CEO PAY RATIO WORKSHOP NOVEMBER 2, 2017
INTRODUCTION Basic Requirement S-K 402(u) requires a U.S. public company to disclose the ratio of its CEO s total compensation to the total compensation of its median employee Timing most companies will first disclose pay ratio information in their 2018 proxy statements, using 2017 data Exemptions emerging growth companies, smaller reporting companies and foreign private issuers Enforcement new guidance says no enforcement action if you have a reasonable basis for estimates and act in good faith Policy Reason a tool to better understand a company s pay practices not to facilitate a comparison of information from one company to another 2
SUMMARY OF COMPLIANCE STEPS Step 1: Select date for determination of median employee Must be within three months of year end Step 2: Determine employee population Step 3: Identify median employee Use consistently applied compensation measure Can generally use the same or a similarly situated employee for three years Step 4: Calculate pay ratio Step 5: Prepare disclosures and communication strategy 3
DATE FOR DETERMINATION Determine as of any date within last three months of last completed fiscal year Must disclose determination date but not reason for date s selection Could have dramatic impact on identity of median employee in industries with significant number of seasonal employees 4
DETERMINE EMPLOYEE POPULATION Employees include full-time, part-time, seasonal and temporary employees Treatment of furloughed employees 5
DETERMINE EMPLOYEE POPULATION Inclusion of Independent Contractors? New guidance indicates that companies may look to employment or tax law to determine who counts as an employee Supersedes prior guidance 6
DETERMINE EMPLOYEE POPULATION Foreign employees are generally included, with two exceptions: Data Privacy Exemption: May exclude if necessary to comply with foreign data privacy laws De Minimis Exemption: May exclude if non-u.s. employees are 5% or less of total workforce 7
DETERMINE EMPLOYEE POPULATION Example: Company has 1,000 employees. The executive team is located in the U.S. (50% of total employees) and the UK (3%). It has employees in the following other jurisdictions: 39% in China, 3% in India, 3% in Brazil, 1% in Canada and 1% in Russia. Can aggregate up to 5% - but must exclude all employees in a selected country Employees excluded under data privacy exemption will reduce 5% basket for de minimis exemption 8
DETERMINE EMPLOYEE POPULATION Acquirors may exclude employees of a newly acquired entity for the fiscal year in which the acquisition becomes effective Must disclose business acquired and approximate number of employees 9
DETERMINE EMPLOYEE POPULATION Using statistical sampling in lieu of identifying entire employee population is permitted Consider appropriate sample size, confidence level, margin of error and sample population Random sample or stratified sample 10
IDENTIFY MEDIAN EMPLOYEE Median employee may be identified using the annual total compensation as calculated for the summary compensation table in the registrant s proxy statement or companies may select another consistently applied compensation measure ( CACM ) (i.e. payroll or tax records) guidance makes clear that the CACM can be any measure that is reasonably reflective of annual compensation 11
SELECTION OF CONSISTENTLY APPLIED COMPENSATION MEASURE (CACM) CACM can be any measure that reasonably reflects annual compensation of employees You can: Use tax, payroll or other internal records Use total cash compensation even if you make widespread equity grants (note change from previous guidance) Use a period other than an annual period Annualize compensation of partial-year permanent employees You can t: Use rates of pay Use FTE adjustments Annualize compensation of temporary/seasonal employees 12
SELECTION OF CACM Example: In addition to base salary or equivalent, 30% of their employees get an equity award, 80% of employees are eligible for cash bonus, 50% of employees are eligible to earn commissions above base pay and 10% are eligible for overtime. What CACM to use? Base pay? Base pay plus overtime? Total cash compensation? Taxable wages? 13
SELECT MEDIAN EMPLOYEE If choosing among a number of employees at median, consider choosing one in position with lower expected turnover Significant change in employee population or compensation practices may necessitate selection of new median employee 14
