United States: SEC Finally Proposes Pay Ratio Disclosure

Last Updated: October 17 2013
Article by Troy M. Calkins and Rachel M. Krol

Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted on July 21, 2010, requires the Securities and Exchange Commission to amend Item 402 of Regulation S-K to require disclosure of the median of the total annual compensation of all employees of an issuer (excluding the chief executive officer), the annual total compensation of that issuer's chief executive officer and the ratio of the median of the total annual compensation of all employees of an issuer (excluding the chief executive officer) to the annual total compensation of that issuer's chief executive officer. This provision of the Dodd-Frank Act has caused great anxiety for many public companies over the last three years. Companies have expressed much concern that the rule required by Section 953(b) would be extremely burdensome, imposing difficult and expensive recordkeeping and analysis requirements with respect to a company's entire employee population. On the other hand, many shareholders and investor advocates have spoken out in support of Section 953(b). High passions on both sides of this issue resulted in the SEC receiving, prior to the issuance of the proposed rule, over 22,000 comment letters and a petition with nearly 85,000 signatures.

The strongly divergent views expressed on the idea of a pay ratio disclosure rule may explain why the Commission took over three years to finally propose, on September 18, 2013, the revisions to Item 402 of Regulation S-K required to implement Section 953(b). Some observers have also suggested that the delay was attributable in part to the fact that the Commission and its staff did not share Congress's enthusiasm for this new disclosure requirement.

The Commission appears to have worked hard in drafting its rulemaking proposal to provide issuers with flexibility in how to approach the required pay ratio calculations. Nonetheless, we expect the proposal to receive a high volume of comments from issuers who continue to feel that the rule will impose an undue burden on issuers and will result in disclosure that is not meaningful to investors. Comments on the rulemaking proposal are due on December 2, 2013, which means that Commission adoption of final rules cannot be expected until sometime in 2014. Given this timeline and the fact that the proposed rules state that a company would be required to report the pay ratio with respect to compensation for its first fiscal year commencing on or after the effective date of the final rule, calendar-year companies will not be required to provide the pay ratio disclosure until they file their proxy statement or Form 10-K in early 2016.

Summary of Proposed Rule 402(u)

The Commission's pay ratio proposal would add a new paragraph (u) to Item 402 that would require registrants to disclose:

(i) the median of the annual total compensation of all employees of the registrant, except the principal executive officer (PEO) of the registrant;

(ii) the annual total compensation of the PEO of the registrant; and

(iii) the ratio of the amount in (i) to the amount in (ii), presented as a ratio in which the amount in (i) equals one or, alternatively, expressed narratively in terms of the multiple that the amount in (ii) bears to the amount in (i).

Disclosure of the ratio in (iii) could take any of the following forms:

  • "PEO pay is X times the median employee pay."
  • "The PEO's annual total compensation is X times that of the median of the annual total compensation of all employees."
  • "The pay ratio is 1 to X."

The rule proposal goes on to define certain terms used above and to require disclosures around the calculation of the ratio.


The Commission's proposal states that the rule is intended to be flexible, therefore it does not prescribe a specific methodology for identifying the median. Approaches that could be used by registrants include, for example:

  • Using reasonable estimates to determine the value of various elements of total compensation in order to identify the median employee. The SEC recognizes that using estimates may be necessary for valuing types of compensation for which the company may not have complete information, such as union pension plan benefits, or personal benefits such as housing or government-mandated pension plans for non-U.S. employees.
  • Using statistical sampling to identify a "median employee" by taking a random sample of employees and determining either the exact compensation of the employees in the sample, or to identify employees as above or below the median, in order to find the employee in the middle of the pay spectrum.

The registrant must briefly disclose the methodology and any material assumptions, adjustments or estimates used to identify the median and must describe any changes in methodology year-to-year and the reasons for the changes, and provide an estimate of the impact of the changes on the median and the ratio. Any discussion should be limited to a brief overview; the registrant does not need to provide technical analyses or formulas.

