REITs Executive Compensation Guide

Pay Ratio Disclosure Under Item 402(u) of Regulation S-K, companies are required to calculate and disclose the ratio between the median of the annual total compensation of all employees relative to the annual total compensation of their principal executive officer. Smaller reporting companies and emerging growth companies are not required to provide pay ratio disclosure in their proxy statements. Companies are required to calculate and disclose this pay ratio annually, but they are only required to calculate the median employee compensation figure once every three years. However, in the event that a company incurs a significant change in employee compensation that they reasonably believe would significantly alter their pay ratio disclosure, the rule requires a recalculation of the median employee compensation figure for that year. A company’s calculation and disclosure must be based on a reasonable belief and the result of reasonable estimates, assumptions and methodologies. The SEC permits the use of reasonable estimates, such as statistical sampling, or a consistently applied compensation measure, such as payroll or tax records, to identify the median employee. The SEC does not provide specific parameters for statistical sampling. Instead, companies are instructed to “make their own determinations on what is appropriate based on their own facts and circumstances.” The SEC does provide a few explicit areas of guidance, stating: (i) reasonable estimates of the median for companies with multiple business lines or geographic

units may be determined using more than one statistical sampling approach; (ii) statistical sampling should draw observations from each business or geographical unit with reasonable assumption on each unit’s compensation distribution; and (iii) exact compensation is not required to be calculated for every employee, so outliers on the high and low end may be excluded. Additionally, companies are permitted to make adjustments at their discretion, such as excluding certain benefits. All material adjustments and assumptions must be disclosed in the description of the methodology. While the mechanics of the calculation are largely left to the company, the SEC has provided a few key guidelines. The pay ratio must account for all employees, including part-time and seasonal workers, as well as employees of consolidated subsidiaries. Companies are not permitted to make “full-time equivalent adjustments” to the compensation of their part-time or seasonal employees. However, annualization of an employee’s compensation may be permitted when the employee was not employed for the full fiscal year. The SEC has also created two exclusions that permit companies to exclude non-U.S. employees from the pay ratio calculation. First, the de minimis exclusion permits the exclusion of non-U.S. employees if they account for 5% or less of the total employee population. Second, the privacy law exclusion permits the exclusion of non-U.S. employees if they are employed in a jurisdiction where disclosing such information would violate the jurisdiction’s privacy laws. The use of the privacy exclusion requires a legal opinion to justify the exclusion.

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