposing to require that a registrant must begin to comply with 
proposed Item 402(u) with respect to compensation for the registrant's 
first fiscal year commencing on or after the effective date of the 
rule, and, as proposed, a registrant would be permitted to omit this 
initial pay ratio disclosure from its filings until the filing of its 
annual report on Form 10-K for that fiscal year or, if later, the 
filing of a proxy or information statement for its next annual meeting 
of shareholders (or written consents in lieu of a meeting) following 
the end of such year. Similar to the proposed instructions for updating 
pay ratio disclosure, the proposed transition instructions also require 
that this initial pay ratio disclosure must, in any event, be filed as 
provided in connection with General Instruction G(3) of Form 10-K not 
later than 120 days after the end of such fiscal year.
    Several commenters noted that companies will need a long transition 
period to enable them to implement systems to compile the disclosure 
and verify its accuracy.\219\ We understand that this time would likely 
be needed by large, multinational registrants and any registrants that 
currently do not have a centralized, consolidated payroll, benefits and 
pension system that captures the information necessary to identify the 
median of the annual total compensation of all employees,\220\ however, 
we seek comment on whether the flexibility in the proposed rules would 
reduce the need for a lengthy transition period. We expect that it will 
take registrants one full reporting cycle to implement and test any 
necessary systems,\221\ and we have designed the initial transition 
period to provide that time for transition and implementation.
---------------------------------------------------------------------------

    \219\ See letters from ABA; American Benefits Council; Brian 
Foley & Co.; Group of Exec. Comp. Lawyers; Davis Polk; NACD; SCSGP; 
RILA; and Towers Watson.
    \220\ See letters from ABA; American Benefits Council; Brian 
Foley & Co.; Group of Exec. Comp. Lawyers; Davis Polk; NACD; SCSGP; 
RILA; and Towers Watson.
    \221\ See letters from American Benefits Council and Group of 
Exec. Comp. Lawyers.
---------------------------------------------------------------------------

l. Proposed Transition Periods
    The proposed requirements also include a transition period for new 
registrants because we are sensitive to the impact that the proposed 
rules could have on capital formation. We note that the requirements of 
Section 953(b), as amended by the JOBS Act, distinguish between certain 
newly public companies and all other issuers by providing an exemption 
for emerging growth companies. We also note that the incremental time 
needed to compile pay ratio disclosure could cause companies that are 
not emerging growth companies to delay an initial public offering, 
which could have a negative impact on capital formation. In this 
regard, we expect that, in order to be disqualified for emerging growth 
company status, these companies are likely to be businesses with more 
extensive operations or a greater number of employees than many 
emerging growth companies, which could increase the initial efforts 
needed to comply with the proposed requirements. We believe that 
providing a transition period for these newly public companies could 
mitigate this potential impact on capital formation.
    Accordingly, the proposed requirements also include instructions 
that would permit new registrants to delay compliance, so that pay 
ratio disclosure would not be required in a registration statement on 
Form S-1 or S-11 for an initial public offering or a registration 
statement on Form 10. Instead, such a registrant would be

[[Page 60598]]

required to first comply with proposed Item 402(u) with respect to 
compensation for the first fiscal year commencing on or after the date 
the registrant first becomes subject to the requirements of Section 
13(a) or Section 15(d) of the Exchange Act.
    We note that commenters did not address the impact of pay ratio 
disclosure requirements on newly public companies. Although investors 
might benefit from pay ratio information in connection with an initial 
public offering or Exchange Act registration, we believe it is 
appropriate to give companies time to develop any needed systems to 
compile the disclosure and verify its accuracy. The transition period 
for new registrants is similar to the proposed time frame provided for 
other registrants to comply with pay ratio disclosure requirements 
following the effective date of the final rules. The proposed approach 
is also similar to the current phase-in for newly public companies in 
connection with Item 308 of Regulation S-K, for management's report on 
the registrant's internal control over financial reporting. We seek 
comment in this release on whether these timing and transition rules 
are sufficient to address the burdens on capital formation that could 
arise due to the mandated pay ratio disclosure requirements.
    We have not proposed a separate transition period for companies 
that cease to qualify as emerging growth companies. We acknowledge that 
companies exiting emerging growth status could need additional time to 
implement systems to compile and verify their pay ratio disclosure, 
particularly because registrants may not be able to predict in advance, 
depending on which of the four conditions occurs, when they will cease 
to be an emerging growth company. By exempting emerging growth 
companies from the scope of Section 953(b), the JOBS Act essentially 
provides a transition period for companies for as long as they qualify 
for emerging growth company status. In connection with other executive 
compensation provisions, the JOBS Act includes specific transition 
periods for companies exiting emerging growth company status.\222\ It 
does not, however, include a similar transition provision in the case 
of Section 953(b). Therefore, we are not proposing any additional 
transition period for compliance after a company ceases to qualify as 
an emerging growth company. We seek comment in this release on whether 
additional transition periods are needed for these companies.
---------------------------------------------------------------------------

    \222\ See, e.g., Section 102(a)(1)(B) (providing such a 
transition for say-on-pay compliance).
---------------------------------------------------------------------------

