SEC Proposes CEO Pay Ratio Rule

The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication by Glen T. Schleyer, Marc Trevino, and Jane Y. Wang.

On September 18, 2013, a divided SEC Commission proposed a requirement that U.S. public companies disclose:

  • the median of the annual total compensation of all employees of the issuer, except the issuer’s CEO (or the equivalent);
  • the annual total compensation of the issuer’s CEO (or the equivalent); and
  • the ratio of those two amounts.

The proposal was approved by a three-to-two vote and will not affect the 2014 proxy season. The specifics of the proposal have not yet been published, and Sullivan & Cromwell LLP will issue a more detailed memorandum after their publication. Comments will be due 60 days after publication of the proposal in the Federal Register, and the objecting Commissioners have specifically requested “detailed and data-heavy” comments regarding the expected cost of complying with the proposal and the potential harm of including the additional disclosure in proxy statements.


Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) directs the SEC to amend Item 402 of Regulation S-K to require disclosure of (1) the median of the annual total compensation of all employees of the issuer, except the issuer’s CEO (or the equivalent); (2) the annual total compensation of the issuer’s CEO (or the equivalent); and (3) the ratio of those amounts. Total compensation is determined in accordance with Item 402(c)(2)(x) of Regulation S-K as in effect on July 20, 2010 (the day before Dodd-Frank was enacted), which captures base salary, bonuses, stock and option grants, non-equity incentive plan compensation, change in pension value, nonqualified deferred compensation earnings and certain other compensation, including perquisites. The Section does not specify how median pay is to be calculated, nor does it specify a timeline for SEC rulemaking.

Proposed Rule

SEC Chairman Mary Jo White and Commissioners Luis A. Aguilar and Kara M. Stein voted in favor of the proposal, and Commissioners Daniel M. Gallagher and Michael S. Piwowar voted against. At the open meeting, the SEC staff summarized some of the important features of the proposal:

  • All employees (including full-time, part-time, temporary, seasonal and non-U.S. employees) must be included. In determining the median employee, all employees employed by the issuer and any of its subsidiaries as of the last day of the fiscal year must be included. Issuers may, but are not required to, annualize compensation for permanent employees who did not work for the full fiscal year, such as new hires. Full-time equivalent adjustments for part-time workers, annualizing adjustments for temporary and seasonal workers, and cost-of-living adjustments for non-U.S. workers would not be permitted.
  • Flexibility provided in identifying the median employee. The proposal does not specify any required calculation methodology for identifying the median employee, but allows each issuer to select a methodology that is appropriate to its size, structure and compensation practices. For example, issuers would be permitted to use their full employee population or a statistical sample of that population to determine the median employee. In addition, issuers may identify the median employee using either annual total compensation as determined under Regulation S-K or other consistently used measures such as payroll or tax records. The issuer would then calculate the ratio and other disclosure based on total compensation of that employee as calculated in accordance with current SEC rules.
  • Estimates permitted for calculating the compensation of the median employee. Issuers would be permitted to use reasonable estimates when calculating annual total compensation or any element of total compensation of the median employee. The CEO’s annual total compensation would continue to be calculated in accordance with current SEC rules.
  • Pay ratio disclosure must be included in SEC filings that would otherwise include executive compensation information required by Item 402 of Regulation S-K. The disclosure must identify the methodology used to determine the median employee and any material assumptions, adjustments or estimates used to identify the median employee or to determine total compensation.

In addition, the SEC confirmed that the proposed rule will not affect the 2014 proxy season. The rule would become effective with respect to the first fiscal year commencing on or after the effective date of the final rule. For newly public companies, the disclosure requirement would apply with respect to compensation for the first fiscal year commencing on or after the date the issuer becomes subject to SEC reporting requirements.

The proposed requirement would not apply to foreign private issuers, smaller reporting companies or emerging growth companies under the Jumpstart our Business Startups Act.

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