At Long Last: SEC Proposes New Rules To Compel Disclosure Of CEO Pay As Ratio To Median Employee Pay

On September 18, 2013, in accordance with Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Reform Act"), the Securities and Exchange Commission (the "SEC") issued a press release and published proposed rules (Release Nos. 33-9452; 34-70443) (the "Proposed Rules") to require certain publicly-held companies to disclose the median annual total compensation of all employees and the ratio of that median to the annual total compensation of the company's chief executive officer.

As we have previously commented (see our blog from July 26, 2010 "The Regulatory March to Reform Executive Compensation Practices Takes Another Step Forward"), the Reform Act implemented numerous new laws affecting executive compensation and corporate governance at publicly-held companies. Section 953(b) of the Reform Act directs the SEC to amend Item 402 of Regulation S-K (i.e., the executive compensation disclosure regulations) to require disclosure of the median of the annual total compensation of all employees of an issuer (excluding the chief executive officer), the annual total compensation of that issuer's chief executive officer and the ratio of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer (the "Pay Ratio Disclosure").

After receiving more than 22,000 public comment letters (along with a petition containing more than 84,000 signatories) on the subject over the past several years, the SEC in a divided 3-2 vote adopted the Proposed Rules, which are designed to comply with the statutory mandate and to address commenters' concerns regarding the potential costs of complying with the disclosure requirement. The magnitude of public comments, the duration of time it took for the SEC to finally propose rules, and the divided SEC vote indicate the contentiousness of Pay Ratio Disclosures. Moreover, in March 2013, a bill was introduced in the House of Representatives (H.R. 1135, Burdensome Data Collection Relief Act) which, if enacted, would entirely repeal the Pay Ratio Disclosure requirement. The House Financial Services Committee supported the bill in June 2013 with a vote of 36 in favor and 21 against.

The Proposed Rules provide some interesting details regarding the implementation of the Pay Ratio Disclosure and seek to address the technical difficulties and burdens that companies would face in achieving compliance. Of course, the Proposed Rules are yet not effective and in this regard, the SEC has solicited the public for comments in numerous areas of the Proposed Rules in order to help them in their process of adopting final regulations. Among other things, the Proposed Rules articulate:

which companies and which SEC filings must contain the Pay Ratio Disclosure; how to determine annual total compensation; how to identify the median; what disclosures must be provided on the underlying methodology, assumptions and estimates used in...

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