E. Request for Comment

    Throughout this release, we have discussed the anticipated costs 
and benefits of the proposed rules. We request data to quantify the 
costs and the value of the benefits described throughout this release. 
We seek estimates of these costs and benefits, as well as any costs and 
benefits not described, that may result from the adoption of these 
proposed amendments. We also request comments on the qualitative 
benefits and costs we have identified and any benefits and costs we may 
have overlooked.
    61. We request comment on all aspects of the costs and benefits of 
the proposed rules, including identification and assessment of any 
costs and benefits not already discussed. We seek comment and data on 
the magnitude and the value of the benefits identified. We also welcome 
comments on the accuracy of the cost estimates and request that 
commenters provide data that may be relevant to these cost estimates. 
In addition, we seek estimates and views regarding these costs and 
benefits for particular covered registrants, including small 
registrants, and, where relevant, for particular categories of covered 
registrants, as well as any other costs or benefits that may result 
from the adoption of these proposed amendments.
    62. What are the characteristics of employee compensation data that 
current payroll systems (or other management information systems) 
maintain? Would it be necessary for registrants to change such systems 
or other employee compensation records in order to track the 
information needed to comply with the proposed pay ratio rules? What 
would the transition costs be to make any such changes? How generally 
are payroll systems maintained across business or geographic segments 
and how would the separate payroll information across segments be 
aggregated to comply with the proposed rules? What are the initial and 
ongoing costs to comply and what activities incur those costs, such as 
burden hours/wages of company personnel, development and maintenance of 
computer systems, use of third-party service providers and other 
professionals? How would the use of reasonable estimates or statistical 
sampling affect these costs generally, including the need to change 
current payroll systems? Please also describe benefits, if any, to the 
registrant, beyond compliance with the proposed rules, from 
implementing changes to current payroll systems or management 
information systems.
    63. How would allowing registrants to choose an approach for 
determining the median influence potential costs? How would allowing 
registrants to choose an approach that permits registrants to use any 
consistently applied measure of compensation and/or statistical 
sampling to identify the median employee and then calculate that 
employee's total compensation in accordance with Item 402(c)(2)(x) 
affect compliance costs, particularly as compared to requiring 
registrants to calculate total compensation in accordance with Item 
402(c)(2)(x) for all employees to identify the median? Comparisons of 
the costs of each approach would be particularly helpful. Would 
allowing for alternative approaches retain the benefits of Section 
953(b)? If not, please provide specific information or data on what 
benefits would not be achieved under the proposed rules.
    64. What are the transition costs that will be imposed on 
registrants as a result of the proposals, if adopted? Please be 
detailed and provide quantitative data or support, as practicable. 
Where applicable, please also distinguish between costs that are 
initial, non-recurring implementation costs and the costs of ongoing 
compliance.
    65. What impact would the proposed rules have on the incentives of 
boards, senior executives and shareholders? Would the proposed rules be 
likely to change the behavior of registrants, investors or other market 
participants? Should we alter the proposed requirements to address that 
impact? If so, describe any changes that would address that impact and 
discuss any related costs and benefits that would arise from such a 
change.
    66. What impact would the proposed rules have on competition? Would 
the expected compliance costs put registrants subject to the rule at a 
competitive disadvantage? Are there particular industries or types of 
registrants that would be more likely to be impacted? If so, what 
changes to the proposed requirements could mitigate the impact?
    67. What impact would the proposed rules have on market efficiency? 
Are there any positive or negative effects of the proposed rules on 
efficiency that we may have overlooked? How could the rules be changed 
to promote any positive effect or to mitigate any negative effect on 
efficiency, while still satisfying the mandate of Section 953(b)?

[[Page 60599]]

    68. Could a registrant's competitors infer proprietary or sensitive 
information about the registrant's business operations, strategy or 
labor cost-structure from the proposed pay ratio disclosure? If so, 
please tell us what type of information could be inferred and how that 
could be determined. Please also tell us what changes to the proposed 
requirements could mitigate that concern?
    69. What impact would the proposed rules have on capital formation? 
How could the rules be changed to promote capital formation or to 
mitigate any negative effect on capital formation resulting from the 
rules, while still satisfying the mandate of Section 953(b)?

V. Paperwork Reduction Act

A. Background

    Certain provisions of the proposed amendments contain ``collection 
of information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (the ``PRA''). \223\ We are submitting the 
proposed amendments to the Office of Management and Budget (``OMB'') 
for review in accordance with the PRA.\224\ The titles for the 
collection of information are:
---------------------------------------------------------------------------

    \223\ 44 U.S.C. 3501 et seq.
    \224\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

     ``Regulation S-K'' (OMB Control No. 3235-0071); \225\
---------------------------------------------------------------------------

    \225\ The paperwork burden from Regulation S-K is imposed 
through the forms that are subject to the disclosures in Regulation 
S-K and is reflected in the analysis of those forms. To avoid a 
Paperwork Reduction Act inventory reflecting duplicative burdens, 
for administrative convenience, we estimate the burdens imposed by 
Regulation S-K to be a total of one hour.
---------------------------------------------------------------------------

     ``Form 10-K'' (OMB Control No. 3235-0063);
     ``Regulation 14A and Schedule 14A'' (OMB Control No. 3235-
0059); \226\
---------------------------------------------------------------------------

    \226\ As described below, our estimates for Form 10-K take into 
account the burden that would be incurred by including the proposed 
disclosure in the annual report directly or incorporating by 
reference from a proxy or information statement. To avoid a 
Paperwork Reduction Act inventory reflecting duplicative burdens, we 
estimate that the proposed disclosure would not impose an 
incremental burden for proxy statements on Schedule 14A.
---------------------------------------------------------------------------

     ``Regulation 14C and Schedule 14C'' (OMB Control No. 3235-
0057); \227\
---------------------------------------------------------------------------

    \227\ As described below, our estimates for Form 10-K take into 
account the burden that would be incurred by including the proposed 
disclosure in the annual report directly or incorporating by 
reference from a proxy or information statement. To avoid a 
Paperwork Reduction Act inventory reflecting duplicative burdens, we 
estimate that the proposed disclosure would not impose an 
incremental burden for information statements on 14C.
---------------------------------------------------------------------------

     ``Form 8-K'' (OMB Control No. 3235-0060);
     ``Form S-1'' (OMB Control No. 3235-0065); \228\
---------------------------------------------------------------------------

    \228\ As described below, we have assumed that the burden 
relating to the proposed disclosure requirements would be associated 
primarily with Form 10-K rather than Forms S-1, S-4, S-11 or N-2 as 
applicable (because registrants would incorporate the disclosure 
from Form 10-K). To avoid a Paperwork Reduction Act inventory 
reflecting duplicative burdens, we estimate that the proposed 
disclosure would not impose an incremental burden for registration 
statements on Form S-1.
---------------------------------------------------------------------------

     ``Form S-4'' (OMB Control No. 3235-0324) \229\
---------------------------------------------------------------------------

    \229\ As described below, we have assumed that the burden 
relating to the proposed disclosure requirements would be associated 
primarily with Form 10-K rather than Forms S-1, S-4, S-11 or N-2 as 
applicable (because registrants would incorporate the disclosure 
from Form 10-K). To avoid a Paperwork Reduction Act inventory 
reflecting duplicative burdens, we estimate that the proposed 
disclosure would not impose an incremental burden for registration 
statements on Form S-4.
---------------------------------------------------------------------------

     ``Form S-11'' (OMB Control No. 3235-0067); \230\
---------------------------------------------------------------------------

    \230\ As described below, we have assumed that the burden 
relating to the proposed disclosure requirements would be associated 
primarily with Form 10-K rather than Forms S-1, S-11 or N-2 as 
applicable (because registrants would incorporate the disclosure 
from Form 10-K). To avoid a Paperwork Reduction Act inventory 
reflecting duplicative burdens, we estimate that the proposed 
disclosure would not impose an incremental burden for registration 
statements on Form S-11.
---------------------------------------------------------------------------

