The SEC adopted a final rule in August of 2015 requiring companies to disclose the ratio of their CEOs' compensation to that of the median compensation of their employees, which includes part-time, temporary and foreign employees. The new rule is one of the mandates required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
This rule under the Dodd-Frank Act will go in effect for a company's fiscal year beginning on or after January 1, 2017. Companies will be required to report certain figures in registration statements, proxy and information statements, and annual reports that already include executive compensation information. Such information is intended to provide additional information to investors as they assess CEO compensation packages.
The companies must disclose the following information:
- The median of the total annual compensation of all employees excluding the CEO;
- The annual total compensation of the CEO; and
- The ratio of the two amounts.
Each company will be allowed to use its own methodology for determining the ratio based on facts and circumstances. However, the company will be required to explain the methodology used in computing the ratio.
Not all businesses will be subject to this rule. Currently, only public companies that are required to disclose executive compensation information under Item 402(c)(2)(x) of Regulation S-K are subject to the "Pay Ratio" rule. Foreign private issuers, multijurisdictional disclosure system filers, smaller reporting companies, emerging growth companies, and registered investment companies are not subject to the this reporting requirement.
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