United States: SEC Adopts Final Rules On Pay Ratio Disclosure

On August 5, 2015, the Securities and Exchange Commission ("SEC") adopted final rules to implement the pay ratio disclosure requirements (the "Final Rules") of Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). Section 953(b) of the Dodd-Frank Act generally requires public companies to disclose the median of annual total compensation of all employees (excluding the chief executive officer), the annual total compensation of the chief executive officer, and the ratio of those two amounts. The rules regarding pay ratio disclosure take effect for filings for the first fiscal year of a registrant beginning on or after January 1, 2017.

Due to the complexities of calculating the median of the annual total compensation of all employees, these rules generated a significant number of comments. The Final Rules include some accommodations to registrants from the proposed rules, including the ability to generally exclude up to 5% of non-U.S. employees from the calculation and the ability to calculate the median employee once every three years rather than annually.


The pay ratio disclosure requirement has been implemented through a new paragraph (u) of Item 402 of Regulation S-K. Under this paragraph, a registrant must disclose:

  • the median of the annual total compensation of all employees of the registrant, except the principal executive officer ("PEO");
  • the annual total compensation of the PEO; and
  • the ratio of such amounts.

The ratio may be expressed either as an amount in which the median for all employees is one (the pay ratio would be disclosed as "X to 1" or "X:1" where X is the PEO's annual total compensation) or narratively as "the PEO's annual total compensation is X times that of the median of the annual total compensation of all employees."


No area of the new rule generated more comment from a policy and implementation standpoint than the calculation of the median of the annual total compensation of all employees of the registrant. While public companies already calculate and disclose the annual total compensation of the PEO, calculation of the median of the annual total compensation for all employees raises a host of issues where companies may have many thousands of employees in various countries and with differing terms of employment. The Final Rules and the SEC Release addressed many of these issues.

  • All Employees. For the most part, the Final Rules provide that "all employees" truly means all employees. It includes any full-time, part-time, seasonal or temporary workers employed by the registrant or any of its consolidated subsidiaries (including officers other than the PEO). Persons who are not employed, such as leased workers and independent contractors, are not included as long as they are employed by, and their compensation is determined by, an unaffiliated third party. Non-U.S. workers are generally included in the determination of the median, but may be excluded in two limited circumstances:

    • Non-U.S. employees who are employed in a jurisdiction with data privacy laws that make the registrant unable to comply with the Final Rules without violating those laws may be excluded. However, there are a number of conditions to rely on this exclusion, including using reasonable efforts to obtain the information without violating data privacy laws (including, at a minimum, using or seeking an exemption or other applicable relief), providing disclosure regarding the exclusion and obtaining a legal opinion from counsel on the inability to obtain or possess the necessary information without violation such laws.
    • Up to 5% of non-U.S. employees (including any employees excluded using the data privacy exemption) may be excluded. If a registrant excludes any non-U.S. employees in a particular jurisdiction, it must exclude all non-U.S. employees in that jurisdiction. The registrant must also disclose that it is relying on the exclusion, including the relevant jurisdiction or jurisdictions, the number of employees excluded from each jurisdiction, and the total number of its U.S. and non-U.S. employees used for its calculation of the 5% limit.
    A registrant may also exclude anyone who became an employee as a result of an acquisition for the fiscal year in which the transaction became effective, although the registrant must disclose the approximate number of employees it is excluding.
  • Calculation Date. A registrant may select a date within the last three months of its last completed fiscal year as of which it will determine the employee population for purposes of identifying the median employee. If, in subsequent years, a registrant changes the date it uses to identify the median employee, it must disclose this change and provide a brief explanation of the reasons for the change.
  • Annualizing Adjustments. The Final Rules allow registrants to annualize compensation for permanent employees who did not work for the entire year. For example, if an employee is hired permanently on September 30 and is still employed as of December 31 (the registrant's fiscal year end), the registrant would be allowed to annualize the three months of compensation for the entire year. Such adjustments apply only to permanent employees, and not to temporary or seasonal workers. A registrant also may not adjust its compensation for part-time workers for full-time equivalent amounts. The adjustments are optional, but if a registrant makes such adjustments, it must do so for all eligible employees.
  • Identifying the Median. For purposes of the Final Rules, identifying the median means identifying the median employee and then calculating that employee's annual total compensation using Item 402(c)(2)(x) (the rule for calculating the PEO's compensation). The Final Rules do not mandate any particular calculation methodology for identifying the median employee. Recognizing the variability in the size and complexity of workforces, Item 402(u) allows a registrant to select a methodology that is appropriate to its facts and circumstances. Methods that may be selected include calculating total compensation for the registrant's entire employee population using Item 402(c)(2)(x), using reasonable estimates and using statistical sampling. The SEC emphasized that the method selected and its application should be tailored to a particular registrant's circumstances. For example, if a registrant uses statistical sampling, the variance of underlying compensation distribution can affect the sample size needed for reasonable statistical sampling.

