The Securities and Exchange Commission approved a new rule on Wednesday August 5th that requires publicly-traded U.S firms to disclose the pay gap between their CEOs’ annual compensation and the median compensation of their other employees.
There were more than 287,000 comment letters sent to the SEC about this rule. Some called the rule unnecessary and difficult to implement, while others said a pay ratio disclosure is material to investors and allows investors to make better assessments of corporate governance pay initiatives. The SEC adopted the final rule with a 3-2 vote.
The executive compensation for the CEO and other top executives is already disclosed in proxy filings. The new rule will require companies to:
– disclose the annual total compensation of the CEO
– report the median of the annual total compensation of all other employees
– provide the ratio of those two amounts
To determine the median employee compensation, companies can select their own methodology. This methodology could:
– use total employee headcount
– use a statistical sampling of workers
– use an other procedure to determine the median employee compensation
– use cost-of-living adjustments to identify the median, however they must disclose the median employee annual total compensation and pay ratio without the cost-of-living adjustment
– exclude non-U.S.workers from the calculation of the median employee compensation if the workers are based where the disclosure would violate data privacy laws
– exclude overseas workers if they make up less than 5% of the total workforce for the company
– exclude up to 5% of overseas workforce.
Companies would be required to include in the disclosure a description of the methodology that was used to identify the median employee and any material assumptions, adjustments (including cost-of-living adjustments), or estimates that they used to identify the median employee or in determining the annual total compensation for their employees. If a company identifies a median employee based on a consistently applied compensation measure, it would be required to disclose the measure it used.
The disclosure requirement applies to all companies currently required to provide executive compensation disclosure. Smaller firms, foreign private issuers, MJDS filers, emerging growth companies and registered investment companies would be exempt. For companies that are new companies, that engage in business combinations or acquisitions, or that cease to be smaller reporting companies or emerging growth companies, there is a transition period to provide this disclosure.
Companies would be required to report the pay-ratio disclosure during their first fiscal year beginning on or after January 1, 2017. This disclosure would be included in a company’s first annual report on Form 10-K or in its proxy or information statement for its annual meeting of shareholders following the end of that fiscal year.