If the registrant uses estimated compensation figures to determine the median, the disclosure would need to clearly identify any estimated amounts and include a brief description of the methods used. If the registrant uses statistical sampling, the disclosure should state the size of the sample and the estimated whole population, which sampling method was used and how the method accounts for separate business or geographic segments. While a small sample size may be appropriate in certain situations, for a larger business, the sample, and any assumptions or inferences used in the calculations, must draw upon observations from each business or geographical unit. Any sample can, however, exclude employees on the high and low extremes of the sample.

Whatever method the registrant uses to identify the median, it must be consistently applied. For example, the registrant could use total direct compensation (i.e., annual salary, hourly wages and any other performance-based pay) or cash compensation to identify a median employee, so long as the method is identified and used consistently throughout the calculations.

"annual total compensation"

Once the median employee is identified, the registrant must calculate annual total compensation and disclose the information required under Item 402(c)(2)(x) as it relates to the median employee (replacing references to "named executive officer" with "employee" and, where necessary, references to "base salary" and "salary with "wages plus overtime"). The registrant must also briefly disclose and consistently apply the methodology and any material assumptions, adjustments or estimates used to calculate the total compensation or any elements of compensation.

Total annual compensation must be calculated for the last completed fiscal year period. Proposed instructions to the rule would permit registrant to use the same annual period already used in payroll, tax or other records for determining the median employee, but the annual compensation amount must be calculated for the last completed fiscal year.

When determining the median, the registrant may annualize the compensation for all permanent employees who were employed for less than the full fiscal year, and are employed on the calculation date described above. In some cases it may be appropriate for the registrant to annualize a permanent part-time employee's compensation (i.e., a permanent employee works three days a week and takes a leave of absence during the year). However, the proposed rule does not permit adjustments for temporary or seasonal employees or cost-of-living adjustments for non-U.S. workers.

"all employees...except the PEO"

The principal executive officer, or PEO, is the same individual already defined in Item 402(a)(3). "All employees" is intended to include any full-time, part-time, seasonal or temporary worker employed by the registrant or any of its subsidiaries, which is consistent with Item 402(a)(2) and Instruction 2 to Item 402(a)(3), and includes U.S. and non-U.S. employees. "All employees" does not include independent contractors, "leased" workers, or temporary workers employed by a third party, but does include officers other than the principal executive officer.

The calculation date for determining who is an employee is the last day of the registrant's last completed fiscal year, the same date used in Item 402(a)(3)(iii) for determining the identity of the three most highly compensated executive officers.

How and When to File:

Under the proposed rule, issuers would be required to include the pay ratio disclosure in filings, such as the Form 10-K and proxy statements, that already require Item 402 disclosures. The rule would only apply to issuers that are required to provide the summary compensation table pursuant to Item 402(c) and would not apply to emerging growth companies, smaller reporting companies, foreign private issuers or multijurisdictional disclosure system filers. The pay ratio disclosure will be considered "filed" rather than "furnished" for purposes of the Securities Act and Exchange Act.

The pay ratio disclosure would not be required to be updated either (i) until the registrant files its proxy statement for its annual meeting of shareholders; or (ii) no later than 120 days after the end of the registrant's fiscal year (as provided in General Instruction G(3) of Form 10-K). Any filing made after the end of the fiscal year but before the filing of the Form 10-K or proxy statement, must include or incorporate by reference the registrant's most recent pay ratio disclosure.

If a registrant relies on Instruction 1 to Item 402(c)(2)(iii) and (iv) to omit disclosure of the salary or bonus of a named executive officer if it is not calculable, the registrant can also omit the pay ratio disclosure (with the appropriate footnote disclosing the omission and providing the date that the compensation will be determined). The registrant would then need to include its pay ratio disclosure in the Form 8-K that included the omitted salary or bonus information pursuant to Instruction 1 described above.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Troy M. Calkins
Similar Articles
Relevancy Powered by MondaqAI
Arnold & Porter
Akin Gump Strauss Hauer & Feld LLP
Proskauer Rose LLP
Shearman & Sterling LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Arnold & Porter
Akin Gump Strauss Hauer & Feld LLP
Proskauer Rose LLP
Shearman & Sterling LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions