- the median annual total compensation of all employees (including all full-time, part-time, temporary, seasonal and non-U.S. employees, but excluding the CEO);
- the annual total compensation of the CEO; and
- the ratio of the median annual total compensation of all employees to the annual total compensation of the CEO.
To address concerns of critics regarding the burden of determining the median annual total compensation of all employees, the proposed rules provide some flexibility in determining that number by allowing companies to use a methodology using reasonable estimates to identify the median employee and reasonable estimates to calculate the annual total compensation or any elements of total compensation for employees other than the CEO (e.g., a company may calculate the median employee compensation on a representative sample of the employee group).
Commissioner Gallagher, one of the two SEC commissioners who voted against the proposed rules, was quite candid with his views: "The pay ratio computation that the proposed rules would require is sure to cost a lot and teach very little. Its only conceivable purpose is to name and, presumably in the view of its proponents, shame U.S. issuers and their executives. This political wish-list mandate represents another page of the Dodd-Frank playbook for special interest groups who seem intent on turning the notion of materiality-based disclosure on its head. There are no – count them, zero – benefits that our staff have been able to discern."
Certain Companies Would be Exempt
In light of the burden that would be associated with complying with these new rules (if adopted), smaller reporting companies, emerging growth companies and foreign private issuers would not be required to comply with the rules. Newly public companies would not be required to comply until the first year after their IPO.
Disclosure Not Expected to be Required Until 2016
The SEC is requesting comments on the proposed rules for 60-days, and final rules are not expected to be adopted until 2014. The SEC indicated that it expects the new rules to apply in the first fiscal year following the date the final rules become effective. Accordingly, companies with a December 31 year-end would be required to comply with the rules (if adopted) in their proxy statements for 2016 stockholder meetings (i.e., the disclosure would be with respect to 2015 compensation).