SEC Adopts CEO Pay Ratio Rule: New Rule Will Not Be Effective Until 2018 Proxy Season

Sullivan & Cromwell LLP - August 7, 2015

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

  • the median of the annual total compensation of all employees of the issuer, except the issuer’s CEO;
  • the annual total compensation of the issuer’s CEO; and
  • the ratio of those two amounts.
Disclosure will be required with respect to the first fiscal year beginning on or after January 1, 2017; accordingly, the rule will not be effective until the 2018 proxy season.  The requirement will not apply to emerging growth companies, smaller reporting companies, foreign private issuers, filers under the U.S.-Canadian Multijurisdictional Disclosure System and registered investment companies.

Notable highlights of the final rule include:
  • Median employees are now required to be identified only once every three years unless there has been a change in the issuer’s employee population or employee compensation that it reasonably believes would result in a significant change to the pay ratio.
  • Full-time, part-time, temporary, seasonal, U.S. and non-U.S. employees continue to be included, but issuers may now exclude up to 5% of non-U.S. employees (or more to the extent necessary to comply with foreign data privacy laws).
  • Cost-of-living adjustments are now permitted in determining the compensation of employees but the issuer must simultaneously disclose the pay ratio without any cost-of-living adjustments applied.
  • An issuer may continue to select a methodology for identifying the median employee that is appropriate to its size, structure and compensation practices, including statistical sampling or consistently applied compensation measures (such as payroll or tax measures).
  • An issuer will be required to calculate the total annual compensation of its median employee using the same rules that apply to the CEO’s compensation, although reasonable estimates are permitted for calculating the compensation of the median employee.
  • Pay ratio disclosure must be included in SEC filings that would otherwise include executive compensation information required by Item 402(c)(2)(x) of Regulation S-K.  The disclosure must identify 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.