The Securities and Exchange Commission (SEC) is moving forward on rules that will require companies to disclose their CEO-to-worker pay ratio. The rule is mandated under the Dodd-Frank Act.
The proposal toward the SEC would specifically amend 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 good news for companies, the SEC elected not to devise any particular methodology for making the required calculations. Rather, the proposed rules would allow companies to select a methodology that is appropriate to the size and structure of their own businesses and the way they compensate employees.
Of course, there are several specific requirements. For instance, “all employees” means full-time, part-time, temporary, seasonal and non-U.S. employees as well as those employed by subsidiaries. In addition, companies will be required to disclose the methodology employed, and any material assumptions, adjustments or estimates used to determine the median employee or total CEO compensation.
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 disclosure requirements would not apply to emerging growth companies, smaller reporting companies, and foreign private issuers.
This provision of Dodd-Frank has proven to be controversial, even before the SEC released its rule proposal. In fact, the SEC has already received over 22,000 comments letters on this aspect of Dodd-Frank. Therefore, it could still be some time before any requirements are implemented.
Nonetheless, given the burden of compiling the required information, companies should stay on top of any new developments. We encourage you to check back to this blog for updates.
If you have any questions about the SEC’s proposed compensation rules or would like to discuss the legal issues involved, please contact me, Kenneth Oh, or the Scarinci Hollenbeck attorney with whom you work.
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