SEC Finalizes CEO Pay Ratio Disclosure Rule

Two years since issuing the proposed rule, after considering more than 285,000 comment letters, and in a contentious three to two vote, the Securities and Exchange Commission (SEC) approved the final rule implementing the CEO pay ratio disclosure mandated by the Dodd-Frank Act. The rule requires disclosure of the ratio of (i) median annual total compensation of all employees other than the CEO to (ii) the reported annual total compensation for the CEO.

Noteworthy differences between the proposed and final rule include:

• Disclosure of the pay ratio will be required for a registrant’s first full fiscal year beginning on or after January 1, 2017 (i.e., not required until 2018 proxy season).
• Consistent with the proposed rule, when identifying the median employee, companies must include “all employees,” including non-U.S., part-time, seasonal and temporary employees. However, the final rule:
  — includes only employees of consolidated subsidiaries;
  — appears to only allow exclusion of independent contractors and “leased” employees if they are employed by and their compensation is determined by an unaffiliated third party (which would mean that directly employed independent contractors must be treated as employees);
  — allows registrants to determine their employee population as of any date in the last three months of the fiscal year for purposes of identifying the median employee; and
  — allows exclusion of certain non-U.S. employees pursuant to a foreign data privacy law exemption and/or a 5 percent de minimis exemption; reliance on either exemption requires additional disclosure.
• Companies may apply “cost-of-living adjustments” to the compensation of employees in jurisdictions different from that of the CEO.
• The pay ratio must be calculated and disclosed annually, but the median employee only needs to be identified once every three years, unless there is a change in employee