On our companion blog — Federal Securities Law Blog – Andrew Trafford describes the Securities and Exchange Commission’s recently proposed CEO pay ratio rule. This rule comes from Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In a nutshell, this rule generally requires public companies to disclose in their proxy statements the ratio of the compensation (as defined in Item 402(c)(2)(x) of Regulation S-K) of the median-compensated employee in the company to the compensation of the company’s CEO.
As Andy points out in his blog, many public companies were concerned about the methods and techniques the SEC would require them to use to calculate this ratio. Key questions involved which employees should be counted, how compensation should be calculated, and to what extent companies could use estimates or sampling to perform these calculations. The SEC appears to have heard these concerns and provided a significant amount of flexibility to companies in this regard.
Although the rules do not become effective until the 2015 proxy season, public companies should start determining how they will calculate this ratio now. Part of this process will require getting a handle on all of the outstanding equity award grants and the benefits that have accrued under both qualified and nonqualified plans. We encourage you to read Andy’s blog for a more detailed discussion of how to comply with the SEC’s proposed CEO pay ratio rule.