August 6, 2015
SEC Finalizes Pay Ratio Disclosure Rules
Following a spirited debate during an open meeting on August 5, the Securities and Exchange Commission (SEC) voted to finalize its pay ratio disclosure regulation under Section 953 of the Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank) Act. The 3-2 vote followed party lines, with Republican Commissioners Daniel Gallagher and Michael Piwowar opposing what is considered by many to be an onerous and controversial final rule. Compliance is required starting in the first fiscal year beginning on or after January 1, 2017. The SEC has also provided a fact sheet on this rule.
Section 953 of the Dodd-Frank Act requires all public companies to calculate the median compensation of all employees other than the CEO and disclose that number and the ratio of the median employee's compensation to total compensation of the CEO as part of the companies' filings with the SEC. This requirement may be difficult for many companies to satisfy, in part because compensation of non-U.S. employees must be included in the calculation.
SEC Chair Mary Jo White noted that some changes based upon an extensive comment period were made from the initial rule proposed in September 2013. In particular, White mentioned the addition of “an exemption for situations when foreign data privacy laws would prevent companies from being able to process or obtain the necessary compensation information to calculate the ratio; an ability to exclude up to 5% of non-U.S. employees when determining the median employee; and allowing companies to use cost-of-living adjustments when determining the median employee and calculating the employee’s total compensation, in order to achieve a more meaningful reflection of the compensation of employees as compared to the chief executive.”
The final rule, White stated, “would also allow companies to choose any date during the last three months of a company’s fiscal year to determine the median employee and, to further reduce costs, would permit companies to use the same median employee for three years unless there has been a change in the employee population or employee compensation arrangements that the company reasonably believes would result in a significant change in the pay ratio disclosure.”
The SEC received 287,000 comments on this rule-making. During the SEC’s discussion prior to the vote Commissioner Luis A. Aguilar remarked on some of the concerns raised about the proposed rule. In his written statement he specifically cited the Council’s comment letter, among others. While acknowledging the concerns, Aguilar voted with the other Democratic Commissioners to finalize the regulation, citing efforts to facilitate compliance in a reasonable and workable manner while still providing transparency and accountability.
For more information, contact Diann Howland, vice president, legislative affairs, Jan Jacobson, senior counsel, retirement policy, or Lynn Dudley, senior vice president, global retirement and compensation policy. All can be reached at (202) 289-6700.
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