On September 18, 2013, the Securities and Exchange Commission proposed a new rule that would require public companies to disclose the ratio of the pay gap between its chief executive officer and the median compensation of their employees. The proposed rule, which is required under the Dodd-Frank Act, was approved by the SEC commissioners 3-2 along partisan lines.
The proposal does not prescribe a specific methodology for companies to follow in calculating the pay ratio. Companies would have flexibility to determine the median annual compensation of its employees. However, companies would be required to disclose the methodology that they use, as well as any material assumptions, adjustments or estimates used to calculate the employee’s median or the CEO’s total compensation. Companies would be required to disclose the information in registration statements, proxy and information statements, and annual reports pursuant to Item 402 of Regulation S-K.
The proposed rule would not apply to emerging growth companies, small reporting companies or foreign private issuers. The proposal is subject to a 60 day public comment period, and the chair of the SEC, Mary Jo White, stated that “We are very interested in receiving comments on the [proposal]”.
While the proposal enjoys the support of labor groups and shareholder activists, others feel that it will result in a huge waste of time and resources, especially for large, multinational companies, requiring them to calculate who is part of the “median” employee base and likely having to factor in different currencies.