US Securities and Exchange Commission Adopts Rule for Pay Ratio Disclosure under Dodd-Frank

On August 5, 2015, the US Securities and Exchange Commission adopted final rules implementing the pay ratio disclosure requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rules would, among other things, require a public company to disclose: (i) the annual total compensation of its CEO; (ii) the median annual total compensation of its other employees; and (iii) the ratio of those two amounts, commonly referred to as the "pay ratio." That information must be disclosed in registration statements, proxy and information statements and annual reports that require executive compensation disclosure. According to the SEC press release adopting the final rule, the purpose of the requirements is to increase the transparency that shareholders of companies have into details of a company’s CEO compensation.

To address concerns regarding the cost of compliance, the final rule allows flexibility in calculating the pay ratio. For example, a company may select its own methodology for identifying its median employee and that employee’s compensation, including through statistical sampling of its employees or other methods. In addition, the final rule permits companies to exclude certain non-US employees from the calculation where the privacy laws or regulations of the applicable countries would prohibit such disclosures in order to comply with the rule. Companies will be required to make their first pay ratio disclosures pay ratios in relation to compensation paid in the first full fiscal year beginning on or after January 1, 2017.