In an article for Bloomberg Law, Bass, Berry & Sims attorney Andrea Orr provided insight on the Securities and Exchange Commission’s (SEC) CEO pay ratio rule, and how newly merged companies navigate the challenges of factoring in the employees acquired as a result of an acquisition when making pay ratio calculations. While public companies are required to disclose the difference between the pay of their CEO and median employee for the first time this year, the SEC gave companies involved in a merger or acquisition in 2017 some flexibility with the rule by allowing them to leave out employees recently acquired from a transaction in their median employee calculation of the pay ratio. 

Andrea emphasized that it can be difficult to get the needed data in a timely fashion for merging companies with segregated payroll processes or divergent compensation structures. “There’s oftentimes a delay in terms of bringing those employees onto centralized payroll systems,” explained Andrea. This delay could be enough for a company to wait until next year to include newly acquired employees in the calculation, especially if the transaction happened toward the end of the year.

A potential burden companies that choose to exclude acquired employees could face, however, is having to reselect a median employee in future reporting periods. As of now, the SEC allows corporations to keep the same median employee for up to three years unless a change in their workforce composition or compensation would cause significant changes to the ratio. “It’s not necessarily a question of whether your pay would go up or down overall on average, but is the person in the middle, is that going to change significantly?” explained Andrea. “If you’ve had a sizable acquisition and you exclude those employees, it might be a little difficult to say that you’re keeping the same median employee.”

The full article, “Newly Merged Firms Face Choice When Tallying CEO Pay Ratio,” was published by Bloomberg Law on May 1, 2018, and is available online.