United States: Top Takeaways From The SEC's New Pay Ratio Disclosure Rules

Last Updated: September 30 2015
Article by Josef Volman and Andrew J. Merken

On August 5, the Securities and Exchange Commission ("SEC") adopted final rules requiring most public companies to make pay ratio disclosures pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules require registered securities issuers to disclose:

  • The median of the annual total compensation of all employees other than the principal executive officer ("PEO").
  • The annual total compensation of the PEO, as defined in Item 402 of Regulation S-K.
  • The ratio of these two amounts.

The final rules are effective on Oct. 19, 2015. They implement rules proposed by the SEC almost two years ago on Sept. 18, 2013, described in detail in a previous Securities Law Update. The final rules were published in SEC Release No.33-9877; 34-75610. Here is what you need to know.


The new rules affect all issuers that must provide executive compensation summary tables, but expressly do not apply to emerging growth companies, smaller reporting companies, foreign private issuers and registered investment companies.


The first reporting period for each affected issuer will be its first fiscal year commencing on or after Jan. 1, 2017. Subject to transition rules noted below, a company with a Dec. 31 year-end would not need to make pay ratio disclosures until 2018 for its fiscal year ended Dec. 31, 2017.


Issuers must make pay ratio disclosures in any filing that requires Item 402 executive compensation disclosure, including proxy and information statements, annual reports and registration statements.


The issuer can select any date within the last three months of their last fiscal year to determine the median employee and relevant total employee population. Any reasonable method can be used to identify the employee receiving the median level of compensation in its workforce. Methods include statistical sampling or complete analysis of payroll records using total compensation or any consistently- applied compensation measures. If an issuer believes that an identified median employee's total compensation elements are not characteristic of similar employees, then another median employee may be chosen so long as the methodology and reasons for selection are fully disclosed.


To determine the median employee's annual total compensation, an issuer must consider all of the elements of compensation outlined in Item 402(c)(2)(x) of Regulation S-K pertinent to the PEO's compensation, including retirement or pension benefits, stock rights, and other perquisites.

Issuers may use reasonable estimates for some elements of compensation that are difficult to quantify, such as partly vested future rights. They must provide a brief disclosure of the basis for any estimates used to calculate total compensation.


The final rules require each issuer to determine the median employee among all of its U.S. and non-U.S. full-time, part- time, temporary and seasonal employees, including employees of any consolidated subsidiaries. Independent contractors and workers employed by third parties (e.g., temporary workers employed by an outside company) would not be included.


Under a data privacy exemption, issuers may exclude from their compensation analysis all employees outside of the United States who are employed in jurisdictions with data privacy laws that could make the required analysis and disclosure illegal, despite reasonable efforts by the company to comply.

There is also a de minimis exemption allowing an issuer to exclude for any reason up to five percent of its foreign workers, including any non-U.S. employees excluded under the data privacy exemption.

Specifically, if an issuer's non-U.S. employees account for five percent or less of its total employees, it may exclude all (but not less than all) of those employees. If their non-U.S. employees exceed five percent of their total U.S and non-U.S. employees, they may exclude up to five percent of their total employees who are non-U.S. employees.

The SEC reasoned that the potential cost savings to issuers was significant in relation to the relatively minor effect it would have on pay ratio disclosure. If the number of employees excluded by the data privacy exemption is equal to or greater than five percent, the de minimis exemption would not apply. To validate use of the data privacy exemption, an opinion of company counsel would have to be filed as an exhibit to the company's SEC filing in which the pay ratio disclosure is made.


The median employee must be identified once every three years, unless there has been a change in employee population or employee compensation arrangements that would result in a significant change to pay ratio disclosures. The pay ratio analysis must still be disclosed during the two "off-years" incorporating changes to the PEO's compensation, but the detailed median employee analysis need not be completed. An issuer must disclose the basis for its conclusions that no significant change has occurred. If the median employee's compensation significantly changes within a three-year period, or if that employee leaves, then that employee may be replaced with another appropriately selected median employee, provided that the reasonable basis for such replacement is fully disclosed.


In a change from the proposed rules, the final rules permit issuers to apply cost-of-living adjustments to the compensation of all employees in jurisdictions other than the one in which the PEO is located so that the effective pay ratio is put into context.

If an issuer makes such adjustments, they must be disclosed with the jurisdiction of the median employee, and both the actual and adjusted compensation of the median employee. If an issuer did not make adjustments for all employees to identify the median employee, then the issuer is prohibited from adjusting the median employee's compensation.


An issuer may annualize the compensation of permanent employees who worked for less than the full fiscal year. But in issuer cannot adjust a permanent part-time employee's compensation as if it were based on a full-time schedule.


Relevant narrative discussion or additional ratios that are not misleading may be used but are not required to supplement the required disclosures.. For example, an issuer could present additional ratios to illustrate the effect of part-time, seasonal and temporary employee inclusion. An issuer could also break out the calculations of separate pay ratios for U.S. and foreign employees.


The final rules permit an issuer to aggregate the total compensation provided to each person serving as PEO during the course of a reporting period, or to annualize the compensation of the PEO serving on the date selected for median employee identification. Full disclosure of the option chosen and the methods of calculation is required.


Employees of an acquired entity do not have to be included in pay ratio calculations until the first full fiscal year after the acquisition is complete. Similarly, expanding issuers that no longer qualify for exempt status as emerging growth or smaller reporting companies do not need to provide pay ratio disclosures until after they complete a full fiscal year with non-exempt status.

A new public issuer must make its initial required disclosures in its first full fiscal year after the issuer has been subject to relevant Securities Exchange Act requirements for at least 12 months, and has filed at least one annual report without pay ratio disclosures.

The SEC's goal with these transition rules is that new issuers will not become subject to the new rules sooner than existing issuers.

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.

Similar Articles
Relevancy Powered by MondaqAI
Bass, Berry & Sims PLC
Hunton Andrews Kurth LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Bass, Berry & Sims PLC
Hunton Andrews Kurth LLP
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