     ``Form 10'' (OMB Control No. 3235-0064); \231\ and
---------------------------------------------------------------------------

    \231\ As described below, because we have assumed that all new 
registrants would take advantage of the transition period afforded 
to them under the proposed requirements, we estimate no annual 
incremental increase in the paperwork burden associated with Form 10 
as a result of the proposed requirements.
---------------------------------------------------------------------------

     ``Form N-2'' (OMB Control No. 3235-0026).\232\
---------------------------------------------------------------------------

    \232\ Only Forms N-2 filed by business development companies 
would be subject to the proposed disclosure requirements, because 
Form N-2 requires business development companies, and not other 
investment companies, to provide Item 402 disclosure. As described 
below, we have assumed that the burden relating to the proposed 
disclosure requirements would be associated primarily with Form 10-K 
rather than Forms S-1, S-11 or N-2 as applicable (because 
registrants would incorporate the disclosure from Form 10-K). To 
avoid a Paperwork Reduction Act inventory reflecting duplicative 
burdens, we estimate that the proposed disclosure would not impose 
an incremental burden for registration statements on Form N-2.
---------------------------------------------------------------------------

    These regulations, schedules and forms were adopted under the 
Securities Act and the Exchange Act, and in the case of Form N-2,\233\ 
the Investment Company Act of 1940.\234\ They set forth the disclosure 
requirements for periodic and current reports, registration statements 
and proxy and information statements filed by companies to help 
investors make informed investment and voting decisions. The hours and 
costs associated with preparing, filing and sending each form or 
schedule constitute reporting and cost burdens imposed by each 
collection of information. An agency may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \233\ 17 CFR 239.14 and 274.11a-1.
    \234\ 15 U.S.C. 80a-1 et seq.
---------------------------------------------------------------------------

    The proposals discussed in this release are intended to satisfy the 
requirements of Section 953(b) of the Dodd-Frank Act, which directs the 
Commission to amend Item 402 of Regulation S-K to add the pay ratio 
disclosure requirements specified by that provision. Compliance with 
the proposed requirements will be mandatory for affected registrants. 
Responses to the information collections will not be kept confidential, 
and there will be no mandatory retention period for the information 
disclosed.

B. Summary of Collection of Information Requirements

    In order to satisfy the legislative mandate in Section 953(b), we 
are proposing to add new paragraph (u) to Item 402 of Regulation S-K. 
This new paragraph (u) would require registrants to disclose:
     The median of the annual total compensation of all 
employees of the registrant (excluding the principal executive 
officer),
     the annual total compensation of the registrant's 
principal executive officer, and
     the ratio between these two amounts.
    For this purpose, Section 953(b) specifies that total compensation 
is to be determined in accordance with Item 402(c)(2)(x). Item 402 
already requires registrants to disclose the annual total compensation 
of the principal executive officer in accordance with Item 
402(c)(2)(x).\235\ The median of the annual total compensation of all 
employees and the ratio would be new, incremental disclosure burdens 
and would require affected registrants to collect compensation 
information for employees that is not currently required to be 
disclosed.
---------------------------------------------------------------------------

    \235\ As of the date of this proposal, the requirements for the 
calculation of total compensation under Item 402(c)(2)(x) are the 
same as those in effect on July 20, 2010. Therefore, for purposes of 
this PRA analysis, we have assumed that registrants would not need 
to recalculate the annual total compensation for the principal 
executive officer in connection with the proposed pay ratio 
disclosure.
---------------------------------------------------------------------------

    Investors and other market participants interested in executive 
compensation disclosure have indicated that the proposed disclosure 
would be

[[Page 60600]]

useful in informing investment and voting decisions, particularly for 
say-on-pay votes and in director elections.\236\ In this regard, pay 
ratio information could be used by shareholders for purposes of 
evaluating the actions of the board of directors in fulfilling its 
responsibilities to the company and its shareholders.\237\ Pay ratio 
information could also be used to enhance an investor's understanding 
of a registrant's compensation practices applicable to non-executive 
employees relative to the named executive officers.\238\
---------------------------------------------------------------------------

    \236\ See, e.g., letters from CtW Investment Group and S. Towns.
    \237\ See, e.g., letters from CtW Investment Group and UAW 
Retiree Medical Benefits Trust.
    \238\ See, e.g., letters from CtW Investment Group and UAW 
Retiree Medical Benefits Trust.
---------------------------------------------------------------------------

    The proposed disclosure under new paragraph (u) of Item 402 would 
be required in registration statements and annual reports that require 
executive compensation information under Item 402 of Regulation S-K and 
in proxy and information statements relating to an annual meeting of 
shareholders or written consents in lieu of such a meeting.\239\ In 
addition, the proposed requirements would allow certain new registrants 
to omit the disclosure otherwise required by Item 402(u) from filings 
made during a specified transition period.
---------------------------------------------------------------------------

    \239\ Consistent with the scope of Section 953(b), the proposed 
requirements would not apply to the annual reports and proxy and 
information statements of emerging growth companies, smaller 
reporting companies or foreign private issuers. In addition, 
consistent with the instructions J and I of Form 10-K, the proposed 
requirements would not apply to the annual reports of issuers of 
asset-backed securities or to wholly-owned subsidiary registrants.
---------------------------------------------------------------------------

    Finally, in order to conform the proposed requirements to current 
rules for the disclosure of PEO compensation when certain elements are 
not yet known, the proposals include a conforming amendment to Item 
5.02 of Form 8-K. This proposed amendment would require registrants 
that are disclosing PEO total compensation in accordance with Item 5.02 
of Form 8-K to also provide in that filing the updated pay ratio 
disclosure required by Item 402(u). Because Item 5.02 of Form 8-K 
provides a delayed method of filing information that would otherwise be 
required in the registrant's proxy or information statement or annual 
report, the PRA analysis assumes that the burden and cost of compliance 
with proposed Item 402(u) would be associated primarily with those 
forms and schedules rather than Form 8-K.

