Using a consistently applied compensation measure (CACM) to identify the median employee. Item 402(u) of Regulation S-K requires registrants to identify the median employee using annual total compensation or another CACM, such as information derived from the registrant's tax or payroll records. Any measure that reasonably reflects the annual compensation of employees could serve as a CACM, and the appropriateness of any measure will depend on the registrant's particular facts and circumstances. For example:

The registrant must also briefly disclose the compensation measure used. It is not expected that the CACM would necessarily identify the same median employee as if the registrant were to use annual total compensation.

(Question 128C.01.)

Using hourly or annual rates of pay as a CACM. While an hourly or annual pay rate may be a component used to determine an employee's overall compensation, the use of the pay rate alone generally is not an appropriate CACM to identify the median employee because:

(Question 128C.02.)

The time period that a registrant using a CACM may use. In calculating the required pay ratio, a registrant must first select a date within three months of the end of its fiscal year to determine the population of its employees from which to identify the median employee. Once the employee population is determined, the registrant must identify the median employee from that population using either annual total compensation or another CACM. In applying the CACM, a registrant is not required to use a period that includes the date on which the employee population is determined, nor is it required to use a full annual period. In addition, a CACM may consist of annual total compensation from the registrant's prior fiscal year so long as there has not been a change in the registrant's employee population or employee compensation arrangements that would result in a significant change of its pay distribution to its workforce. (Question 128C.03.)

Treatment of furloughed employees. Because a furlough could have different meanings for different employers, registrants will need to determine based on the facts and circumstances whether it should include as employees workers that are furloughed on the date the employee population is determined. If the registrant determines that a furloughed worker is an employee on that date, his or her compensation should be determined by the same method as for a non-furloughed employee. The registrant must determine in which class the employee belongs on that date (full-time, part-time, temporary, or seasonal) and determine the individual's compensation using annual total compensation or another CACM in accordance with Instruction 5 of Item 402(u) of Regulation S-K. Instruction 5 states that a registrant may annualize the total compensation for all permanent employees (full-time or part-time):

In contrast, a registrant may not annualize the total compensation for employees in temporary or seasonal positions. It also may not make a full-time equivalent adjustment for any employee. (Question 128C.04.)

Treatment of independent contractors. In determining whether a worker is an employee under the pay ratio rule, a registrant must consider the composition of its workforce and its overall employment and compensation practices. A registrant should include workers whose compensation it or one of its consolidated subsidiaries determines, regardless of whether these workers would be considered employees for tax or employment law purposes, or under other definitions of that term. The C&DI states that when a registrant obtains the services of workers by contracting with an unaffiliated third party that employs the workers, the SEC staff does not believe the registrant is determining the workers' compensation for purposes of the rule if, for example, the registrant only specifies that those workers receive a minimum level of compensation. Further, an individual who is an independent contractor may be the "unaffiliated third party" who determines his or her own compensation. (Question 128C.05.)