Why Comparing CEO Pay to Employee Salaries Might Not Be As Bad As Business Leaders Think

“The pay ratio disclosure would be required in annual reports on Form 10-K, registration statements and proxy and information statements. […] Pay ratio disclosure would be considered ‘filed’ not ‘furnished,’ and, therefore, would be subject to liability under the Securities Act and Exchange Act.” (Dechert)

On September 18, a divided Securities and Exchange Commission proposed a new rule that will require public companies to disclose the “CEO pay ratio:” how the chief executive officer’s compensation compares to that of the company’s employees.

To comply with the requirement – mandated by the Dodd-Frank Act – companies will need to calculate the salary of their median employee, and publish the ratio in all SEC filings.

But the reporting burden may not be as onerous as you think. Here are three reasons why:

1. Companies probably won’t have to report the pay ratio until 2016:

“The SEC noted in the proposing release that it expects the new rules to apply in the first fiscal year following the date the final rules become effective. Assuming the SEC adopts the final rules in 2014, companies with a December 31st fiscal year end first would be required to disclose the pay-ratio information relating to 2015 compensation in their proxy or information statements for their 2016 shareholder meetings.” (Skadden Arps)

2. The rule doesn’t apply to every company:

“Emerging growth companies, smaller reporting companies, foreign private issuers and issuers under the Canadian Multijurisdictional Disclosure System need not bother with this as the proposed rules say they are not covered.” (Leonard, Street and Deinard)

3. Companies have some flexibility for calculating the median employee:

“The proposed rule would not specify any required calculation methodologies for identifying the median employee in terms of total compensation for all employees. Instead, it would allow companies to select a methodology that is appropriate to the size and structure of their own businesses and the way they compensate employees. For example, a company would be permitted to identify the median employee based on total compensation using either its full employee population or a statistical sample of that population.” (Akin Gump)

The updates:

Read additional updates on the Pay Ratio Disclosure Rule at JD Supra Law News>>