United States: SEC Narrowly Adopts Contentious CEO Pay-Ratio Rule

On August 5, 2015, in a 3-2 vote, the Securities and Exchange Commission ("SEC") adopted a long-awaited and contentious rule that requires most public companies to disclose the ratio of their CEO's annual pay as compared with the median annual pay of its workers. This so-called "CEO pay ratio rule" was first passed by Congress in 2010 under section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and proposed by the SEC in September 2013.

Even after receiving more than 280,000 comments, concerns remain over the practicality and administrative burden imposed on companies by this final rule. This final rule, which amends Item 402 of Regulation S-K, requires a public company to disclose the median of the annual total compensation of its employees (excluding the CEO), the annual total compensation of its CEO, and the ratio of the median of the annual total compensation of all employees (excluding the CEO) to the annual total compensation of the CEO (the "Final Rule").

Importantly, public companies must comply with the Final Rule for the first fiscal year beginning on or after January 1, 2017, which means, for most companies, reporting in the 2018 proxy statement (based on 2017 compensation data). However, the Final Rule does not apply to smaller reporting companies, foreign private issuers, Multijurisdictional Disclosure System ("MJDS") filers, "emerging growth companies" under the Jumpstart Our Business Startups ("JOBS") Act, or registered investment companies.

Pay Ratio Disclosure Requirements.

As stated above, the Final Rule requires disclosure of (i) the median annual total compensation of all employees (other than the CEO), (ii) the annual total compensation of the CEO, and (iii) the ratio of the two amounts. The key terms of the Final Rule are set forth below:

Determination of Median Annual Total Compensation and Disclosure of Methodology.

The Final Rule does not require a calculation of the annual total compensation of a company's entire workforce under the Item 402 rules; instead, in response to concerns, the Final Rule requires a comparison of the compensation of a "median employee" with the compensation of the company's CEO.

The Final Rule permits a company to identify its median employee once every three years, unless there has been a change in its employee population or employee compensation arrangements that it reasonably believes would result in a significant change in the pay ratio disclosure. If there have been no changes that the company reasonably believes would significantly affect its pay ratio disclosure, the company must disclose that it is using the same median employee in its pay ratio calculation and describe briefly the basis for its reasonable belief.

If the registrant is using the same median employee, it must calculate that median employee's annual total compensation each year and use that figure to update its pay ratio disclosure each year. For example, the company is required to identify the median employee and calculate that median employee's annual total compensation in year one. In years two and three, however, the company may use that same median employee (or an employee whose compensation is substantially similar to the original median employee based on the compensation measure used to select that median employee) to re-calculate the annual total compensation for that employee without re-identifying the median employee as would otherwise be required under the final rule if it satisfies the above conditions.

The Final Rule does not specify any required calculation methodologies for identifying this median employee in terms of total compensation for all employees. Each company has the flexibility to select a reasonable methodology that is appropriate to the size and structure of its own businesses and compensation practices, such as through examination of payroll or tax records of its entire employee population, or through statistical sampling, and may use annual total compensation under Regulation S-K or another consistent measure. Companies are required to disclose their methodology for determining median annual total compensation of their employees, including any material assumptions, adjustments or estimates used to identify the median, or to determine total annual compensation.

Applicable Employees.

For purposes of determining median annual total compensation, "all employees" of the company must be considered, including all U.S. and non-U.S. employees, as well as its part-time, seasonal, and temporary employees. The Final Rule allows a company to select a date within the last three months of its last completed fiscal year on which to determine the employee population for purposes of identifying the median employee. The company does not need to count individuals not employed on that date. Accordingly, companies may avoid fluctuations caused by seasonal employees hired at the end of a year.

The Final Rule provides an exemption to "all employees" for (i) employees in foreign jurisdictions in which it is not possible for a company to obtain or process information necessary to comply with the rule without violating the data privacy laws or regulations of that jurisdiction (the company must obtain a legal opinion to use this exemption); and (ii) a de minimis exemption for up to 5 percent of non-U.S. employees, including any non-U.S. employees excluded using the data privacy exemption. Also, if a company excludes any non-U.S. employee in a particular jurisdiction, it must exclude all non-U.S. employees in that jurisdiction.

Individuals employed by unaffiliated third parties or independent contractors are not considered employees of the company.

Disclosure of Pay Ratio.

Once the median employee is identified, both the annual total compensation of such median employee and the total annual compensation of the CEO must be disclosed based on the Item 402 proxy disclosure rules used to calculate CEO pay. The ratio of median annual total compensation of all employees to the annual total compensation of the CEO must be disclosed either as a ratio (where the median employee compensation equals one) or narratively in terms of the multiple that CEO compensation bears to median employee compensation.

When calculating the required pay ratio, the Final Rule prohibits a company from making full-time equivalent adjustments for part-time workers, or annualizing adjustments for temporary and seasonal workers.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
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