On September 18, 2013, a divided SEC Commission (the “SEC”) voted to propose for public comment rules to implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), requiring U.S. public companies to provide disclosure regarding internal pay equity (the “Proposed Rule”). Section 953(b) of the Dodd-Frank Act requires the SEC to amend Item 402 of Regulation S-K to require companies to disclose the following information:

  • The median of the annual total compensation of all employees of the company, excluding the Chief Executive Officer;
  • The annual total compensation of the Chief Executive Officer; and
  • The ratio of these two amounts.

Referred to as the “pay ratio” disclosure, it would be required in any SEC filings that currently require executive compensation disclosure pursuant to Item 402 of Regulation S-K, including any annual report, proxy statement, information statement or registration statement. The Proposed Rule would not apply to emerging growth companies, smaller reporting companies or foreign private issuers.

Determination of Median Compensation For All Employees

Determining the Pool of Employees. The pool of employees for which the median is to be determined includes all individuals employed as of the last day of a company’s most recently completed fiscal year, other than the Chief Executive Officer. “Employees” includes full-time, part-time, seasonal and temporary workers employed by the company or any of its subsidiaries, but does not include independent contractors or “leased” workers. For multinational companies, the pool of employees from which the median must be calculated includes both U.S. and non-U.S. employees.

Flexibility in Calculation Methodology. In response to concerns about the administrative difficulty and expense of determining the median annual total compensation for all employees, the Proposed Rule provides a degree of flexibility in how companies calculate the total compensation figures. The Proposed Rule does not specify any required calculation methodology for identifying the median. A company may determine the median by calculating the total compensation for all employees to find the median outcome, or may determine the employee that represents the median using any consistently applied compensation measure, and then calculate the total compensation amount for that employee. In addition, the Proposed Rule allows companies to utilize statistical sampling, estimation and reasonable assumptions to identify the median.

The use of reasonable estimates is permitted when calculating annual total compensation or any specific element of total compensation, other than for the Chief Executive Officer. For newly hired permanent employees, the Proposed Rule allows, but does not require, an employee’s compensation to be annualized. However, if a company decides to annualize such compensation, it must do so for all permanent employees who have not worked the full year (other than seasonal or temporary employees).

Disclosure of Calculation Methodology. Companies must briefly disclose and consistently apply any methodology used to determine the median and any material assumptions, adjustments or estimates used to identify the median or to calculate annual total compensation, including the type of statistical sampling employed. If there are material changes to the methodology, assumptions or estimates used in the prior year, disclosure of the change, the reason for such change and an estimate of the impact on the median and the pay ratio is required. The Proposed Rule explicitly states that there is no need for detailed or technical disclosure, especially concerning any statistical sampling method that may be used. A company is permitted to include any supplemental narrative disclosure it feels is necessary to provide the proper context for the pay ratio disclosure, including providing additional pay ratio disclosures (such as a pay ratio limited only to U.S. employees).

Disclosure Timing and Transitional Matters

The Proposed Rule generally does not require the pay ratio disclosure to be updated for the most recently completed fiscal year until the company timely files its annual proxy statement. Thus, for example, a registration statement filed after the end of the fiscal year but prior to the filing of a company’s annual proxy statement would not be required to include updated pay ratio disclosure.

The SEC intends to allow companies to omit the initial pay ratio disclosure from their filings until the filing of the annual report or proxy statement for the first fiscal year commencing on or after the date the Proposed Rule becomes final. For example, if the Proposed Rule becomes final in 2014, a company with a fiscal year ending on December 31 would first be required to include pay ratio information in its proxy for its 2016 annual meeting of shareholders. In addition, new registrants would not be required to provide pay ratio disclosure in a registration statement, such as a Form S-1 filed in conjunction with an initial public offering.


It has taken over three years since the enactment of the Dodd-Frank Act for the SEC to prepare the highly anticipated and controversial Proposed Rule. While it remains to be seen whether the final rule will be substantively different from the Proposed Rule, the internal process necessary to determine the median compensation amount will be an additional burden, and companies should begin to consider how to implement the pay ratio disclosure rules based on their structure and specific business circumstances.

The Proposed Rule includes a number of requests for comments, both technical and interpretive. The Proposed Rule will be open for comment for a period of 60 days following its publication in the Federal Register (approximately November 18, 2013).