SEC Publishes CEO Pay Ratio Proposal: Will Not Affect 2014 or, Most Likely, 2015 Proxy Seasons; Issuers May Use Sampling and Reasonable Estimates to Determine Median; Ratio Must Include All Full-Time, Part-Time, Temporary, Seasonal and Non U.S. Employees

Sullivan & Cromwell LLP - September 20, 2013

On Wednesday, the SEC published the text of its proposed rule, adopted that morning by a three-to-two vote, requiring U.S. public companies to disclose:

  • the median annual total compensation of all employees of the issuer other than the CEO;
  • the annual total compensation of the CEO; and
  • the ratio of those two amounts.

Disclosure would be required with respect to the first fiscal year starting on or after the effective date of the final rule; accordingly, the rule will not affect the 2014 proxy season and likely will not affect the 2015 proxy season. The proposed requirement would not apply to foreign private issuers, smaller reporting companies or emerging growth companies under the JOBS Act, and newly public companies would not be required to comply until after their first full fiscal year as a reporting company.

Notable highlights of the ratio calculation include:

  • All employees (including full-time, part-time, temporary, seasonal and non-U.S. employees) must be included in determining the median employee.
  • In determining the median employee, an issuer may select a methodology that is appropriate to its size, structure and compensation practices. This could include, for example, statistical sampling or consistently applied compensation measures (such as payroll or tax records).
  • The issuer would then calculate the median employee’s total compensation in accordance with current SEC rules (but could include perquisites and non-discriminatory benefits that would be excludable from total compensation in the Summary Compensation Table).
  • Issuers may use reasonable estimates when calculating annual total compensation or any element of total compensation of the median employee.
  • The disclosure must briefly describe the methodology used to determine the median employee and any material assumptions, adjustments or estimates used to identify the median employee or to determine total compensation.

Comments on the proposal are due 60 days after the proposal text is published in the Federal Register. The SEC has specifically requested quantitative information as to costs and benefits of the proposed rule and any alternatives suggested by commenters.