CALCULATE PAY RATIO MEDIAN EMPLOYEE AND CEO ANNUAL TOTAL COMPENSATION Actual compensation of median employee shall be calculated based on employee s annual total compensation as if reported in the Summary Compensation Table (SCT), which includes: Base salary; Bonus/incentive or other non-equity pay; Grant date fair value of equity awards for the year; Changes in pension value or certain non-qualified deferred compensation earnings; and All other compensation For the CEO, compensation is total amount reported in SCT 15
CALCULATE PAY RATIO SPECIAL ISSUES Actual compensation of median employee can include items typically excluded from SCT disclosure, including: Perks less than $10,000; Benefits provided under non-discriminatory plan; If including these amounts in the annual compensation of the median employee, the company must also include such amounts for the annual compensation of the CEO and must disclose same. If the company has two or more CEOs for a given year, the annual total compensation of the CEO is either (i) the combined pay of each during the period such individuals were CEO, or (ii) the annualized pay of the CEO serving as CEO on the median employee identification date 16
#1 - Determine Employee Population (as of December 31, 2017) #2 - Identify Median Employee (CACM - total cash compensation) #3 - Calculate Median Employee and CEO Annual Total Compensation Median Employee CEO RATIO Anna $30,000 Bill $32,000 Cathy $34,000 David $36,000 Erin $40,000 Frank $42,000 Garry $45,000 Henry $47,000 Ingrid $50,000 Julie $52,000 Kyle $54,000 Liam $56,000 $ 92,000 $ 920,000 10 to 1 Michael $60,000 Nancy $62,000 Ned $63,000 Oliver $64,000 Paul $67,000 Quinn $70,000 Ron $72,000 Steve $74,000 Tammy $76,000 Ursula $80,000 Vonni $85,000 Wanda $90,000 Xander $95,000 Yale $100,000 Zach $120,000 MEDIAN $62,000 PAY RATIO EXAMPLE 17
PAY RATIO EXAMPLE CONT. Annual Total Compensation (Item 402 of S-K Summary Compensation Table) Salary Bonus Stock awards Option awards Nonequity incentive plan compensation Non-qualified deferred compensation Earnings All other compensation TOTAL Median Employee (Nancy) $ 62,000 $ - $ 20,000 $ - $ - $ - $ 10,000 $ 92,000 CEO $ 400,000 $ 100,000 $ 200,000 $ - $ 200,000 $ - $ 20,000 $ 920,000 18
PREPARE DISCLOSURE Disclose the (1) median of annual total compensation of all employees (except the CEO), (2) annual total compensation of the CEO; and (3) ratio between the two amounts Pay ratio may be disclosed as a ratio (e.g. 10:1 or 10 to 1) or narratively (e.g. the CEO s annual total compensation amount is 10 times that of the median of the annual total compensation of all employees ). Briefly (and in non-technical terms) describe the methodology used to identify the median employees, as well as any material assumptions, adjustments or estimates used to determine the median employee or annual total compensation. For example, Disclose the median employee determination date (but not the reason for selecting same). If a company uses a CACM, briefly describe the measure chosen. Disclose changes from prior year (if significant). Disclose if using the same median employee from prior year. Disclose features of statistical sampling (if used). Disclose inclusion of perks and benefits under non-discriminatory plan in calculating annual compensation. 19
PREPARE DISCLOSURE Comply with extra disclosure requirements, if any. For example: Disclosure required for data privacy exception. Disclosure required for foreign employee de mimimis exception. Disclosure required for exclusion of employees pursuant to a business combination. Disclosure required if using a COLA. Companies may also supplement the foregoing required disclosure with additional discussion or ratios so long as they are clearly identified, not misleading and not presented with greater prominence than the required pay ratio. Be careful not to confuse investors. Useful additional disclosure may include information concerning the employee workforce, the median employee, or other issues that help explain an unusually high ratio. Alternate ratios are generally not expected (US only ratio for companies with significant foreign operations in low wage countries?) 20
