United States: SEC Adopts Final Pay Ratio Disclosure Rules

The U.S. Securities and Exchange Commission (SEC) has adopted final pay ratio disclosure rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the new rules, a covered registrant will be required to provide annually, as more fully discussed below, the following information:

(a) the median of the annual total compensation of all employees of the registrant (excluding the CEO);

(b) the annual total compensation of the registrant's CEO; and

(c) the ratio of the CEO's annual total compensation to the amount described in (a).

The following questions and answers discuss the most important provisions of the new rules. 

Which registrants are covered under the new rules?

A registrant is covered by the new rules unless it is:

  • an emerging growth company;
  • a smaller reporting company;
  • a foreign private issuer;
  • a registered investment company; or
  • a registrant that files reports and registration statements with the SEC pursuant to the U.S.-Canadian Multijurisdictional Disclosure System.

When will the new pay ratio disclosure be required in a registrant's filings?

A registrant's initial pay ratio disclosure will be required for its first full fiscal year beginning on or after January 1, 2017. Thus, for a registrant with a fiscal year ending on December 31, the disclosure initially will be required in the registrant's 2018 filings. Consistent with the initial reporting requirement applicable to an existing registrant, the first pay ratio reporting period for a new registrant will be its first fiscal year commencing on or after January 1, 2017, that is, after the date it first becomes subject to the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act").

OBSERVATION: The delay of the date a registrant is first required to include in its filings pay ratio disclosure from that specified in the rules as originally proposed is in recognition of the fact that some registrants may require additional time to implement the systems needed to compile the required disclosure and verify its accuracy. Thus, a registrant should consider, early on, the time it will require, given its particular facts and circumstances, to establish and test the systems necessary to collect and analyze the data required to identify its median employee, make any necessary changes to its disclosure controls and procedures and put its system into operation.

In what documents will the new pay ratio disclosure be required?

The pay ratio disclosure must be included in any filing described in Item 10(a) of Regulation S-K that requires executive compensation disclosure under Item 402 of Regulation S-K, including annual reports on Form 10-K, registration statements under the Securities Act of 1933 or the Exchange Act (other than a registration statement relating to an initial public offering) and proxy and information statements, to the same extent these filings require compliance with the executive compensation disclosure requirements in Item 402.

OBSERVATION: Under the pay ratio disclosure rules, as adopted, a registrant is not required to provide the mandated pay ratio disclosure for a completed fiscal year (including an update of its pay ratio disclosure for the prior fiscal year) until it files its annual report on Form 10-K for that fiscal year or, if later (but in no event later than 120 days after the end of that fiscal year), it files the definitive proxy or information statement relating to its next annual meeting of shareholders or amends the previously filed annual report on Form 10-K, in either case, containing the required pay ratio disclosure.

What constitutes an "employee"?

For purposes of the pay ratio disclosure rules, an "employee" is defined to include any full-time, part-time, seasonal or temporary employee of the registrant or any of its consolidated subsidiaries, whether employed within or outside the United States. Independent contractors and leased workers are excluded from the definition, provided they are employed, and their compensation is determined, by an unaffiliated third party. Additionally, a registrant may exclude persons who become employees as the result of a merger or acquisition occurring in the most recently completed fiscal year for purposes of determining the employee population for that fiscal year, although such persons will need to be included for purposes of determining the employee population for subsequent fiscal years. In determining its employees for a fiscal year, a registrant may measure the employee population as of any date that is within three months of the end of that fiscal year, as long as that date is disclosed in the registrant’s pay ratio disclosure for that fiscal year.

Do any different rules apply with respect to a registrant's non-U.S. employees?

The short answer is, "Yes." The new rules include two key provisions: a "data privacy" provision and a de minimis provision, each discussed below, which are applicable only to non-U.S. employees.

The "Data Privacy" Provision

Under the "data privacy" provision, a registrant may exclude its non-U.S. employees in a foreign jurisdiction that has local data privacy laws or regulations that prevent it from obtaining or processing the information necessary to comply with the pay ratio disclosure rules despite "reasonable efforts" to do so. In order to satisfy the "reasonable efforts" requirement, a registrant will be required to seek an exemption or other relief from the applicable jurisdiction's data privacy laws or regulations. If any employee in a jurisdiction is excluded under the data privacy provision, all of the registrant's employees within that jurisdiction must be excluded. The registrant must identify in its pay ratio disclosure any jurisdictions where employees have been excluded in reliance on the data privacy provision. In addition, for each jurisdiction so identified, the registrant must include the following information:

  • the specific data privacy laws or regulations requiring the exclusion;
  • an explanation as to how complying with the pay ratio disclosure rules would violate those data privacy rules or regulations; and
  • the approximate number of employees in the jurisdiction that have been excluded based on the data privacy provision.

