SEC proposed rules for pay ratio disclosure

The Securities and Exchange Commission (SEC) in a 3-2 vote proposed a new rule that would require public companies to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees. As provided by the JOBS Act, the proposed rule would not apply to emerging growth companies, smaller reporting companies or foreign private issuers. Newly public companies would have a transition period and initial compliance would be required with respect to compensation for the first fiscal year commencing on or after the date the company becomes subject to the reporting requirements. SEC Chair Mary Jo White stated that « this proposal would provide companies significant flexibility in complying with the disclosure requirement while still fulfilling the statutory mandate ».

This new rule is required under Section 953(b) « Executive compensation disclosures » of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). Section 953(b) the “Dodd-Frank Act”) directs the Commission to amend section 229.402 of title 17, Code of Federal Regulations, to require each issuer companies to disclose in any filing of the issuer described in section 229.10(a) of title 17, Code of Federal Regulations (or any successor thereto) — the median of the annual total compensation of all employees of the company, except the chief executive officer (or any equivalent position) of the issuer; the annual total compensation of the chief executive officer (or any equivalent position) of the company; and the ratio of the median of the total compensation of all employees of the company to the annual total compensation of the chief executive officer of the company. Section 953(b) also requires that the total compensation of an employee of a company shall be determined in accordance with section 229.402(c)(2)(x) of title 17, Code of Federal Regulations, as in effect on the day before the date of enactment of the Dodd Frank Act.

The proposed pay ratio rules would provide flexibility since they do not prescribe a specific methodology for companies to use when calculating « pay ratio ». Companies would be allowed to determine the statistical methodology that best suits their particular circumstances to determine the median annual total compensation of its employees. Registrants may choose to identify the median using their full employee population or by using statistical sampling or another reasonable method. However, companies would be required to disclose the methodology used to identify the median, and any material assumptions, adjustments or estimates used to identify the median or to determine total compensation. One of the reasons to allow registrants flexibility in developing their own methodology is to take into account potential costs associated for compliance with the new rule.

Under the SEC current rules, companies are required to provide extensive information about the compensation of their CEO and other named executive officers but are not required to disclose the same type of information for other employees. The proposal will have a 60-day public comment period following its publication in the Federal Register.