United States: SEC Proposes CEO Pay Ratio Disclosure

On September 18, 2013, the Securities and Exchange Commission (SEC) proposed to amend Item 402 of Regulation S-K to require issuers to disclose the ratio of the annual total compensation of the issuer's CEO to the median annual total compensation of all of the issuer's employees. The proposed rules, known as "pay ratio" disclosure, were approved by a 3-2 vote of the SEC Commissioners and will renew the focus on issuers' compensation practices.  

Given the reaction of commentators, market participants and even the SEC Commissioners, the proposal is expected to generate critical commentary. The SEC has asked for comments on more than 60 issues relating to the proposed rules. The 60-day public comment period concerning the proposed rules expires on December 2, 2013. The rules are expected to be effective for the 2016 proxy season.  

Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the SEC to amend executive compensation disclosure rules to require issuers to disclose: 

  • The median of the annual total compensation of all employees, excluding the CEO; 
  • The annual total compensation of the CEO; and 
  • The ratio of the median of annual total employee compensation to the annual total compensation of the CEO. 

Currently, issuers are not required to disclose detailed compensation information for employees other than their CEO and named executive officers. 

The Proposed Rules 

The proposed rules will amend Item 402 of Regulation S-K to include a new paragraph (u). The pay ratio disclosure will be required in any filing that must include executive compensation disclosure under Item 402 of Regulation S-K, including annual reports on Form 10-K, proxy and information statements and certain registration statements. The pay ratio disclosure requirements would apply only to those issuers that must provide summary compensation table disclosure pursuant to Item 402(c).  Accordingly, emerging growth companies, smaller reporting companies and foreign private issuers will not be subject to the new rules.  

The Pay Ratio Disclosure 

The proposed rules require that the ratio of CEO compensation to median employee compensation be expressed either as a ratio, with the median employee compensation equal to one, or in narrative form setting forth the multiple that the CEO's compensation represents to the median employee's compensation. 

Finding the Median Employee  

The proposed rules provide flexibility to issuers in that they do not prescribe the methodology by which issuers should calculate the median employee. Each issuer is free to select a methodology that is appropriate in light of its operations, size and current compensation practices. The SEC indicated that an issuer may identify the median employee by applying a consistent compensation measure (such as salary plus bonus, using payroll records), or could calculate the "total compensation" (as defined under Item 402(c) of Regulation S-K) for each employee included in the calculation and then determine the median. Issuers may use statistical sampling or may include in the calculation the entire employee population. 

Calculating Total Compensation for the Median Employee 

Once a company identifies its median employee by compensation, it must calculate total compensation for that employee under Item 402(c)(2) of Regulation S-K.  Reasonable estimates and certain adjustments are permitted, in part due to the concern that applying rules designed for executive compensation to a non-executive could prove challenging to the issuer. 

Which Employees Are Covered? 

Employees included in the calculation of the median employee include full-time, part-time, temporary, seasonal and foreign employees of the issuer and its subsidiaries employed as of the last day of the prior fiscal year. With regard to employees working for a portion of the fiscal year, an issuer may annualize the total compensation for such employees, but may not make adjustments for part-time, temporary or seasonable workers or make cost-of living adjustments for foreign workers. The SEC believes that such adjustments have the potential to distort the actual composition of issuers' workforces and compensation practices. 

Disclosure of Methodology, Material Assumptions, Adjustments and Estimates 

Issuers must include disclosure of the methodology and any material assumptions, adjustments and/or estimates that are used to determine the median employee and to calculate the median employee's annual total compensation. Issuers must disclose any consistently applied compensation measure so used. If statistical sampling is used, the size of the sample, the estimated size of the whole population and any assumptions used in determining sample size must be disclosed. Any amounts estimated must also be disclosed. The proposed rules provide issuers with some latitude to provide additional disclosures and/or ratios to the required pay ratio disclosure. 


The SEC has proposed that an issuer will be required to include the initial pay ratio disclosure for the issuer's first fiscal year commencing after the effective date of the rules and may be included on Form 10-K or incorporated by reference from a proxy statement on Schedule 14A or an information statement on Schedule 14C. However, the initial pay ratio disclosure must be provided within 120-days after the end of such first fiscal year. Accordingly, if the issuer will not file a proxy or information statement until after this 120 day period, such issuer must include the initial pay ratio disclosure on Form 10-K or an amendment thereto, covering the first fiscal year.  

What About IPOs? 

Importantly, the pay ratio disclosure is not required in a registration statement on Form S-1 for an IPO. Instead, a new issuer required to provide a summary compensation table pursuant to Item 402(c) would first provide the pay ratio disclosure for the fiscal year beginning on or after the date the issuer becomes subject to the requirements of Section 13(a) or 15(d) of the Exchange Act. For example, if an issuer completes an IPO in 2015, it would need to include the pay ratio disclosure in its proxy or information statement for its 2017 annual meeting of stockholders. 


The new rules will bring increased attention to the disparity between executive compensation and rank and file employees.  It may also impose substantial compliance costs, particularly for large multinational companies.  It is expected that the final rules will not be adopted until 2014.  Accordingly, issuers with a calendar year fiscal year end will need to include pay ratio disclosure in their proxy statements for the 2016 annual meeting of stockholders (covering the fiscal year 2015). 

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.

In association with
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.