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Aug 05, 2015

SEC adopts final pay-ratio rule

Rule allows companies to choose methodology used to identify median employee

The SEC has approved a hotly debated rule that obliges publicly traded companies to disclose the ratio of the pay of their chief executive officer to the compensation of their median employee.

The commission voted 3-2 in favor of the measure, which was advocated by activist investors as an increase in transparency and a step toward greater fairness, and resisted by many corporations as misleading and an unnecessary expense. The two Republican members of the commission opposed it.

The SEC says the new rule, which requires disclosure in registration statements, proxy statements, information statements, and annual reports starting January 1, 2017, is meant to help shareholders evaluate a CEO’s compensation.  

‘The commission adopted a carefully calibrated pay-ratio disclosure rule that carries out a statutory mandate,’ says SEC chairman Mary Jo White in a press release. ‘The rule provides companies with substantial flexibility in determining the pay ratio, while remaining true to the statutory requirements.’

The SEC says it has addressed companies’ concerns about the cost of gathering the information by giving them flexibility in how they meet the requirements. It says companies can, for example, choose the methodology they use to identify the median employee in terms of compensation, including through statistical sampling. Companies also need to determine the ratio only once every three years and may exclude non-US employees who work in countries where data privacy laws would prevent compliance, the SEC adds.

Democrat commissioner Kara Stein said in casting her vote in favor of the rule that ‘flexibility has been provided to companies in a thoughtful way and is carefully tailored to address implementation concerns, without undermining the intended benefits of the rule.’

Daniel Gallagher, a Republican commissioner, voted against the rule, saying: ‘The pay ratio being adopted today will produce so few (if any) benefits for regular shareholders that the information seems likely to be useless for anything butnaming and shaming. Thus, the rule is not intended to, and does not, produce information in furtherance of a legitimate government purpose.’