SEC’s Pay Ratio Rules Would Require U.S. Companies to Compare CEO Pay with Median Employee Pay

The SEC is proposing new rules, mandated by the Dodd-Frank Act, that would require U.S. companies to disclose the ratio of the CEO’s compensation to the median compensation of other employees. The SEC is proposing exemptions for emerging growth companies, smaller reporting companies and foreign private issuers, including Canadian MJDS issuers.


The SEC received a large number of comment letters even before the pay ratio rules were proposed, indicating the contentious nature of the Dodd-Frank requirement, particularly with respect to the cost and complexity of calculating median employee compensation. Partly to help contain compliance costs, the SEC is not proposing a mandatory methodology for calculating median employee pay. Instead, issuers would be able to create a methodology appropriate to their size and the way they compensate employees. Reasonable estimates could be used in the calculations, but all types of compensation would have to be included for all types of employees; e.g., full-time, part-time, temporary, seasonal and non-U.S. employees. A company’s methodology, along with any material assumptions and estimates, would have to be disclosed. 


The SEC is proposing a one-year grace period before companies would have to comply with the new rules. This means that a U.S. company’s first proxy circular or annual report containing pay ratio disclosure would likely be filed in 2016 reflecting compensation paid during 2015.

Cross-Border Implications

When Canada’s executive compensation disclosure rules were amended in 2011, regulators declined to adopt a pay ratio requirement on the basis that the benefits of disclosure would not exceed the costs of compliance. However, if the SEC’s proposal becomes law, some Canadian companies that already follow U.S. disclosure practices may decide to provide pay ratio information on a voluntary basis. That outcome would be similar to the Canadian approach to say-on-pay, which has been adopted voluntarily by many of Canada’s largest companies.




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