PAY RATIO EXAMPLE DISCLOSURE Adam Resources & Energy In August 2015 pursuant to a mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd Frank Act ), the Securities and Exchange Commission ( SEC ) adopted a rule requiring annual disclosure of the ratio of the median employee s annual total compensation to the total annual compensation of the principal executive officer ( PEO ). The Company s PEO is Mr. Smith. The purpose of the new required disclosure is to provide a measure of the equitability of pay within the organization. The Company believes its compensation philosophy and process yield an equitable result and is presenting such information in advance of the required disclosure date as follows. Median Employee total annual compensation $70,057 Mr. Smith ( PEO ) total annual compensation $400,000 Ratio of PEO to Median Employee Compensation 5.7:1.0 In determining the median employee, a listing was prepared of all employees as of December 31, 2016. Employees on leave of absence were excluded from the list and wages and salaries were annualized for those employees that were not employed for the full year of 2016. The median amount was selected from the annualized list. For simplicity, the value of the Company s 401(k) plan and medical benefits provided was excluded as all employees including the PEO are offered the exact same benefits and the Company utilizes the Internal Revenue Service safe harbor provision for 401(k) discrimination testing. As of December 31, 2016 the Company employed 654 persons of which 434 are professional truck drivers. 21
PAY RATIO EXAMPLE DISCLOSURE CONT. Range Resources As a result of the recently adopted rules under the Dodd-Frank Act, beginning with our 2018 proxy statement, the SEC will require disclosure of the CEO to median employee pay ratio. Mr. Ventura had 2016 annual total compensation of $9,862,925 as reflected in the Summary Compensation Table included in this Proxy Statement. Our median employee s annual total compensation for 2016 was $127,938. As a result, we estimate that Mr. Ventura s 2016 annual total compensation was approximately 77 times that of our median employee. 22
PAY RATIO EXAMPLE DISCLOSURE CONT. Nova Gold We believe our executive compensation program must be consistent and internally equitable to motivate our employees to perform in ways that enhance shareholder value. We are committed to internal pay equity, and the Compensation Committee monitors the relationship between the pay of our executive officers and the pay of our non-executive employees. The Compensation Committee reviewed a comparison of our CEO s annual total compensation in fiscal year 2016 to that of all other Company employees for the same period. The calculation of annual total compensation of all employees was determined in the same manner as the Total Compensation shown for our CEO in the "Summary Compensation Table" on page 64 of this Circular. Pay elements that were included in the annual total compensation for each employee are: Salary received in fiscal year 2016 Annual incentive payment received for performance in fiscal year 2016 Grant date fair value of stock option and PSU awards granted in fiscal year 2016 Company-paid 401(k) Plan or RRSP match made during fiscal year 2016 Company-paid ESPP match made during fiscal year 2016 Company-paid life insurance premiums during fiscal year 2016 Auto allowance paid in fiscal year 2016 Reimbursement for Company-paid executive physical during fiscal year 2016 23
PAY RATIO EXAMPLE DISCLOSURE CONT. Nova Gold Cont. Our calculation includes all employees as of November 30, 2016. We applied a Canadian to U.S. dollar exchange rate to the compensation elements paid in Canadian currency. We determined the compensation of our median employee by: (i) calculating the annual total compensation described above for each of our employees, (ii) ranking the annual total compensation of all employees except for the CEO from lowest to highest (a list of 12 employees), and (iii) since we have an even number of employees when not including the CEO, determining the average of the annual total compensation of the two employees ranked sixth and seventh on the list ( Median Employee ). The annual total compensation for fiscal year 2016 for our CEO was $5,476,244 and for the Median Employee was $406,170. The resulting ratio of our CEO s pay to the pay of our Median Employee for fiscal year 2016 is 13.5 to 1. 24
DEVELOP COMMUNICATION STRATEGY Key constituencies include: Investors Employees The press and the public at large Peer companies and their execs/employees? Other (ISS?) Consistent message that includes: Compensation Philosophy At risk-pay Explanation of total compensation, particularly for other employees. Other Message delivered consistently across the company 25
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