SEC Approves Final Rules for Pay Ratio Disclosure

On August 5, 2015, the Securities and Exchange Commission approved its final “Pay Ratio Disclosure” rules as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rules require annual disclosure of the ratio of a reporting company’s principal executive officer’s total annual compensation to the median of the total annual compensation of all its employees. Most public companies will be required to make the pay ratio disclosure following their first full fiscal year beginning on or after January 1, 2017. Specifically, for a calendar-year reporting company, the first pay ratio disclosure must be made in the proxy statement for its 2018 annual meeting.

Under the final rules a company must disclose:

  • the CEO’s annual total compensation (no change in the method of calculation);
  • the median employee’s annual total compensation; and,
  • the ratio of these two amounts.

A company must calculate the median employee’s annual total compensation in accordance with existing SEC executive compensation disclosure rules.

The pay ratio disclosure may be expressed as a ratio or as a multiple. The disclosure is required only for the last completed fiscal year. A company must also briefly describe the methodology used to identify the median employee and any material estimates, adjustments or assumptions used in determining the ratio.

A company may determine its median employee by analyzing all full-time, part-time, seasonal, and temporary workers it employs and any of its consolidated subsidiaries as of a date it selects within the last three months of its fiscal year. However, companies are not permitted to make full-time equivalent adjustments for part-time employees or to include annualized adjustments for temporary and seasonal workers. When selecting the median employee, companies may, but are not required to, annualize the total compensation for permanent employees who did not work a full year, such as new hires.

A company may choose a method to identify the median employee based on its own facts and circumstances and may use either its total population of employees or a statistical sample of that population.

The rules allow certain additional computational flexibility, permitting companies to:

  • use the same median employee for the three most recent fiscal years unless there has been a change in the employee population or compensation arrangements that would significantly impact the calculation;
  • exclude certain non-U.S. employees from the calculation where foreign data privacy laws prevent companies from obtaining such information;
  • exclude up to 5% of non-U.S. employees, provided that all employees in a particular jurisdiction are excluded; and,
  • make cost-of-living adjustments when identifying the median employee and in calculating the median employee’s annual total compensation.

The rules do not apply to smaller reporting companies, foreign private issuers, or emerging growth companies. 

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