Bloomberg BNA

In August 2015, the SEC released final rules relating to the annual disclosure of the ratio of the median employee’s annual total compensation to the annual total compensation of the Chief Executive Officer (also known as the ‘‘Pay Ratio Disclosure’’). These rules implement a section of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Registrants must comply with this rule beginning with the registrant’s first fiscal year beginning on or after January 1, 2017. For companies with a fiscal year ending on December 31st, this means that their annual report on Form 10-K for the fiscal year ending December 31, 2017 or the proxy statement for that year’s annual meeting will have to include the Pay Ratio Disclosure.

From the time that Dodd-Frank was passed, the Pay Ratio Disclosure rule has been very controversial, and there have been questions as to whether the Pay Ratio Disclosure rule would be revoked or postponed. However, it is now clear that the rule will not be delayed, and that the Pay Ratio Disclosure will be required, beginning in 2018.

Preparing the Pay Ratio Disclosure is likely to be complicated and time consuming, particularly in the first year that the pay ratio is calculated and disclosure is made. Identifying the median employee, whose annual total compensation is compared to the annual total compensation of the CEO, will mean examining and comparing the compensation of all employees of the registrant, or developing a methodology to take a statistical sample of employees. At this time, companies should be preparing to identify a “median employee” under the Pay Ratio Disclosure rules. This article summarizes the requirements of the Pay Ratio Disclosure rules that relate to the identification of the median employee and the elements of the disclosure itself.

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