    The data used by a registrant to determine the median employee does not necessarily need to be total compensation. For example, a registrant could use salary and wage data from payroll or tax records to identify the median employee and then calculate the median employee's annual total compensation in accordance with Item 402(c)(2)(x).

    A registrant can apply a cost-of-living adjustment to the compensation measure used to identify the median employee, and would then use the same adjustment in calculating the median employee's annual total compensation. A registrant electing to do so must also disclose the median employee's annual total compensation and the pay ratio without the cost-of-living adjustment.

    A registrant would be permitted to identify its median employee once every three years, unless there has been a change in its employee population or employee compensation that the registrant reasonably believes would result in a significant change to its pay ratio disclosure. During year two and year three, where the registrant continues to use the same median employee, it must disclose that it is using the same median employee and the basis for its reasonable belief that there have been no changes that would result in a significant change to the registrant's pay ratio disclosure. Also, within those three years, if the median employee's compensation changes, the registrant may use another employee with substantially similar compensation as its median employee. The registrant still must determine the annual total compensation of the median employee every year and make the required disclosure; this provision only allows a registrant to go through the process of identifying its median employee every three years.

    A registrant will be required to briefly disclose the methodology to determine the median employee and any material assumptions, adjustments (including cost-of-living adjustments) and estimates used to identify the median employee or to calculate the median employee's annual total compensation. Any estimated amounts should be clearly identified as such.
  • Determination of Total Compensation. Total compensation is defined by reference to Item 402(c)(2)(x) of Regulation S-K. As a result, the annual total compensation of the median employee must be calculated using the same rules and methods as for the PEO and other executive officers under Item 402. As discussed above, a registrant is permitted to use reasonable estimates, sampling or similar methods to identify the median employee, and then calculate that employee's total compensation based upon Item 402(c)(2)(x) of Regulation S-K. As part of calculating the median employee's total compensation, a registrant would be permitted to use reasonable estimates in determining any element of total compensation. Annual total compensation for the median employee is determined for the registrant's last completed fiscal year, as with the PEO, under Item 402(c)(2)(x).


The pay ratio disclosure must be made in any filing that requires executive compensation disclosure under Item 402 of Regulation S-K. For most public companies, the disclosure will appear in the annual proxy or information statement, and be incorporated by reference into the annual report on Form 10-K. Disclosure will also be required in those registration statements under the Securities Act of 1933 that require executive compensation disclosure.


Registrants will be permitted, but not required, to supplement the required disclosure with a narrative discussion or additional notes. For example, a registrant could also disclose the annual total compensation of the median of U.S. full-time employees and the ratio of such compensation to the PEO's total compensation. Any additional discussion or ratios must be clearly identified, not misleading and not presented with greater prominence than the required pay ratio.


The disclosure requirements will apply to those registrants that are required to provide summary compensation disclosure pursuant to Item 402(c) of Regulation S-K. This includes most public companies that file Form 10-K reports with the SEC. However, the requirements will not apply to emerging growth companies and smaller reporting companies. In addition, foreign private issuers will not be covered because they are not required to provide Item 402 disclosure.


A registrant must comply with the requirements of Item 402(u) with respect to compensation for the registrant's first fiscal year commencing on or after January 1, 2017. As a result, for a registrant with a December 31 fiscal year end, the rule would take effect for compensation for the year ending December 31, 2017. The disclosure would need to be included in the registrant's Form 10-K for that year or, if the registrant's proxy or information statement for its annual stockholders meeting is filed within 120 days of December 31, 2017, the disclosure can be included in the proxy or information statement and incorporated by reference into the Form 10-K.

For most public companies, the pay ratio disclosure will not be required until the 2018 proxy statement, which gives companies more than two years to prepare for compliance. However, the reason the SEC moved the compliance date back from its original proposal is the complexity of assembling the data to make the calculation for many companies. Public companies should start planning for implementation of the rule now, including determining the method by which to identify the median employee, considering the applicability of exclusions, running test calculations, and determining the processes and controls that will be used to support the calculation.

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.


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.