C. Burden and Cost Estimates Related to the Proposed Amendments

    We anticipate that the proposed amendments, if adopted, would 
increase the burdens and costs for registrants that are subject to the 
proposed disclosure requirements. For purposes of the PRA, we estimate 
that the total annual increase in the paperwork burden for all affected 
registrants to comply with the proposed collection of information 
requirements to be approximately 545,792 hours of company personnel 
time and total costs of approximately $72,772,200 for the services of 
outside professionals.\240\ These estimates include the time and the 
cost of implementing data gathering systems and disclosure controls and 
procedures, compiling necessary data, preparing and reviewing 
disclosure, filing documents and retaining records.
---------------------------------------------------------------------------

    \240\ We describe how we derived the three-year average hour and 
cost burdens per response below. For administrative convenience, the 
presentation of the totals related to the paperwork burden hours 
have been rounded to the nearest whole number and the cost totals 
have been rounded to the nearest hundred.
---------------------------------------------------------------------------

    In deriving these estimates, we have assumed that:
     Registrants subject to the proposed requirements would 
satisfy the proposed requirements by either including the information 
directly in annual reports on Form 10-K or incorporating the 
information by reference from a proxy statement on Schedule 14A or 
information statement on Schedule 14C. Our estimates assume that 
substantially all of the burden relating to the proposed disclosure 
requirements would be associated with Form 10-K;
     For registrants that would be permitted to provide their 
pay ratio disclosure in a filing made in accordance with Item 5.02 of 
Form 8-K, rather than in Form 10-K, the burden relating to the proposed 
disclosure requirements would be associated primarily with Form 10-K 
rather than Form 8-K; \241\
---------------------------------------------------------------------------

    \241\ Our PRA estimates for Form 8-K include an estimated one 
hour burden to account for the inclusion of the proposed pay ratio 
disclosure.
---------------------------------------------------------------------------

     100% of new registrants would use the proposed transition 
provisions allowing them to omit the proposed disclosure from their 
filings and, for follow-on offerings by these registrants, the burden 
relating to the proposed disclosure requirements would be associated 
primarily with Form 10-K rather than Forms S-1, S-11 or N-2 as 
applicable (because registrants would incorporate the disclosure from 
Form 10-K); and
     For Form 10-K and Form 8-K, 75% of the burden would be 
carried by the company internally and that 25% of the burden would be 
carried by outside professionals retained by the company at an average 
cost of $400 per hour. \242\
---------------------------------------------------------------------------

    \242\ The portion of the burden carried by outside professionals 
is reflected as a cost, while the portion of the burden carried by 
the company internally is reflected in hours. We recognize that the 
costs of retaining outside professionals may vary depending on the 
nature of the professional services, but for purposes of this PRA 
analysis we estimate that such costs would be an average of $400 per 
hour. This is the rate we typically estimate for outside legal 
services used in connection with public company reporting.
---------------------------------------------------------------------------

    As discussed above in this release, we understand from commenters 
that the costs of compliance will likely vary among individual 
companies based on a number of factors, including the size and 
complexity of their organizations, the nature of their operations, the 
nature of their workforce, the location of their operations, and, 
significantly, the extent that their existing payroll systems collect 
the information necessary to identify the median of the annual total 
compensation of their employees (including whether a single, 
centralized computer system covers all employees of the registrant and 
whether the company's benefits and cash compensation records reside in 
the same system). Because the proposed requirements would allow 
registrants some flexibility in identifying the median and the annual 
total compensation of employees, the actual burden could be lower if 
the methodology used is able to reduce the effort needed to collect the 
data or if the registrant is able to use information that it uses for 
other purposes.\243\ We believe that the actual burdens will likely 
vary significantly among individual companies based on these 
factors.\244\ Our estimates reflect average burdens, and, therefore, 
some companies may experience costs in excess of our estimates and some 
companies may experience costs that are lower than our estimates.\245\
---------------------------------------------------------------------------

    \243\ See Section II of this release for a discussion of the 
proposed requirements.
    \244\ We also note that companies could address these factors in 
a variety of ways. For example, some companies might perform the 
data collection and consolidation manually, while others may incur 
the cost of implementing an information technology solution for 
collecting the data. In addition, some companies might outsource 
some of the burden hours to consultants or third party payroll 
management providers, which could increase the costs to the 
registrant while decreasing the burden hours of company personnel.
    \245\ Although we received some information from commenters and 
stakeholders regarding the time and costs to comply with Section 
953(b), in light of the limitations of that information described 
above in Section IV of this release, we did not that information as 
the basis for our PRA estimates. We received various hours 
estimates, including estimates of approximately 201 to 500 hours, 
and another estimate of 4,000 hours (based on 50 hours per country 
where employees are located). We received four cost estimates, 
including $7.6 million, $6.5 million, $4.725 million and $350,000 
per registrant. We note that all of these estimates are estimates 
based on the commenter's initial reading and interpretation of the 
statute and do not reflect the discretionary choices we have made in 
the proposed rule implementing the statute. For instance these 
estimates do not take into account the ability to use statistical 
sampling. We also note that the estimates do not represent the full 
breadth of the registrant population. As noted in our economic 
analysis section, we anticipate that the PRA estimates will be 
revised in light of further information we receive on estimated 
costs.

---------------------------------------------------------------------------

[[Page 60601]]

    We have derived our burden estimates by estimating the average 
number of hours it would take a registrant to prepare and submit the 
required data. In determining these estimates, we considered the burden 
estimates for similar disclosure requirements. We believe the burden 
hours associated with the preparation of the proposed pay ratio 
disclosure may be comparable to a registrant's preparation of the 
summary compensation table and other executive compensation disclosures 
required by the 2006 amendments to Item 402.\246\ We recognize that, in 
this proposal, the burden reflects the compilation of data covering the 
entire workforce rather than only the named executive officers. We note 
that the proposal allows for a broad use of any consistently applied 
compensation measure and statistical sampling and the use of other 
reasonable estimates to identify the median. As noted above, the actual 
burden will vary depending on factors including the size of the 
company, the number of employees and how many are located outside of 
the United States. For a company with a medium-sized workforce, located 
primarily in the United States, that is able to identify a median 
employee from a sample of its employee population using a consistently 
applied compensation measure, the burden hours could be less than the 
estimated burden hours for the 2006 amendments to Item 402.\247\ In 
contrast, for a large, multi-national registrant with hundreds of 
thousands of employees, the burden hours could be more than the 
estimated burden hours for the 2006 amendments to Item 402.\248\ We 
believe, therefore, that it is reasonable to assume that the burden 
hours will be a multiple of the average burden hours associated with 
the 2006 amendments to Item 402. We also expect that, similar to the 
2006 amendments, the proposed rules' burden would be greatest during 
the first year of their effectiveness and diminish in subsequent years. 
Accordingly, to derive our estimates, we multiplied the average burden 
estimate for the 2006 amendments by two, yielding an estimated burden 
of 340 hours in year one, 160 hours in year two and 70 hours in year 
three and thereafter, for a three-year average burden of 190 hours.
---------------------------------------------------------------------------

