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SEC Proposes Rules Regarding Internal Pay Ratio Disclosure

The SEC today held an open meeting and voted, 3-2, to approve the issuance of proposed rules to implement the internal pay ratio disclosure requirement in Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  SEC Chair Mary Jo White and Commissioners Kara Stein and Luis Aguilar voted to propose the rules and Commissioners Daniel Gallagher and Michael Piwowar dissented.  Statements made by the Commissioners today regarding the proposal are on the SEC website and available here.  The comment period for the SEC’s proposed rules will be 60 days after the proposing release is published in the Federal Register; the proposing release is on the SEC website and available here.

Section 953(b) of the Dodd-Frank Act mandates that the SEC promulgate rules requiring companies to disclose in their SEC filings the median of annual total compensation of all employees other than the CEO (or any equivalent position), the annual total compensation of the CEO (or any equivalent position) and the ratio of those two amounts.   

The pay ratio disclosure provision of the Dodd-Frank Act has been among the most controversial of the statute’s provisions to be implemented by the SEC.  In the near future, Gibson Dunn will issue a client alert with a more detailed discussion of the proposed rules based on the proposing release.  In the interim, based on the discussion at the Commission today, we note the following significant points:

  • The proposed rules would permit companies to select a methodology that they determine is appropriate for identifying the median employee; for example, companies may use any consistently used compensation measure, such as payroll or tax records, to identify their median employee, and may base their determination on their entire employee population or a statistical sampling.
  • For purposes of determining the median annual compensation of all employees, the proposed rules provide that “all employees” includes all full-time, part-time, temporary, seasonal and non-U.S. employees employed as of the last day of a company’s fiscal year.  While the proposed rules would permit companies to annualize the compensation of a permanent employee who did not work for the entire year, adjustments with regard to temporary or seasonal employees, and cost-of-living adjustments for non-U.S. workers, would not be permitted.
  • Once a company has identified the median employee, the proposed rules would require the employee’s total compensation to be calculated, for purpose of computing the pay ratio, in accordance with the Commission’s executive compensation rules set forth in Item 402(c)(2)(x) of Regulation S-K.  Companies would be permitted to use reasonable estimates for this calculation. 
  • Under the proposed rules, companies would be required to disclose their methodologies for identifying their median employees and any assumptions, adjustments and estimates used in determining total compensation. 
  • The proposed rules would require the pay ratio disclosure to be included in filings that under current rules contain executive compensation disclosures, such as registration statements and proxy and information statements. 
  • For most U.S. public companies, the disclosure requirement is proposed to apply with respect to the first fiscal year commencing after final rules are adopted and become effective.  For example, if final rules are adopted and become effective in March 2014, calendar year companies would be subject to the rules with respect to 2015 compensation, and their first pay ratio disclosure would appear in their 2016 proxy statement.  The proposed rules would not apply to emerging growth companies, small reporting companies or foreign private issuers, and newly public companies would be permitted to commence compliance with the first fiscal year beginning on or after the date they become subject to reporting requirements. 

At the meeting, all of the Commissioners strongly encouraged companies, investors and others to submit robust, data-driven comments on the proposal.


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