• SEC Adopts Final Pay-Ratio Disclosure Rule Despite Opposition
  • September 3, 2015
  • Law Firm: Jones Walker LLP - Washington Office
  • In August, the Securities and Exchange Commission ("SEC"), in a 3-2 vote, backed a final rule requiring public companies to disclose a ratio comparing their CEO's compensation to the median for other employees, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd Frank Act").

    On a 3-2 vote, with the SEC's two Republican commissioners dissenting, the SEC adopted the rule in Release No. 33-9877, entitled "Pay Ratio Disclosure," which will cover a wide swath of the public market. The rule requires that U.S. public companies disclose:
    • the median of the annual total compensation of all employees of the issuer, except the issuer's CEO;
    • the annual total compensation of the issuer's CEO; and
    • the ratio of those two amounts.
    Starting in 2018, public companies will be required to provide this disclosure in proxy statements, annual reports, and registration statements, using 2017 compensation data.

    The requirement is being implemented with an amendment to Item 402 of Regulation S-K. Smaller filers, including "emerging growth companies" under the JOBS Act, would be exempted from the disclosure, as would registered investment companies.

    Public companies and industry groups lobbied to exclude certain populations of foreign and part-time workers from the ratio, arguing that the data would be difficult to gather, and would unfairly skew the ratio.

    In a nod to U.S. multinationals' concerns, the final rule allows companies to exclude up to five percent of their non-U.S. workers from the calculation. Companies are also permitted to adjust the ratio to account for differences in the cost-of-living between regions, although they must present that data along with the non-adjusted version.

    The approval comes two years after the commission proposed the disclosure requirement, one of several executive compensation and corporate governance requirements mandated by the Dodd Frank Act. That package of rules represents some of the commission's last remaining governance work under the Dodd-Frank Act.

    Proponents of pay-ratio disclosure say the rule will help inform shareholders in say-on-pay votes. Other backers of the measure, including the AFL-CIO, see it as a step toward reducing outsized CEO pay packages.

    Opponents of the rule view it as a distraction from the SEC's more pressing work, one that is costly for companies to implement, while providing no real benefit to investors. Opponents wanted to delay the measure, which carried no statutory deadline, while Democrats on Capitol Hill pushed for the SEC to move on it.