    \246\ See 2006 Adopting Release, supra note 14, at 53215 (which 
we estimated to be a three-year average of 95 hours, based on 170 
hours in year one, 80 hours in year two and 35 hours in year three 
and thereafter).
    \247\ We expect that such a company would be determining total 
compensation under Item 402(c)(2)(x) for only one additional 
employee.
    \248\ For these companies, we considered the estimated burden of 
other international reporting regimes, such as the Commission's 
rules implementing Section 1502 of the Dodd-Frank Act. See Conflict 
Minerals, Release No. 34-67716 (Aug. 22, 2012) [77 FR 56273] (which 
we estimated to be a three year average of 495 hours). In that 
regard, we assume this proposal would be less burdensome because the 
underlying information would be under the control of the registrant 
rather than data that must be gathered from unrelated third parties 
in the registrant's supply chain.
---------------------------------------------------------------------------

    We used this three-year average hour burden to estimate the cost 
and hour burden for each collection of information as follows:
1. Regulation S-K
    While the proposed amendments would make revisions to Regulation S-
K, the collection of information requirements for that regulation are 
reflected in the burden hours estimated for the forms and schedules 
listed below. The rules in Regulation S-K do not impose any separate 
burden. Consistent with historical practice, we are proposing to retain 
an estimate of one burden hour to Regulation S-K for administrative 
convenience.
2. Form 10-K
    Only Forms 10-K that are filed by registrants that are not smaller 
reporting companies or emerging growth companies would be required to 
include the proposed disclosure. For purposes of our PRA estimates, we 
have assumed that 100% of asset-backed securities issuers would omit 
Item 402 disclosure from Form 10-K pursuant to Instruction J of Form 
10-K and 100% of wholly-owned subsidiary registrants would omit Item 
402 disclosure from Form 10-K pursuant to Instruction I of Form 10-K, 
and, accordingly, these registrants would also not be subject to the 
proposed disclosure requirements. Based on a review of EDGAR filings in 
calendar year 2011, we estimate that of the approximately 8,870 annual 
reports filed in that year, approximately 3,830 annual reports are 
filed by registrants that would be subject to the proposed disclosure 
requirements.\249\ We estimate that the proposed disclosure 
requirements would add an average of 190 burden hours to the total 
burden hours required to produce each Form 10-K that is subject to the 
proposed requirements (143 hours in-house personnel time and a cost of 
approximately $19,000 for outside professionals).
---------------------------------------------------------------------------

    \249\ Based on a review of EDGAR filings in 2011, approximately 
3,750 annual reports were filed by smaller reporting companies, 
approximately 290 were filed by ABS issuers and approximately 100 
were filed by wholly-owned subsidiaries of other registrants. We 
have also reduced the total number of Form 10-K filings by 900 to 
reflect the approximate number of emerging growth companies that 
have identified themselves as such in their EDGAR filings as of May 
2013.
---------------------------------------------------------------------------

    We estimate that the preparation of annual reports currently 
results in a total annual compliance burden of 21,430,988 hours and an 
annual cost of outside professionals of $2,857,465,000. If the 
proposals were adopted, we estimate that the incremental cost of 
outside professionals for annual reports would be approximately 
$72,770,000 per year and the incremental company burden would be 
approximately 545,775 hours per year.
3. Form 8-K
    As described in this release, we are proposing to require a 
registrant that is filing its PEO total compensation on a delayed basis 
due to the unavailability of certain components of compensation on Form 
8-K (in accordance with Instruction 1 to Items 402(c)(2)(iii) and (iv) 
of Regulation S-K and Item 5.02(f) of Form 8-K) to provide the proposed 
pay ratio disclosure at the same time. We have proposed a conforming 
amendment to Item 5.02 of Form 8-K that would require a registrant to 
include updated pay ratio disclosure in the Form 8-K that it files to 
disclose its PEO total compensation information.\250\ We estimate that 
the burden for adding the pay ratio disclosure to that Form 8-K filing 
would be one hour per registrant.\251\ We also estimate that the 
proposed Form 8-K amendment would not result in additional Form 8-K 
filings because registrants who omit disclosure in reliance on 
Instruction 1 to Items 402(c)(2)(iii) and (iv) are already required to 
file a Form 8-K. The proposed amendments would, however, add pay ratio 
disclosure requirements to that Form 8-K filing.
---------------------------------------------------------------------------

    \250\ See Section II.C.7.b. above.
    \251\ As noted above, we have assumed that the burden relating 
to the proposed pay ratio requirements would remain associated with 
the registrant's proxy or information statement or annual report, 
and, therefore, our PRA estimates for those forms reflect that 
burden.
---------------------------------------------------------------------------

    Based on a review of EDGAR filings for calendar years 2011 and 
2012, we estimate that approximately 29 Forms

[[Page 60602]]

8-K are filed pursuant to Item 5.02(f) annually and approximately 75% 
of these relate to disclosure of PEO compensation. As a result, we 
estimate that 22 of the Forms 8-K filed in a given year would spend 1 
additional hour preparing the disclosure required by the amendments 
(0.75 hours of internal personnel time and a cost of approximately $100 
for professional services), in addition to the total burden hours 
required to produce each Form 8-K. We estimate that the preparation of 
current reports on Form 8-K currently results in a total annual 
compliance burden of 507,665 hours and an annual cost of outside 
professionals of $67,688,700. If the proposals were adopted, we 
estimate that the incremental company burden would be approximately 
16.5 hours per year and approximately $2,200 in the incremental cost of 
outside professionals for current reports on Form 8-K.
4. Proxy Statements on Schedule 14A
    Only proxy statements on Schedule 14A that are required to include 
Item 402 information, and that are not filed by smaller reporting 
companies or emerging growth companies, would be required to include 
the proposed pay ratio disclosure. For purposes of our PRA estimates, 
consistent with past amendments to Item 402,\252\ we have assumed that 
all of the burden relating to the proposed disclosure requirements 
would be associated with Form 10-K, even if registrants include the 
proposed disclosure required in Form 10-K by incorporating that 
disclosure by reference from a proxy statement on Schedule 14A.
---------------------------------------------------------------------------

    \252\ We took a similar approach in connection with the rules 
for Summary Compensation Table disclosure required by the 2006 
amendments to Item 402. See 2006 Adopting Release, supra note 14.
---------------------------------------------------------------------------

