United States: SEC Proposed Rules On CEO Pay Ratios: What Employee Benefits Professionals Need To Know

On Sept. 18, 2013, the Securities Exchange Commission ("SEC") issued long-awaited (and controversial) proposed rules regarding the disclosure of what is commonly referred to as the "CEO pay ratio." This disclosure, which is required pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), will apply to the proxy statements of most U.S. public companies. This article will provide an overview of the new rules from an employee benefits prospective (as opposed to for a securities lawyer).


The relevant provision of the Dodd-Frank Act requires a public company (other than an "emerging-growth company") to disclose in its proxy (1) the median of the annual total compensation of all employees, except the CEO, (2) the annual total compensation of the CEO, and (3) the ratio of the first number to the second number.

From the time of passage, the business community noted that there were many problems with this requirement. For example, first, the calculation of total compensation for a single employee can be incredibly time consuming, and the statute could appear to require this number to be calculated for all employees (how else would the median employee total compensation be determined?). As a reminder, annual total compensation includes base salary (or wages plus overtime for non-salaried employees), bonus, grant-date fair value for equity awards, changes in pension value and "all other compensation" under the SEC rules. Second, the statute refers to all employees, which would seem to include part-time, temporary, seasonal and even non-U.S. employees. Finally, the ratio itself is not user-friendly. Most people would easily understand that the CEO makes X times more than the median employee, but the statute flips that around so that the number to be reported is a fraction (i.e., if the CEO pay is 100 times the pay of the median employee it would be reported as 0.01, while if the CEO pay is 200 times that of the median employee it would be reported as 0.005 – everyone understands the difference between 100 to 1 and 200 to 1, but .01 compared to .005 can be confusing, to say the least).


The SEC has proposed a number of rules aimed at simplifying compliance with these CEO pay ratio requirements. Importantly, a company may choose to identify the median employee (i.e., the employee who has the median annual total compensation of all employees) using its full employee population or by using statistical sampling or another reasonable method. However, in identifying the number of employees, a company must consider all full-time, part-time, seasonal or temporary employees, including foreign employees and employees of its subsidiaries. Independent contractors and "leased" employees are not included. For this purpose an employee is an individual employed as of the last day of the company's last completed fiscal year. While there is a proposed instruction that allows (but does not require) employers to annualize compensation for all permanent (but not temporary or seasonal) employees who were employed for less than the full fiscal year, employers may not make a cost-of-living adjustment for foreign employees.

Companies do not need to calculate the actual summary compensation table amount for every single employee. Instead, they need to use an appropriate, consistently applied methodology to determine who the median employee is and then calculate the summary compensation table number for that individual. In determining the methodology the SEC indicated that the following items should be considered:

  • the size and nature of the workforce;
  • the complexity of the organization;
  • the stratification of pay levels across the workforce;
  • the types of compensation the employees receive;
  • the extent that different currencies are involved;
  • the number of tax and accounting regimes involved;
  • the number of payroll systems the employer has and the degree of difficulty involved in integrating payroll systems to readily compile total compensation information for all employees;

Companies must also briefly describe the methodology used and the material assumptions that were applied.

The pay ratio disclosure is required for public filings that must include an Item 402(c) disclosure. In general, this would mean annual reports on Form 10-K and proxy and information statements. The disclosure itself should be brief and consistent with the statutory provision. In other words, the annual total compensation of the median employee and of the CEO will be disclosed, along with the ratio of the two amounts (as well as a description of the methodology and assumption used in the calculations).

With respect to the odd way in which the statute requires the ratio to be presented, the proposed rules would allow the ratio to be disclosed either as, for example, 1 to 100 or 1 to 200, or in narrative form, such as the CEO's annual total compensation is x times that of the median annual total compensation of all employees.

Companies should keep the disclosure brief and avoid overly technical or detailed descriptions of the pay ratio and related calculations. Relevant information to be disclosed could include whether compensation for permanent employees was annualized and how currency translations were handled. Companies must disclose any changes in the method or assumptions from those used in a prior year that result in a material change to the ratio, as well as the reason for the change and its estimated impact on the numbers. Finally, companies are permitted to supplement the required disclosure with a narrative description or additional ratios provided that such information is clearly identified and not misleading and not presented with greater prominence than that of the required ratio. So, for example, a company may want to disclose that it has a comparatively large number of foreign employees.

The proposed rule will not apply for the upcoming 2014 proxy season and does not apply to foreign private issuers, smaller reporting companies or emerging-growth companies. The SEC has identified a large number of issues for public comment and has requested in-depth responses, so this process is far from complete.

Comments on the proposed new rules are due no later than Dec. 2, 2013 (60 days after the date that the rules were published in the Federal Register). Some of the areas on which the SEC requested comments are:

  • Whether the pay ratio disclosure should be required in filings that do not currently require Item 402 disclosure, including whether such disclosure would be meaningfully helpful to investors?
  • Should smaller reporting companies or foreign private issuers be subject to the rules, and if so, should a modified version of the rules apply?
  • Are there alternative ways to comply with the statutory requirement of covering "all employees" that could reduce compliance costs, particularly with respect to cross-border issues and part-time employees?
  • Should there be separate ratios for U.S. employees and for non-U.S. employees?
  • What data privacy laws, and similar laws, could impact the gathering of the data necessary to comply with the new rules?
  • Should the employees of subsidiaries be included, particularly subsidiaries that do not consolidate their financial statements with the employer?
  • How should "leased employees" and other temporary employees be treated?
  • Will employers change their corporate structure or employment arrangements to alter the number of employees covered by the rules?
  • Are there any competition concerns raised by the rules?


Given the number of questions that the SEC is seeking comments on, it appears that actual number-crunching is still a ways off for most companies. However, there are a number of action items for human resource professionals in particular to start considering.

First, primarily since foreign employees are to be considered, it will be important to get a good sense for all of the payroll systems a company (and each subsidiary) maintains and how to convert any foreign compensation and benefits into the U.S. equivalent.

Second, companies should start discussing with their legal counsel and compensation consultants what sampling methods might be appropriate, as well as what costs and benefits of choosing one method vs. another are for their specific situation.

However, since it is clear that there are still a lot of open issues, it probably makes the most sense to identify the data gaps and take steps to resolve them without undergoing a full calculation until the rules are finalized. Instead, the public comments and various discussions of what best practices are should be monitored, so that companies are best positioned to comply when the rules become final.

Reprinted with permission from Employee Benefit Review - December 2013

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.