By Hu Benton
By a 3-2 vote, the Securities and Exchange Commission today approved a final rule requiring public companies to disclose the ratio of the annual compensation of the CEO to the median of the annual compensation of the company’s employees. The rule, mandated by the Dodd-Frank Act, requires companies to include the pay ratio in registration statements, proxy and information statements and annual reports that must already include executive compensation information under SEC public reporting requirements for fiscal years starting on or after Jan. 1, 2017.
The main required disclosures are the median of the annual total compensation of all the company’s employees, except the CEO; the annual total compensation of the CEO; and the ratio of those two amounts. Under the rule, “annual total compensation,” which must be calculated consistently for the median employee and the CEO, means total compensation for the last completed fiscal year using the definition of “total compensation” in existing executive compensation rules that apply to public securities reporting.
Companies are permitted some flexibility in adopting a method for identifying the “median employee,” although they must adopt a methodology and publicly disclose it. They may use the total employee population or a statistical sample, but subject to certain exceptions—generally, for compliance with data privacy laws—the company must include all employees regardless of domicile, full-time status or whether they are employed by a consolidated subsidiary.
A company may generally apply a cost-of-living adjustment to the compensation measure used to identify the median employee. If it applies this adjustment, it would need to use the same COLA in calculating the median employee’s annual total compensation. Companies are permitted to identify the median employee once every three years unless changes intervene that would significantly affect the pay ratio.