5. Information Statements on Schedule 14C
    Only information statements on Schedule 14C that are required to 
include Item 402 information, and that are not filed by smaller 
reporting companies or emerging growth companies, would be required to 
include the proposed pay ratio disclosure. For purposes of our PRA 
estimates, consistent with past amendments to Item 402, we have assumed 
that all of the burden relating to the proposed disclosure requirements 
would be associated with Form 10-K, even if registrants include the 
proposed disclosure required in Form 10-K by incorporating that 
disclosure by reference from an information statement on Schedule 14C.
6. Form S-1
    Because we have assumed that all new registrants would take 
advantage of the transition period afforded to them under the proposed 
requirements, we estimate that approximately 70 registration statements 
on Form S-1 would be required to include the proposed disclosure.\253\ 
In addition, because we assume that all of these Forms S-1 will 
incorporate by reference the registrant's disclosure from its annual 
report, we have assumed that all of the burden relating to the proposed 
disclosure requirements would be associated with Form 10-K.
---------------------------------------------------------------------------

    \253\ Based on a review of EDGAR filings for calendar year 2012, 
we estimate that approximately 70 Forms S-1 would be filed in 
connection with follow-on offerings (rather than initial public 
offerings) by companies that are not emerging growth companies or 
smaller reporting companies.
---------------------------------------------------------------------------

7. Form S-4
    We have assumed that registrants filing on Form S-4 for whom 
executive compensation information under Item 402 is required pursuant 
to Items 18 or 19 of Form S-4 will incorporate by reference the pay 
ratio disclosure contained in the registrant's annual report. Thus, we 
have assumed that all of the burden relating to the proposed disclosure 
requirements would be associated with Form 10-K.
8. Form S-11
    Because we have assumed that all new registrants would take 
advantage of the transition period afforded to them under the proposed 
requirements, we have assumed that five registration statements on Form 
S-11 would be required to include the proposed disclosure.\254\ In 
addition, because we assume that these Forms S-11 will incorporate by 
reference the registrant's pay ratio disclosure contained in its annual 
report, we have assumed that all of the burden relating to the proposed 
disclosure requirements would be associated with Form 10-K.
---------------------------------------------------------------------------

    \254\ Based on a review of EDGAR filings for calendar year 2012, 
we estimate that approximately five Forms S-11 would be filed in 
connection with follow-on offerings by registrants that are not 
emerging growth companies.
---------------------------------------------------------------------------

9. Form N-2
    Only Forms N-2 filed by business development companies would be 
subject to the proposed disclosure requirements. Based on a review of 
EDGAR filings for calendar year 2011, our best estimate of the total 
number of business development companies is 41 and that 28 of these 
have no employees.\255\ Therefore, of the 205 Forms N-2 that are filed 
annually, we estimate that approximately 41 are filed by business 
development companies and approximately 13 of these business 
development companies have employees. In addition, because we assume 
that all of these Forms N-2 will incorporate by reference the 
registrant's disclosure in its annual report, we have assumed that all 
of the burden relating to the proposed disclosure requirements would be 
associated with Form 10-K.
---------------------------------------------------------------------------

    \255\ As discussed in this release, the proposed requirements 
for identifying the median apply to workers who are employees of the 
registrant. Business development companies are often externally 
managed rather than having their own employees.
---------------------------------------------------------------------------

10. Form 10
    Because we have assumed that all new registrants would take 
advantage of the transition period afforded to them under the proposed 
requirements, we estimate no annual incremental increase in the 
paperwork burden associated with Form 10 as a result of the proposed 
requirements.

D. Summary of Proposed Changes to Annual Compliance Burden in 
Collection of Information

    Tables 1 and 2 below illustrate the total annual compliance burden 
of the collection of information in hours and in cost under the 
proposed amendments for annual reports on Form 10-K and current reports 
on Form 8-K under the Exchange Act. The burden estimates were 
calculated by multiplying the estimated number of annual responses by 
the estimated average number of hours it would take a company to 
prepare and review the proposed disclosure. We recognize that some 
registrants may need to include the pay ratio disclosure in more than 
one filing covering the same period, accordingly actual numbers may be 
lower than our estimates.
    As discussed above, there is no change to the estimated burden of 
the collection of information under Forms S-1, S-4, S-11 or N-2 or 
under Schedule 14A and 14C because we have assumed that the burden 
relating to the proposed disclosure requirements would be associated 
primarily with Form 10-K. In addition, there is no change to the 
estimated burden of the collection of information under Form 10, 
because we have assumed that all new registrants would take advantage 
of the proposed transition period. There is no change to the estimated 
burden of the collection of information under Regulation S-K because 
the burdens that Regulation S-K imposes are

[[Page 60603]]

reflected in our revised estimates for the forms.

                                     Table 1--Calculation of Increases in Burden Estimates Due to the Rule Proposal
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                           Estimated
                                                                                                                                         aggregate cost
                                         Estimated annual    Estimated hour       Estimated                            25% Outside         of outside
                                        responses subject      burden per         aggregate         75% Company        professional      professions in
                                           to proposed          response       incremental hour       (hours)            (hours)        connection with
                                           requirements                             burden                                                  proposed
                                                                                                                                          requirements
                                                      (A)                (B)    (C) = (A) * (B)   (D) = (C) * 0.75     (E) = C * 0.25   (F) = (E) * $400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form 10-K.............................              3,830                190            898,700            545,775            181,925        $72,770,000
Form 8-K..............................                 22                  1                 22               16.5                5.5              2,200
                                       -----------------------------------------------------------------------------------------------------------------
    Total.............................              3,852                191            898,722            545,792            181,931         72,772,200
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                   Table 2--Calculation of Total PRA Burden Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                       Current      Proposed     Current    Increase in    Proposed        Current        Increase in       Proposed
                                        annual       annual       burden       burden       burden       professional    professional     professional
                                      responses    responses      hours        hours        hours           costs            costs           costs
                                             (A)          (B)          (C)    (D) \256\  (E) = C + D                (F)           (G)            = F + G
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form 10-K..........................       14,296       14,296   21,430,988      545,775   22,105,013     $2,857,465,000   $72,770,000     $2,930,235,000
Form 8-K...........................      118,387      118,387      507,665         16.5    507,681.5         67,688,700         2,200         67,690,900
                                    --------------------------------------------------------------------------------------------------------------------
    Total..........................      132,683      132,683   21,938,653      545,792   22,612,694      2,925,153,700    72,772,200      2,997,925,900
--------------------------------------------------------------------------------------------------------------------------------------------------------

E. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order 
to:
---------------------------------------------------------------------------

    \256\ The increase in burden hours reflected in the table is 
based on the aggregate incremental burden hours per form multiplied 
by the annual responses that would be required to include additional 
disclosure under our rules as proposed. As explained in the 
discussion above, for purposes of determining the total increase in 
burden hours, we have reduced the current number of annual responses 
to reflect that the proposed disclosure requirements will not apply 
to all forms filed. See Table 1 for estimates per response.
---------------------------------------------------------------------------

     Evaluate whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
Commission, including whether the information would have practical 
utility;
     Evaluate the accuracy of our estimates of the burden of 
the proposed collections of information;
     Determine whether there are ways to enhance the quality, 
utility and clarity of the information to be collected;
     Evaluate whether there are ways to minimize the burden of 
the collections of information on those who respond, including through 
the use of automated collection techniques or other forms of 
information technology; and
     Evaluate whether the proposed amendments would have any 
effects on any other collections of information not previously 
identified in this section.
    Any member of the public may direct to us any comments concerning 
the accuracy of these burden estimates and any suggestions for reducing 
the burdens. Persons who desire to submit comments on the collection of 
information requirements should direct their comments to the OMB, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Room 10102, New Executive 
Office Building, Washington, DC 20503, and send a copy of the comments 
to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 
100 F Street NE., Washington, DC 20549-1090, with reference to File No. 
S7-07-13. Requests for materials submitted to the OMB by us with regard 
to these collections of information should be in writing, refer to File 
No. S7-07-13 and be submitted to the Securities and Exchange 
Commission, Office of FOIA Services, 100 F Street NE., Washington, DC 
20549-2736. Because the OMB is required to make a decision concerning 
the collections of information between 30 and 60 days after 
publication, your comments are best assured of having their full effect 
if the OMB receives them within 30 days of publication.

VI. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\257\ we solicit data to determine whether the 
proposed amendments constitute a ``major'' rule. Under SBREFA, a rule 
is considered ``major'' where, if adopted, it results or is likely to 
result in:
---------------------------------------------------------------------------

    \257\ Public Law 104-121, tit. II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment or 
innovation.
    Commenters should provide comment and empirical data on (a) the 
potential annual effect on the U.S. economy; (b) any increase in costs 
or prices for consumers or individual industries; and (c) any potential 
effect on competition, investment or innovation.

VII. Regulatory Flexibility Act Certification

    The Commission hereby certifies, pursuant to 5 U.S.C. 605(b), that 
the amendments contained in this release, if adopted, would not have a 
significant economic impact on a substantial number of small entities. 
The proposed amendments would provide that a registrant (other than a 
smaller reporting company or an emerging growth company) would be 
required to disclose a pay ratio (showing the median of the

[[Page 60604]]

annual total compensation of all employees of the registrant and its 
subsidiaries to the annual total compensation of the principal 
executive officer of the registrant) in filings that are required to 
include executive compensation information pursuant to Item 402 of 
Regulation S-K. Section 953(b) does not apply to smaller reporting 
companies and does not apply to emerging growth companies, and, 
consistent with Section 953(b), the proposed requirements would not 
apply to smaller reporting companies or emerging growth companies. 
Because smaller reporting companies and emerging growth companies are 
not subject to the proposed requirements, we believe the proposed rules 
would not have a significant economic impact on a substantial number of 
small entities.

VIII. Statutory Authority and Text of Amendments

    The amendments contained herein are being proposed pursuant to 
Sections 7, 10 and 19(a) of the Securities Act, Sections 3(b), 12, 13, 
14, 15(d) and 23(a) of the Exchange Act, Section 953(b) of the Dodd-
Frank Act, as amended, and Section 102(a)(3) of the JOBS Act.

List of Subjects

17 CFR Part 229

    Reporting and recordkeeping requirements, Securities.

17 CFR Part 249

    Brokers, Reporting and recordkeeping requirements, Securities.

Text of Proposed Amendments

    In accordance with the foregoing, title 17, chapter II of the Code 
of Federal Regulations, is proposed to be amended as follows:

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933 AND SECURITIES EXCHANGE ACT OF 1934--REGULATION S-K

0
1. The general authority citation for part 229 is revised to read as 
follows:

    Authority:  15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 
78 mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-
38(a), 80a-39, 80b-11 and 7201 et seq.; 18 U.S.C. 1350; Sec. 953(b) 
Pub. L. 111-203, 124 Stat. 1904; and Sec. 102(a)(3) Pub. L. 112-106, 
126 Stat. 309, unless otherwise noted.

0
2. Amend Sec.  229.402 by:
0
a. In paragraph (l) removing ``(k) and (s)'' and adding in its place 
``(k), (s) and (u)''; and
0
b. Adding paragraph (u) directly after the Instructions to Item 402(t).
    The addition reads as follows:


Sec.  229.402  (Item 402) Executive Compensation.