OBSERVATION: For a registrant with employees in foreign jurisdictions, a timely evaluation should be undertaken to determine what, if any, jurisdictions have data privacy laws or regulations that may conflict with the use of the data of employees in those jurisdictions to comply with the new pay ratio disclosure requirements. If there are such jurisdictions, the registrant must take the steps required by the new data privacy rules to seek an exemption or other relief and to obtain and provide with its SEC filings the necessary legal opinions required by the rules when employees are excluded pursuant to the data privacy exception.

The De Minimis Provision

A second basis for a registrant's exclusion of foreign employees is a de minimis provision, which permits a registrant to exclude up to five percent of its non-U.S. employees, subject to the following specific limitations:

  • Any non-U.S. employees excluded pursuant to the data privacy provision, discussed above, must be counted toward the five percent de minimis limit.
  • In the case of a registrant whose non-U.S. employees represent five percent or less of its total employees, if it chooses to exclude any non-U.S. employees under this provision, all of its non-U.S. employees must be excluded.
  • In the case of a registrant with more than five percent of its total employees being non-U.S. employees, and consistent with the data privacy provision, if it chooses to exclude any employee in a particular jurisdiction, all of its employees in that jurisdiction must be excluded.

If any employee is excluded under the de minimis provision, the registrant must disclose the jurisdiction or jurisdictions where its non-U.S. employees are being excluded, the approximate number of employees from each jurisdiction that have been excluded under this provision, and the total number of its U.S. and non-U.S. employees used for its de minimis calculation.

How is the median employee to be identified?

The final rules provide a registrant with flexibility in determining its median employee, permitting the use of its entire employee population, a statistical sample or other reasonable methods for this purpose. In making the determination, a registrant may use annual total compensation or another measure of compensation that is consistently applied, such as information derived from payroll or tax records. A registrant's pay ratio disclosure must include a brief description of the methodology used in identifying the median employee, as well as any material assumptions, adjustments or estimates that are used. If applicable, the disclosure must also note any changes from the methodology used in the prior year and the purpose of the changes.

OBSERVATION: In a statement reflecting the complexity some registrants will encounter in determining a median employee, the adopting release observes that, in determining the methodology to be used, a registrant may consider, among other factors, the following:

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

In determining the median employee, may a registrant make cost-of-living adjustments to the compensation levels of its employees in order to reflect the value of compensation paid to individuals in other countries?

A registrant may make cost-of-living adjustments to the compensation of its employees that are located in jurisdictions other than the jurisdiction where the CEO resides when identifying its median employee, provided the adjustment is applied to all such employees included in the pay ratio calculation. If a registrant chooses to use a cost-of-living adjustment to identify its median employee, and the median employee identified is an employee in a jurisdiction other than the one in which the CEO resides, the registrant must use the same cost-of-living adjustment in calculating the median employee's annual total compensation and disclose the median employee's jurisdiction. Finally, a registrant electing to present the pay ratio using a cost-of-living adjustment must disclose its median employee's annual total compensation and the pay ratio calculated both with and without the cost-of-living adjustment, with the pay ratio that reflects the cost-of-living adjustment constituting the pay ratio required by Item 402, as amended by the new rules.

How often must a new median employee be determined?

Under the new rules, a registrant need only identify the median employee once every three years, unless there is a change to its employee population and/or employee compensation arrangements that it reasonably believes would significantly change its pay ratio disclosure.

OBSERVATION: If a registrant determines that there have been no changes that it reasonably believes would significantly affect its pay ratio disclosure, the registrant must include in its pay ratio disclosure a statement to the effect that it is using in the current-year pay ratio calculation the same median employee used in the prior year and a brief description of the basis for its reasonable belief that it is entitled to do so.

How must the pay ratio be expressed?

The pay ratio is required to be expressed as a ratio in which the annual total compensation of the median employee is set at one (for example, 162 to 1), or in a narrative describing the CEO's compensation as a multiple of the median (for example, 162 times that of the median employee). The median employee's annual total compensation may not be expressed as a percentage of the CEO's annual total compensation.

The preceding discussion is but a brief summary of some of the key provisions of the new pay ratio rules. Accordingly, registrants are urged to undertake an early, detailed review of the pay ratio provisions, as adopted, in order to timely identify and address all of the obligations imposed under the new provisions.

If you have any questions about this Alert, please contact Darrick M. Mix, Howell J. Reeves, any of the attorneys in our Capital Markets Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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.