SEC adopts final rule for pay ratio disclosure

Published on: 06 Aug 2015

In a 3–2 vote at its meeting yesterday, the SEC adopted a final rule1 that requires a registrant to calculate and disclose (1) the median of the annual total compensation of all of its employees (excluding its principal executive officer (PEO)), (2) the PEO’s annual total compensation, and (3) the ratio of (1) to (2). Starting with its first full fiscal year beginning on or after January 1, 2017, the registrant will include the disclosures in filings in which executive compensation information is required, such as proxy and information statements, registration statements, and annual reports. Emerging growth companies, smaller reporting companies, foreign private issuers, registered investment companies, and filers under the U.S.-Canadian Multijurisdictional Disclosure System are exempt from the rule’s requirements.

In determining median employee compensation under the rule, a registrant generally must consider all of its employees and those of its consolidated subsidiaries, including full-time, part-time, temporary, and seasonal workers, and those working in foreign jurisdictions. Although a registrant can annualize compensation amounts considered for permanent employees who worked only part of the year (e.g., a new hire), it cannot annualize amounts for seasonal or temporary employees, nor can it make full-time equivalent adjustments for any employee. 

The rulemaking associated with the new requirements has been extremely controversial, as evidenced by the SEC’s receipt of over 287,400 comment letters on the original rule proposal and yesterday’s split vote on the final rule. To address concerns expressed by many commenters about the costs of complying with the requirements, the rule permits a registrant to:

  • Select the methods it uses to determine median employee compensation, including methods that may incorporate reasonable estimation, statistical sampling, or cost-of-living adjustments.
  • Select a date within the last three months of its most recent fiscal year on which to identify its median employee.
  • Identify its median employee only once every three years (instead of annually) and calculate total compensation for that employee each year, unless changes that could significantly affect the pay ratio disclosure have occurred.
  • Exclude up to 5 percent of non-U.S. employees from the determination of the median employee (i.e., a de minimis exclusion).
  • Exclude non-U.S. employees employed in jurisdictions whose data privacy laws prevent compliance with the rule. A registrant will need to obtain a legal opinion to support such an assertion, and employees excluded under this provision would be considered part of the 5 percent de minimis exclusion noted above.


1 SEC Final Rule Release No. 33-9877, Pay Ratio Disclosure. The final rule’s requirements were mandated by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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