SEC Proposes Rules on CEO Pay Ratio Disclosures

On September 18, 2013, the SEC issued its long-awaited, and much debated, proposed rules regarding CEO pay ratio disclosures, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in July 2010.

The proposed rules would require U.S. public companies to disclose the following in their annual meeting proxy statements: (1) the median of the annual total compensation of all employees of the company, except the company’s CEO (or equivalent); (2) the annual total compensation of the company’s CEO (or equivalent); and (3) the ratio of these two amounts. The term “total compensation” is defined under SEC rules to include base salary, bonuses, equity grants, non-equity incentive plan compensation, change in pension value, nonqualified deferred compensation earnings and other compensation (including perquisites).  The pay ratio disclosure would be included in context with other executive compensation disclosures, such as the compensation tables and the Compensation Discussion and Analysis section.

While the disclosure required seems relatively straightforward, the process of calculating the median of the annual total compensation of all employees of the company could prove to be a daunting one.  The proposed rules would require companies to include all employees (whether full-time, part-time, temporary or seasonal) at the company or subsidiary level, including non-U.S. employees. The employees to consider are those employed on the last day of the company’s fiscal year, and their compensation may be annualized.  The proposed rules do not require a specific method for identifying the median employee, thus allowing companies some flexibility to use statistical sampling, if an all-employee survey method is not practical. The proposed rules would allow the use of reasonable estimates for calculating the median employee’s total compensation (but not the CEO’s).

The proposed rules contain exemptions for foreign private issuers, smaller reporting companies and emerging growth companies, meaning none of these companies would be required to provide this disclosure.  The exact timing of final rules is not certain; however, it is generally believed that final rules would not be issued in time to impact the 2014 proxy season. 

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