* * * * *
    (u) Pay ratio disclosure. (1) Disclose:
    (i) The median of the annual total compensation of all employees of 
the registrant, except the PEO of the registrant;
    (ii) The annual total compensation of the PEO of the registrant; 
and
    (iii) The ratio of the amount in paragraph (u)(1)(i) of this Item 
to the amount in paragraph (u)(1)(ii) of this Item. For purposes of the 
ratio required by this paragraph (u)(1)(iii), the amount in paragraph 
(u)(1)(i) of this Item shall equal one, or, alternatively, the ratio 
may be expressed narratively as the multiple that the amount in 
paragraph (u)(1)(ii) of this Item bears to the amount in in paragraph 
(u)(1)(i) of this Item.
    (2) (i) For purposes of this paragraph (u), the total compensation 
of employees of the registrant (including the PEO of the registrant) 
shall be determined in accordance with paragraph (c)(2)(x) of this Item 
402. In determining the total compensation, all references to ``named 
executive officer'' in this Item 402 and the instructions thereto may 
be deemed to refer instead, as applicable, to ``employee'' and, for 
non-salaried employees, references to ``base salary'' and ``salary'' in 
this Item 402 and the instructions thereto may be deemed to refer 
instead, as applicable, to ``wages plus overtime.''
    (ii) For purposes of this paragraph (u), annual total compensation 
means total compensation for the registrant's last completed fiscal 
year.
    (3) For purposes of this paragraph (u), employee or employee of the 
registrant means an individual employed by the registrant or any of its 
subsidiaries as of the last day of the registrant's last completed 
fiscal year. This includes any full-time, part-time, seasonal or 
temporary worker employed by the registrant or any of its subsidiaries 
on that day (including officers other than the PEO).
    Instruction 1 to Item 402(u)--Updating for the last completed 
fiscal year. Pay ratio information (i.e., the disclosure called for by 
paragraph (u)(1) of this Item) with respect to the registrant's last 
completed fiscal year is not required to be disclosed until the filing 
of its annual report on Form 10-K for that last completed fiscal year 
or, if later, the filing of a definitive proxy or information statement 
relating to its next annual meeting of shareholders (or written 
consents in lieu of such a meeting) following the end of such fiscal 
year; provided that, the required pay ratio information must, in any 
event, be filed as provided in General Instruction G(3) of Form 10-K 
(17 CFR 249.310) not later than 120 days after the end of such fiscal 
year. In any filing made by a registrant after the end of its last 
completed fiscal year and before the filing of such Form 10-K or proxy 
or information statement, as applicable, a registrant that was subject 
to the requirements of paragraph (u) of this Item for the fiscal year 
prior to the last completed fiscal year shall include or incorporate by 
reference the information required by paragraph (u) of this Item for 
that prior fiscal year.
    Instruction 2 to Item 402(u)--Methodology and use of estimates. (i) 
Registrants may use (A) a methodology that uses reasonable estimates to 
identify the median and (B) reasonable estimates to calculate the 
annual total compensation or any elements of total compensation for 
employees other than the PEO.
    (ii) In determining the employees from which the median is 
identified, a registrant may use (A) its employee population or (B) 
statistical sampling or other reasonable methods.
    (iii) A registrant may identify the median employee using (A) 
annual total compensation or (B) any other compensation measure that is 
consistently applied to all employees included in the calculation, such 
as amounts derived from the registrant's payroll or tax records. In 
using a compensation measure other than annual total compensation to 
identify the median employee, if that measure is recorded on a basis 
other than the registrant's fiscal year (such as payroll or tax 
information), the registrant may use the same annual period that is 
used to derive those amounts. Where a compensation measure other than 
annual total compensation is used to identify the median employee, the 
registrant must (A) disclose the compensation measure used and (B) 
calculate and disclose the annual total compensation for that median 
employee.
    (iv) Registrants must briefly disclose and consistently apply any 
methodology used to identify the median and any material assumptions, 
adjustments or estimates used to identify the median or to determine 
total compensation or any elements of total compensation, and 
registrants must clearly identify any estimated amount. This disclosure 
should be a brief overview; it is not

[[Page 60605]]

necessary to provide technical analyses or formulas. If a registrant 
changes methodology or material assumptions, adjustments or estimates 
from those used in its pay ratio disclosure for the prior fiscal year, 
and if the effects of any such change are material, the registrant 
shall briefly describe the change and the reasons for the change, and 
shall provide an estimate of the impact of the change on the median and 
the ratio.
    Instruction 3 to Item 402(u)--Permitted annualizing adjustments. A 
registrant may annualize the total compensation for all permanent 
employees (other than those in temporary or seasonal positions) that 
were employed by the registrant for less than the full fiscal year 
(such as newly hired employees or permanent employees on an unpaid 
leave of absence during the period).
    Instruction 4 to Item 402(u)--PEO compensation not available. A 
registrant that is relying on Instruction 1 to Item 402(c)(2)(iii) and 
(iv) in connection with the salary or bonus of the PEO for the last 
completed fiscal year, shall disclose that the pay ratio required by 
paragraph (u) of this Item is not calculable until the PEO salary or 
bonus, as applicable, is determined and shall disclose the date that 
the PEO's actual total compensation is expected to be determined. The 
disclosure required by paragraph (u) of this Item must then be 
disclosed in the filing under Item 5.02(f) of Form 8-K (17 CFR 249.308) 
that discloses the PEO's salary or bonus in accordance with Instruction 
1 to Item 402(c)(2)(iii) and (iv).
    Instruction 5 to Item 402(u)--Transition period. A registrant must 
comply with paragraph (u) of this Item with respect to compensation for 
the first fiscal year commencing on or after the date the registrant 
first becomes subject to the requirements of Section 13(a) or 15(d) of 
the Exchange Act (15 U.S.C. 78m or 78o(d), and may omit such pay ratio 
disclosure from any filing until it the filing of its annual report on 
Form 10-K for such fiscal year or, if later, the filing of a proxy or 
information statement relating to its next annual meeting of 
shareholders (or written consents in lieu of such a meeting) following 
the end of such year, provided that, such pay ratio disclosure must, in 
any event, be filed as provided in General Instruction G(3) of Form 10-
K (17 CFR 249.310) not later than 120 days after the end of such fiscal 
year.
    Instruction 6 to Item 402(u)--Emerging growth companies. A 
registrant is not required to comply with paragraph (u) of this Item if 
it is an emerging growth company as defined in Section 3(a) of the 
Exchange Act (15 U.S.C. 78c(a)).

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
3. The general authority citation for part 249 is revised to read as 
follows:

    Authority:  15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b) Pub. L. 111-203, 124 Stat. 
1904; and Sec. 102(a)(3) Pub. L. 112-106, 126 Stat. 309, unless 
otherwise noted.
* * * * *
0
4. Form 8-K (referenced in Sec.  249.308) is amended by revising 
paragraph (f) of Item 5.02, designating paragraph (f) as (f)(1) and 
adding paragraph (2).
    The revisions and additions read as follows:

    Note:  The text of Form 8-K does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 8-K
* * * * *


Item 5.02  Departure of Directors or Certain Officers; Election of 
Directors; Appointment of Certain Officers; Compensatory Arrangements 
of Certain Officers.

* * * * *
    (f)(1) * * *
    (2) As specified in Instruction 4 to Item 402(u) of Regulation S-K 
(17 CFR 229.402(u)), disclosure under this Item 5.02(f) with respect to 
the salary or bonus of a principal executive officer shall include pay 
ratio disclosure pursuant to Item 402(u) of Regulation S-K calculated 
using the new total compensation figure for the principal executive 
officer. Pay ratio disclosure is not required under this Item 5.02(f) 
until the omitted salary or bonus amounts for such principal executive 
officer become calculable in whole.
* * * * *

    Dated: September 18, 2013.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-23073 Filed 9-30-13; 8:45 am]
BILLING CODE 8011-01-P