The SEC's Proposed Pay Ratio Rule: What it Could Mean for Your Upcoming Filings

by Smith Anderson

Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) mandates the Securities and Exchange Commission (SEC) to amend Item 402 of Regulation S-K (Item 402) to require certain companies to disclose the ratio of annual total compensation paid to their chief executive officers (CEOs) to the median annual total compensation of all other employees (excluding the CEOs).  On September 18, 2013, the SEC approved—by a narrow 3-2 vote of its commissioners—to propose a new rule (Proposed Rule) that implements the pay ratio disclosure as mandated by Section 953(b) of Dodd-Frank.  The key provisions of the Proposed Rule are as follows:

  • Which companies are subject to the Proposed Rule?  The Proposed Rule applies to all companies that are already required to provide summary compensation table disclosure under Item 402, except (i) emerging growth companies (under the JOBS Act), (ii) smaller reporting companies and (iii) foreign private issuers. 

  • In which filings should a company include its pay ratio disclosure?  The disclosure required by the Proposed Rule would be included in all annual reports, proxy statements, information statements and registration statements that already require executive compensation disclosure.

  • How will a company calculate the median annual total compensation of its employees (excluding its CEO)?  One of the most debated aspects of the Proposed Rule is that for a company to calculate its pay ratio, it must account for the annual total compensation of all of its employees (as of the last day of the last fiscal year).  For the purposes of this analysis, the company must consider part-time, temporal and seasonal employees, as well as international employees and employees of subsidiaries. Recognizing the challenge of determining the compensation of such a potentially large group, the SEC provides two alternative methods of calculation:

    1. Statistical sampling.  A company may take a reasonable statistical sample of all of its employees (considering the facts and circumstances), calculate the annual total compensation for the last completed fiscal year for each employee in the sample, and identify the employee with the median annual total compensation in the sample; or
    2. Consistently Applied Compensation Measure.  A company may use a consistently applied alternative definition of compensation, including (but not limited to) annual cash compensation, annual direct compensation or annual W-2 compensation. Once the company identifies the employee with the median annual total compensation, it could then calculate the annual total compensation under the Item 402 definition for that particular employee.
  • When should a company subject to the Proposed Rule begin disclosing its pay ratio?  The Proposed Rule would require a company to provide pay ratio disclosures for its first fiscal year commencing on or after the effective date of the final rule.  While the effective date of the final rule has not been determined, most commentators believe that it will become effective sometime in 2014.  If that prediction is accurate, a company with a calendar fiscal year would first be required to include the new disclosures in its annual report for the 2015 fiscal year or proxy or information statement filed in 2016 for the annual meeting held in 2016.  Of course, a company may always voluntarily comply with SEC rules at an earlier time.  Finally, the Proposed Rule creates a transition period for a private company going public, allowing it to avoid making pay ratio disclosure on Forms S-1, S-11, and 10.  In that case, the SEC would allow the company to omit this disclosure until (i) the Form 10-K covering the first fiscal year commencing on or after the company becomes subject to the Exchange Act of 1934 or, if later, (ii) the filing of a proxy or information statement for its next annual meeting of shareholders (or written consents in lieu of a meeting) following the end of such fiscal year.

In spite of its apparent simplicity, the Proposed Rule is one of the most controversial provisions of Dodd-Frank.  As previously mentioned, the SEC commissioners were sharply divided in their decision to adopt the Proposed Rule, and their divergent views reflect the rift among public commentators.  The proponents argue that the Proposed Rule furthers the purpose of Dodd-Frank and holds CEOs “accountable,” while granting companies significant flexibility in how they choose to derive their pay ratios.  Critics, meanwhile, argue that the Proposed Rule is overly burdensome and potentially expensive to comply with.  The public may provide comments to the SEC regarding the Proposed Rule until December 2, 2013.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Smith Anderson | Attorney Advertising

Written by:

Smith Anderson

Smith Anderson on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.