On August 5, 2015, the SEC adopted new rules implementing the pay ratio disclosure requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Section 953(b) of the Dodd-Frank Act required the SEC to adopt rules requiring reporting companies to disclose the ratio of the annual compensation of the company’s median employee to the annual compensation of its principal executive officer. These rules will become effective generally for companies in their Form 10-K for the 2017 fiscal year or in their proxy statement for the 2018 annual meeting. Below are some frequently asked questions that companies should be considering now in preparing for this new disclosure.
1. What are the new rules on pay ratio generally?
The new rules are contained in a new Item 402(u) of Regulation S-K added by the SEC. Item 402(u) generally requires companies to disclose
- the median of the annual total compensation of all company employees other than the company principal executive officer (PEO),
- the PEO’s annual total compensation, and
- the ratio between the two numbers.