SEC Finalizes CEO Pay Ratio Disclosure Rule

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SEC Finalizes CEO Pay Ratio Disclosure Rule by Frederic W. Cook & Co.

Two years since issuing the proposed rule, after considering more than 285,000 comment letters, and in a contentious three to two vote, the Securities and Exchange Commission (SEC) approved the final rule implementing the CEO pay ratio disclosure mandated by the Dodd-Frank Act. The rule requires disclosure of the ratio of (i) median annual total compensation of all employees other than the CEO to (ii) the reported annual total compensation for the CEO.

Noteworthy differences between the proposed and final rule include:

  • Disclosure of the pay ratio will be required for a registrant’s first full fiscal year beginning on or after January 1, 2017 (i.e., not required until 2018 proxy season).
  • Consistent with the proposed rule, when identifying the median employee, companies must include “all employees,” including non-U.S., part-time, seasonal and temporary employees. However, the final rule:
    – includes only employees of consolidated subsidiaries;
    – appears to only allow exclusion of independent contractors and “leased” employees if they are employed by and their compensation is determined by an unaffiliated third party (which would mean that directly employed independent contractors must be treated as employees);
    – allows registrants to determine their employee population as of any date in the last three months of the fiscal year for purposes of identifying the median employee; and
    – allows exclusion of certain non-U.S. employees pursuant to a foreign data privacy law exemption and/or a 5 percent de minimis exemption; reliance on either exemption requires additional disclosure.
  • Companies may apply “cost-of-living adjustments” to the compensation of employees in jurisdictions different from that of the CEO.
  • The pay ratio must be calculated and disclosed annually, but the median employee only needs to be identified once every three years, unless there is a change in employee population or employee compensation arrangements that could significantly alter the pay ratio.


On August 5, 2015, the SEC approved the final rule for implementing Section 953(b) of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Under new paragraph 402(u) of Regulation S-K, disclosure is required in any annual report, proxy, information or registration statement that requires executive compensation disclosure. Emerging growth companies, smaller reporting companies, foreign private issuers, MJDS filers, and registered investment companies are not subject to the rule.

The new rule requires disclosure of:

  • the median annual total compensation of all employees of the registrant, except the CEO;
  • the annual total compensation of the CEO; and
  • the ratio of those two amounts.

Compliance Date

Registrants are required to comply with respect to compensation for the first full fiscal year beginning on or after January 1, 2017. For example, disclosure will first be required in the Form 10-K or proxy statement filed in 2018 for calendar-year companies.

A newly public registrant’s first pay ratio disclosure is required in its first full fiscal year beginning after the registrant has (i) been subject to the requirements of Section 13(a) or 15(d) of the Exchange Act for a period of at least 12 calendar months beginning on or after January 1, 2017 and (ii) filed at least one annual report that does not contain the pay ratio disclosure. The SEC’s release states that if a newly public registrant completes its IPO on March 1, 2017, it will first provide the pay ratio disclosure in the proxy or information statement for its 2019 annual meeting of shareholders, where the disclosure would relate to its 2018 fiscal year. As such, new registrants will not become subject to the final rule sooner than existing registrants.

Transition periods are provided for newly public companies, companies engaged in business combinations during the year, and companies who cease to be smaller reporting or emerging growth companies.

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