New Disclosure: CEO Pay Ratio

The guiding principle of public company disclosure is this: the information regulators require to be disclosed should be useful to investors. Was this principle at the forefront of Congress’ mind when it included in Dodd-Frank a requirement that companies disclose the ratio of CEO compensation to the compensation of his or her company’s median employee? Maybe not. Nevertheless, as required by Dodd-Frank, the SEC has recently released proposed rules to operationalize Section 953(b)’s requirement that public companies provide, in addition to the CEO’s total compensation, the median total annual compensation of all employees (excluding the CEO) and the ratio of this median to the CEO’s compensation.

Though the critics of this rule are legion, there may well be some benefit to the Section 953(b). For now the rules are only proposed, and the SEC is at the point in the process where it is soliciting comments. This process is not a useless exercise; the SEC is listening, and concerned parties should seriously consider submitting comments while the opportunity still exists.

The rules as proposed have some helpful features, such as not being applicable to “emerging growth companies,” foreign private issuers and newly public companies.

One of the issues for companies will be identifying who is the “median employee.”  This is especially difficult for companies with large numbers of employees and/or complex compensation structures.  Easing this burden is the fact that the proposed rules exclude certain categories of employees, such as leased workers and independent contractors. Somewhat surprisingly, the proposed rules also exclude anyone who was not employed on the last day of the fiscal year. This last item is especially unexpected because the population of employees, as proposed, would include seasonal and other temporary workers as well as part-time workers. The employee population also includes employees of all subsidiaries, including non-US subsidiaries. Reasonable estimates and statistical sampling are allowable alternatives to actually ranking all employees by compensation and choosing the one in the middle.


The rules, once they become effective, are likely to apply to companies in the next fiscal year that begins after the rules are finalized.


With any new disclosure, the “filed versus furnished” question arises, the popular understanding of which is that “filed” information—if incorrect—can give rise to liability under the federal securities laws. The new disclosures concerning CEO Pay ratios are to be filed, not furnished, in SEC filings that otherwise require executive compensation disclosure (i.e. an issuer’s 10-K, proxy statement and registration statements).

It remains to be seen is whether any of the proxy advisory services such as ISS will opine on pay ratios. They may well take a pass if they conclude that pay ratios are not seen by their clients as a particularly informative investment metric.

What steps should be taken now?

While the SEC has been soundly criticized for taking so long to implement much of Dodd-Frank, it is clearly making progress when it comes to CEO pay ratios. As a result, it’s a good idea for management to start taking steps to determine what is feasible—and what needs to become feasible—when it comes to gathering, sorting, and making usable the information that will be needed to generate the soon-to-be-required CEO pay ratio disclosure.

The views expressed in this blog are solely those of the author. This blog should not be taken as insurance or legal advice for your particular situation. Questions? Comments? Concerns? Email me at



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