SEC Finalizes CEO Pay Ratio Disclosure Rules

The Democrat appointees to the Securities and Exchange Commission (SEC), by a 3-2 majority vote, recently finalized the SEC’s controversial pay ratio rule.

Mandated under the Dodd-Frank Act, the new disclosures will require companies to reveal how their chief executive officers’ compensation compares to their workforce at large.

The SEC pay ratio rule attracted more than 280,000 public comments. Supporters of the new rule maintain that it will discourage reckless compensation packages and help foster economic equality; meanwhile, critics argue that the rule’s recordkeeping obligations are unnecessary and will unduly burden businesses. “To say that the views on the pay ratio disclosure requirement are divided is an obvious understatement,” SEC Mary Jo White stated in advance of the vote, in which the Republican appointees cast the negative votes.

The final rule

The final rule specifically amends existing executive compensation disclosure rules to require companies to disclose: the median of the annual total compensation of all its employees (excluding the CEO); the annual total compensation of its CEO; and the ratio of the two amounts. In response to public comments, the final rule gives businesses some leeway in reporting their CEO pay ratios. However, it does not provide as much flexibility as business groups had requested.

Companies will have some input into how they make the calculations. For instance, the final rule authorizes the use of statistical sampling to define the compensation of an entity’s median employees. Businesses will also be allowed to exclude up to five percent of their non-U.S. employees from their calculations.

Companies would only be required to provide the new information in filings that must already include executive compensation information under Item 402 of Regulation S-K, such as registration statements, proxy and information statements, and annual reports. The SEC’s new corporate disclosure requirements would not apply to emerging growth companies, smaller reporting companies, and foreign private issuers.

Companies must begin submitting disclosures in the first fiscal year beginning on or after Jan. 1, 2017. After the initial disclosure, updates are generally required every three years.