SEC Says Companies Must Compute Ratio of CEO Pay to That of Median Employee

By Susan Jones | August 6, 2015 | 11:22am EDT
(AP File Photo)

( - The Securities and Exchange Commission on Wednesday adopted a final rule requiring public companies to disclose the ratio of the CEO's total compensation to the median compensation of their employees.

So if the CEO makes a million dollars and the median employee makes $50,000, the ratio would be 20:1.

A company would be required to calculate the annual total compensation for its median employee using the same rules that apply to the CEO’s compensation.

The new rule was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Republicans called its adoption disappointing:

"[I]t is the latest example of the SEC squandering its resources on rulemakings that do nothing to help small business startups and will instead harm U.S. companies and investors," Financial Services Committee Chairman Jeb Hensarling (R-Texas) said in a statement.

"The SEC has devoted thousands of man-hours and millions of dollars to finish rules mandated by the Dodd-Frank Act that neither address the causes of the financial crisis nor advance the SEC's statutory mission."

Hensarling said the rule was adopted to appease those who want the economy to be controlled by government regulators.

"Instead of focusing on rules that would protect investors or facilitate capital formation for small and medium-sized businesses, Dodd- Frank decided to mandate disclosure rules that burden every U.S. public company and that cost the economy billions of dollars without any material benefit."

Hensarling predicted that to make up for the costs of complying with the CEO pay-ratio rule, some companies will reduce their workforces:

"I'm guessing that a worker who loses his or her job will take little comfort in knowing the ratio between the CEO's pay and the salary that they are no longer receiving because Dodd-Frank has put them out of work."

Hensarling said the Financial Services Committee will consider legislation to repeal the rule in the fall.

The SEC said the new rule will provide shareholders with information they can use to evaluate a CEO’s compensation. The new pay ratio must be disclosed in registration statements, proxy and information statements, and annual reports that call for executive compensation disclosure.  

Companies will be required to provide disclosure of their pay ratios for their first fiscal year beginning on or after Jan. 1, 2017.

To address concerns about the costs of complying with the rule, the SEC said it is providing companies with "flexibility" in meeting the rule’s requirements.  

For example, a company will be permitted to select its methodology for identifying its median employee and that employee’s compensation, including through statistical sampling of its employee population or other "reasonable" methods.  

A company also would be permitted to identify its median employee once every three years unless there has been a change in its employee population or employee compensation arrangements that would result in a significant change to its pay ratio disclosure.

The SEC voted  3-2 along partisan lines to adopt the regulation, which will take effect 60 days after its publication in the Federal Register.

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