The Securities and Exchange Commission (SEC) has by a 3 to 2 vote adopted proposed rules requiring companies to disclose how their principal executive officer’s pay compares to pay of all company employees. Specifically, the proposed rules implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which relates to disclosure of employee compensation, principal executive officer compensation and the ratio between these amounts. Commissioners Michael Piwowar and David Gallagher issued strong dissents in voting against the proposed rules.  

Section 953(b) of the Dodd-Frank Act  

Section 953(b) of the Dodd-Frank Act requires the SEC to implement rules requiring companies 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 (which is already required to be disclosed under existing rules); and  
  • the ratio of these two amounts.  

“Annual total compensation” is required to be calculated in accordance with the current rules for determining a named executive officer’s total compensation in the Summary Compensation Table included in the proxy statement.  

SEC’s Proposed Rules  

Even before the adoption of the proposed rules, the SEC solicited and received extensive comments based on the Section 953(b) requirements from a wide range of commenters. In adopting the proposed rules, the SEC was mindful of comments regarding the potentially substantial cost of compliance with the implementation of Section 953(b) while seeking to remain consistent with its requirements, including the burden of compiling compensation statistics across an entire organization, particularly for an organization with international employees in multiple jurisdictions and multiple business units. In general, the proposed rules provide companies with significant flexibility in developing the disclosures required by Section 953(b).

Presentation of Ratios

The proposed rules amend Item 402 of Regulation S-K to require Section 953(b) disclosure items to require companies to present the pay ratio as a ratio in which the median of the annual total compensation of all employees equals one or, to express it narratively in terms of the multiple that the PEO’s annual total compensation bears to the median of the annual total compensation of all employees. For example, if the median of the annual total compensation of all employees of a company is $45,790.39 and the annual total compensation of a company’s PEO is $12,260,000.40, then the pay ratio disclosed would be “1 to 268” (which could also be expressed narratively as “the PEO’s annual total compensation is 268 times that of the median of the annual total compensation of all employees”).

Methodology for Identifying the Median Employee

Under the proposed rules, companies will not be required to use any specific methodology to identify the median employee for annual total compensation. Companies may choose a methodology to identify the median that works best within the structure of their business and their individual compensation practices. In determining the employees from which the median is identified, companies may choose to use the entire employee population, a statistical sample or other reasonable methods. To identify the median employee, companies could use annual total compensation or another compensation measure that is consistently applied to all employees included in the calculation, such as amounts derived from their payroll or tax records.

Calculation of Employee Annual Total Compensation

The proposed rules define annual total compensation as the total compensation determined for purposes of the Summary Compensation Table for the last completed fiscal year. The proposed rules allow companies to use reasonable estimates when calculating the annual total compensation or any element of total compensation for any employee, including the median employee, other than the PEO.

Definition of “All Employees”

The proposed rules define “all employees” of the company to include:

  • Any person employed as of the last day of the most recently completed fiscal year, whether a full-time, part-time, temporary, seasonal or non-US employee.
  • Employees of the company and all subsidiaries.  

The proposed rules would permit companies to annualize salaries for permanent employees that did not work the entire fiscal year, such as new hires or permanent employees on unpaid leaves of absence, but would prohibit annualizing the salaries of temporary or seasonal workers.

Additionally, companies would not be permitted to make any adjustments to employee total compensation to account for the full-time equivalents of part-time employees or the cost-of-living differences for non-U.S. employees.


Companies would be required to disclose the methodology used to identify the median and any material assumptions, adjustments or estimates used to identify the median or to determine total compensation. If the company uses a compensation measure other than annual total compensation, it must disclose the compensation method used. Companies must also identify clearly all estimated amounts. Companies would be permitted, but not required, to provide additional narrative disclosures or notes, though the SEC is not inviting lengthy disclosure or technical analysis or formulas.  

Companies Subject to the Disclosure Requirement

Under the proposed rules, any company that is currently required to provide disclosure on executive compensation under Item 402 of Regulation S-K would be required to disclose pay ratios under the proposed rules. Consistent with existing exemptions from executive compensation disclosure, smaller reporting companies and foreign private issuers would be exempt from compliance with the proposed rules. As provided by the JOBS Act, the proposed rules would not apply to emerging growth companies. Companies subject to compliance will be required to disclose these pay ratios in registration statements, proxy and information statements, and any annual reports that must already include executive compensation information.  

Compliance Transition Periods

The proposed rules would be effective with respect to compensation for a company’s first fiscal year beginning on or after the effective date of the rule. Companies would be permitted to omit the initial pay ratio disclosure from their filings until the Form 10-K for that fiscal year, or if later, the filing of their proxy or information statement for the next annual meeting of shareholders following the end of that fiscal year, but in any event must file the pay ratio disclosure not later than 120 days after the end of that fiscal year. For example, if the proposed rules become effective in 2014, a company with a December 31st fiscal year would first be required to include the pay ratio disclosure with respect to fiscal 2015 compensation in its proxy statement for its 2016 annual meeting of shareholders.  

The proposed rules provide newly public companies with a transition period allowing these companies to begin disclosure with the first fiscal year commencing on or after the fiscal year that the company becomes subject to reporting requirements under the Securities Exchange Act. 

Comment Period

Comments on the proposed rules are due within 60 days of their publication in the Federal Register.