Last week, the SEC proposed a new rule that would require public companies to disclose:
- The median annual total compensation of all employees except the CEO,
- The annual total compensation of the CEO, and
- The ratio of the two amounts.
The proposed rule, which has been long-delayed and highly controversial, is required by the Dodd-Frank Act.
We will include a more detailed discussion of the proposed rule and related issues in our upcoming fall issue of the Public Company Forum. But for now, here are a few things to note:
- The methodology for identifying the median employee has been left intentionally open-ended to allow flexibility.
- Annual total compensation is calculated using the current executive compensation rules, subject to reasonable assumptions and estimates.
- “All employees of the registrant” is defined very broadly.
- Companies must disclose the selected calculation methodology, including any material assumptions, adjustments and estimates.
- Companies may add supplemental narrative and ratio disclosure.
- The proposing release contains a transition period that would allow companies to “omit” disclosure for the first year of adoption. So if the rule becomes effective in 2014 (the most realistic time frame), then companies would first be required to comply in the 2016 proxy season by disclosing 2015 fiscal year information.
Keep in mind that, despite its high profile, this is just a proposal. There will be a sixty-day public comment period that may well be extended depending on the nature of the comments, which are expected to be voluminous. For right now, it’s enough to simply monitor this for further developments