Pressure for disclosure of CEO pay ratios have been gaining traction for some time. It was considered, and rejected, in the UK’s long enquiry into better remuneration disclosure (see HERE) . It is now being considered again (see HERE).

Now, the US Securities and Exchange Commission (SEC) has issued its first guidelines for calculating pay ratios that compare executive compensation to that of the company’s median employee.

US companies are required to report this information in their proxy, registration and information statements, as well as annual reports for the first fiscal year beginning January 1, 2017. The rule is mandated by the Dodd-Frank law.

The SEC, in an update on compliance and disclosure interpretations on October 18, said companies must pick a date within the last three months of their fiscal year on which to assess their employee population. The worker count should include employees whose compensation the company or its subsidiaries determine, but exclude contract workers from unaffiliated third parties.

The regulator gave no new guidance on foreign-based employees, who are included in the population calculation under the final rule.

US multinational companies will be scrambling to put in place the systems and processes for collecting the necessary payroll data to comply with the regulation,

There is no doubt that pay ratio disclosure stems for a political response to populist pressure. Guerdon Associates have written of this before (see HERE). With US middle class income in long term decline, low social mobility, unfair taxation favouring rent seekers, plus a political system based on gerrymanders, money and a political class, it is not difficult to understand the rise of populism. However, pay ratios have huge potential for unintended consequences, and it is difficult to see what such disclosures are useful for.

The SEC has provided a Q&A guide (see HERE).

Pay ratio disclosures will not be required until 2018. In general, a public company will be required to include pay ratio disclosure in its annual proxy statement with respect to its first fiscal year commencing on or after January 1, 2017. Emerging growth companies, smaller reporting companies and foreign private issuers are exempt from the pay ratio disclosure requirement.

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