SEC Grants Leeway in Pay Ratio Disclosures

New guidance suggests 'reasonable’ measures to determine median compensation

Public companies might rest a little easier following new guidance issued by the U.S. Securities and Exchange Commission.

In the coming months, larger companies registered with the U.S. Securities and Exchange Commission will for the first time disclose the ratio of their CEO’s compensation to that of their median employee. A recent SEC rule requires this pay ratio reporting, and while companies had other concerns with this requirement, many were also vague on how to properly calculate it. The SEC published interpretive guidance that assured companies that they have some leeway in calculating the ratio while still complying with the rule.

In August 2015, the SEC adopted the final pay ratio rule as part of a raft of regulations mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Public companies must identify their median employee and calculate their annual total compensation, comparing it with their principal executive’s. In early 2018, registrants must start submitting these pay ratios using data from the fiscal year beginning on or after January 1, 2017.

The rule was “ designed to allow shareholders to better understand and assess a particular registrant’ s compensation practices,” but shareholders aren’ t meant to use the company’ s ratio to compare with pay practices of others in its industry, the SEC said in a press release announcing the rule.

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