SEC proposes rule on “pay ratio” disclosures

Published on: 19 Sep 2013

Yesterday, the SEC voted by a 3-2 margin to issue a proposed rule1 implementing Section 953(b) of the Dodd-Frank Act, which would require a registrant to disclose (1) the median of the annual total compensation of its employees and (2) the ratio of such median to its CEO’s annual pay. Except for emerging growth companies,2 smaller reporting companies,3 and foreign private issuers,4 the proposed rule would apply to filings of registrants that are required to include information under Regulation S-K, Item 402.5 

According to the proposed rule, the SEC received nearly 23,000 comment letters on Section 953(b). In addition to expressing various levels of support for the disclosures, commenters noted concerns about the complexity and costs to implement them. The proposal indicates that to mitigate such concerns, registrants would be permitted flexibility in:

  • Identifying the population of employees upon which to calculate the median employee income. Although the population must include full-time, part-time, seasonal, domestic, and foreign employees “employed as of the last day of the registrant’s last completed fiscal year,” such a population may (1) include all employees or (2) be on the basis of a statistical sample.
  • The methods they use to identify the median annual total compensation of their employees.
  • Use of reasonable estimates to calculate annual total compensation, any element of total compensation, and the annual total compensation of the median employee.

In addition, a registrant could annualize the income of full-time employees who have not worked the entire year (i.e., newly hired employees) but would not be permitted to annualize part-time or seasonal employees’ compensation. In addition, registrants would not be permitted to adjust a non-U.S. employee’s income for cost-of-living differences.

Comments on the proposed rule are due 60 days after its publication in the Federal Register.

1    SEC Proposed Rule Release No. 33-9452, Pay Ratio Disclosure.

2    As defined in Section 3(a) of the Securities Exchange Act of 1934.

3    As defined in Regulation S-K, Item 10(f)(1).

4    Foreign private issuers include those that file annual reports and registration statements on Forms 20-F and 40-F.

5    Regulation S-K, Item 402, “Executive Compensation.”

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