Executive Compensation Regulation - Pay Ratio Disclosure

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Timeline, Pay Ratio Disclosure, SEC
Proposal Date Comment Deadline Final Rule Issue Compliance Date
October 1, 2013 December 2, 2013 August 5, 2015 First fiscal year after Jan 2017

On August 5, 2015, the SEC issued a final rule implementing Section 953 of the Dodd-Frank Act, which called for a rule that public firms disclose:

  • The median of the annual total compensation of all its employees except the CEO.
  • The annual total compensation of its CEO.
  • The ratio of the two amounts.

The rule was first proposed in September 2013, and entered the Federal Register on October 1, 2013. Public comments were filed HERE.

The rule becomes effective 60 days after entering the Federal Register. Companies will be required to provide disclosure of their pay ratios for their first fiscal year beginning on or after Jan. 1, 2017.[1]

Summary of the Rule

Under the rule, companies are given flexibility in how the pay ratio is calculated and how the "median employee" is identified and how compensation data is compiled. For example, the median employee could be identified by using annual total compensation, or any consistently-applied measure reported in payroll or tax returns. The company may choose to apply a cost-of-living adjustment, but, to provide context for this adjustment, a company electing to present the pay ratio in this manner must also disclose the median employee’s annual total compensation and the pay ratio without the cost-of-living adjustment.

The rule did not specify an exact methodology for calculation. Rather, a company may identify the median employee based upon either the employee population or a representative sample. The rule covers "all employees" which includes:

  • All employees (including full-time, part-time, temporary, seasonal and non-U.S. employees)
  • Those employed by the company or any of its subsidiaries.
  • Those employed as of the last day of the company’s prior fiscal year.

For non-U.S. employees employed in jurisdictions where data privacy laws prevent the disclosure of compensation data, such employees may be excluded from the calculations. Also, companies may opt to annualize the compensation of permanent employees who did not work an entire year.

Companies need to disclose the methodology for calculating the median, and include any assumptions and estimates. Companies are not required to provide additional disclosure, such as a narrative discussion or additional ratios, but may provide them if they choose.

The rule would NOT apply to:

  • emerging growth companies;
  • smaller reporting companies;
  • foreign private issuers;
  • registered investment companies; or
  • Multijurisdictional Disclosure System (MJDS) filers.

Also, newly public companies will be granted a transition period for compliance in the first fiscal year after the firm becomes subject to the reporting requirements.

Companies must include the information in registration statements, proxy and information statements, and annual reports that must already include executive compensation information as set forth under Item 402 of Regulation S-K.

Related Document: Federal Register Entries for Proposed Rule (October 2013) and Final Rule (August 2015)

  1. SEC Adopts Rule for Pay Ratio Disclosure. U.S. Securities and Exchange Commission. Retrieved on August 12, 2015.

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