The SEC adopted a final rule on disclosure of CEO pay relative to that of his or her company’s median employee.
Pay ratio disclosure, to take effect in 2017, was mandated under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
The new rule, requiring a publicly traded company to annually compute the ratio of the executive’s total compensation to that of its median employee, passed 3-2 on Aug. 5, according to news reports. The SEC’s two Republican commissioners voted against it.
The rule is also expected to facilitate comparisons of CEO pay relative to industry peers and advisory votes by shareholders on executive pay packages.
Mary Jo White, the chairwoman of the SEC, who voted in favor of the rule, noted the debate that has swirled around the issue since the rule was proposed.
The SEC “has received more than 287,400 comment letters, including over 1,500 unique letters, with some asserting the importance of the rule to shareholders as they consider the issue of appropriate CEO compensation and investment decisions, and others asserting that the rule has no benefits and will needlessly cause issuers to incur significant costs,” White said in a press release.
She also noted accommodations in the final rule that would alleviate cost, including:
- providing companies with substantial discretion to use estimates and sampling as a means to determine the median employee and the employee’s compensation
- excluding emerging growth and smaller reporting companies, foreign private issuers, registered investment companies and registrants filing under the US-Canadian Multijurisdictional Disclosure System
- providing an exemption for situations when foreign data privacy laws would prevent companies from being able to process or obtain the necessary compensation information to calculate the ratio; an ability to exclude up to 5 percent of non-US employees when determining the median employee
- allowing companies to use cost-of-living adjustments when determining the median employee and calculating the employee’s total compensation, in order to achieve a more meaningful reflection of the compensation of employees as compared to the chief executive.
- allowing companies to choose any date during the last three months of a company’s fiscal year to determine the median employee and, to further reduce costs, would permit companies to use the same median employee for three years unless there has been a change in the employee population or employee compensation arrangements that the company reasonably believes would result in a significant change in the pay ratio disclosure.
