A set of long-awaited proposed rules requiring public companies to make additional executive compensation disclosure has finally been proposed by the Securities and Exchange Commission (the “SEC”). On September 18, 2013, the SEC voted 3-2 to propose rules that require each SEC registrant disclose the ratio of the median of the annual total compensation of its employees to the annual total compensation of its chief executive officer. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 mandates that the SEC amend existing rules to require disclosure of this ratio.
Proposed Required Disclosure
Under the proposed rules, registrants will be required to disclose:
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The median of the annual total compensation of all employees of an issuer (excluding the chief executive officer, referred to as the “principal executive officer”);
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The annual total compensation of the principal executive officer; and
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The ratio of the median annual total compensation of all employees to the annual total compensation of the principal executive officer.
Currently, registrants disclose the compensation of their named executive officers but are not currently required to disclose compensation information for other employees. The SEC has tried to propose rules that would allow registrants flexibility in developing the required disclosure. Registrants would be able to choose from several methods in developing the disclosure and calculations, including identifying the median using the full employee population or by using statistical sampling or another reasonable method.
Registrants may calculate the annual total compensation for each employee included in the calculation (whether the entire population or a statistical sample) using the same method it uses to calculate the compensation of its principal executive officer and identify the median based on that information. Or registrants may identify the median employee based on any consistently applied compensation measure and then calculate the annual total compensation for the median employee. The time period for the annual total compensation for the median employee would be for the last completed fiscal year.
The ratio must be expressed as a ratio in which the median of the annual total compensation of all employees is equal to one (e.g., “1 to 100”), or, alternatively, expressed narratively in terms of the multiple that the principal executive officer’s total compensation amount bears to the median employee’s total compensation amount (e.g., “the principal executive officer’s annual total compensation is 100 times that of the median of the annual total compensation of all employees”).
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