SEC Issues Guidance on Pay Ratio Calculation

As public companies prepare to begin making Dodd-Frank Act mandated disclosures of the pay ratio between their CEOs and a median employee, the Securities and Exchange Commission is issuing guidance to facilitate compliance. Public companies must 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 — meaning that the first disclosures will begin in January of 2018.

“In our view, if a registrant uses reasonable estimates, assumptions or methodologies, the pay ratio and related disclosure that results from such use would not provide the basis for Commission enforcement action unless the disclosure was made or reaffirmed without a reasonable basis or was provided other than in good faith,” the SEC said about the methodologies for calculating the median employee’s compensation. The agency also provided guidance on the use of existing records and the exclusion of contractors from the employee compensation calculation.