Wednesday, September 25, 2013

SEC Proposes Rule for "Pay Ratio" Disclosure

By Tim Dulaney, PhD, FRM

Last week, the Securities and Exchange Commission (SEC) released a rule proposal that would require "public companies to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees."  The proposed rule gives companies flexibility with respect to the methodology used to calculate the pay ratio.  This flexibility allows for a variety of approaches that are appropriate for each company's size and structure.

Although the SEC does not specify the methodology companies have to implement, each company must disclose the "methodology used to identify the median, and any material assumptions, adjustments or estimates used to identify the median or to determine total compensation."  Companies would be required to disclose this ratio on any form that already requires a discussion of executive compensation.

In order to determine the median employee, companies can use a sample of employees as long as a reasonable sampling method is used.    Once a median employee is chosen, the company must calculate total compensation in a way that is consistent with the calculation used for the CEO's compensation.

The proposed rule would fulfill a mandate by the Dodd-Frank act for the implementation of such a rule, but it's not clear what if any impact such a disclosure will have on investor relations (or even executive compensation in particular).  The porposed rule will, as usual, feature a 60 day comment period.  For more discussion of the rule, see Rueters or Law360.  The text of the proposed rule can be found here (PDF).

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