SEC approves “pay ratio” disclosure for CEOs

August 06 01:45 2015

The Securities and Exchange Commission Wednesday narrowly approved a new rule requiring publicly traded U.S firms to disclose the gap between CEOs’ annual compensation and the median compensation of other employees. Handing a defeat to business opponents of the change, the 3-2 vote by the SEC’s five commissioners capped a multi-year battle over the so called pay ratio disclosure required by the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted after the national financial crisis.635630546629745884-AP-SEC-Money-Market-Funds-002

The outcome came after more than 287,000 comment letters and related meetings as business and other groups called the rule unnecessary and said it would be expensive and difficult to implement, while supporters contended it would help investors make more informed evaluations of corporate governance and so-called say-on-pay initiatives. What’s not in dispute is that the new rule is likely to be a new feature in protests over U.S. income inequality.

“While there is no doubt that this information comes with a cost, the final rule recommended by the (SEC) staff provides companies with substantial flexibility in determining the pay ratio, while remaining true to the statutory requirements,” said SEC Chair Mary Jo White. Companies would be allowed to use total employee headcount, a statistical sampling of workers or other methodology to determine the median employee level. That could include applying cost-of-living adjustment to the compensation measure used to identify the median. However, the firm would be required to disclose the median employee annual total compensation and pay ratio without the cost-of-living adjustment.

In an effort to ease compliance, the rule allows companies to exclude non-U.S.workers from the methodology used to calculate the median employee level if the workers are based in a location where the disclosure would violate data privacy laws. Up to 5% of overseas workers could be excluded from the calculations, a lower percentage than opponents had sought.

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