SEC Adopts Final Dodd-Frank Pay Ratio Disclosure Rules
On August 5, 2015, the Commissioners of the SEC voted three-to-two, along party lines, to adopt final rules implementing the pay ratio disclosure mandated under Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Final Rule”). The Final Rule amends existing executive compensation disclosure rules to require companies to disclose:
- The median of the annual total compensation of all its employees, except the CEO;
- The annual total compensation of its CEO; and
- The ratio of those two amounts.
The Final Rule preserves the substantial flexibility provided under the rule as proposed in 2013 for companies to identify the median employee and calculate total pay. However, the SEC made several changes and clarifications to the rule in response to comment letters received which provide additional flexibility for companies. These include:
- Ability to determine the median employee once every three years
- Ability to select any date in the last three months of the fiscal year as the determination date
- Permission to make cost of living adjustments to compensation for employees not living in the same country as the CEO; importantly, companies must also present the ratio on an unadjusted basis
- Ability to exclude certain non-US employees in instances where (a) foreign data privacy laws would prevent the company from complying with the final rule, or (b) the non-US workforce represents less than 5% of the total workforce
The Final Rule clarifies that the disclosure of additional ratios is permitted so long as it is not misleading or given more prominence than the required ratio.
The SEC extended the initial compliance date to the first fiscal year beginning on or after January 1, 2017 meaning that companies are not required to disclose the CEO pay ratio until the 2018 proxy statement.
As always, we stand ready to assist with any questions that may arise in the implementation of this rule or the crafting of the required disclosure.
We continue to believe that there is limited utility, if any, in the disclosure required by the Final Rule. We recommend that companies begin considering how they will comply with the disclosure mandate, including how to word the narrative for the required disclosure to ensure investors, employees and other stakeholders are provided with the proper context for reviewing the ratio.