Industry Insights

SEC Adopts Final Rule on Pay Ratio Disclosures

September 2015

Beginning January 1, 2017, many public companies will be required to compare their principal executive officer’s (PEO) annual total compensation—including salary, bonus and equity awards—to the median annual pay of their employees.

On August 5, 2015, the Securities and Exchange Commission (SEC) adopted the final rule, Pay Ratio Disclosure, requiring U.S. public companies to disclose the PEO’s annual total compensation, the median employee’s annual total compensation and the relationship between the two amounts. The new rules under Item 402(u) of Regulation S-K also require a brief description of the methodology used to identify the median employee and any material assumptions, adjustments or estimates used to determine the ratio components.

Mandated by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the pay ratio disclosure is effective for a company’s first fiscal year beginning on or after January 1, 2017, and is required only for the last completed fiscal year. The rule applies to annual filings on Form 10-K requiring executive compensation information pursuant to Item 402 of Regulation S-K as well as registration statements, proxy and information statements. Smaller reporting companies, foreign private issuers, emerging growth companies and registered investment companies (except business development companies) are exempt from the requirement. 

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