As part of the Dodd-Frank Act, the SEC recently approved a new rule requiring U.S. public companies to disclose the ratio between their CEO’s compensation and that of their median employee. Companies will now be required to reveal the median of the total annual compensation of all their employees except the CEO, the annual total compensation of the CEO, and the ratio of the two amounts. The new rule will establish guidelines for companies to determine a “median” employee to compare with the CEO. Flexibility is available to management in choosing a methodology to identify a median employee.
For example, companies can use their total employee population or a statistical sampling of that population. The rule requires companies to calculate the median employee’s annual total compensation using the same rules used to calculate the CEO’s compensation. The disclosure is required for most companies that are already required to provide executive compensation disclosure under the current rules with exemptions for smaller reporting companies, foreign private issuers, and emerging growth companies. Reporting of the pay ratios is required starting with the first fiscal year beginning on or after January 1, 2017.