Tuesday, August 11, 2015

Companies Must Disclose the Ratio Between CEO and Employee Pay

Public companies must now disclose how much more their CEOs make than the average employee. In a rule issued last week, the Securities and Exchange Commission (SEC) required many public companies to disclose the ratio of CEO pay to that of their median employee.  

The Dodd-Frank Act, passed in 2010 as a means of reforming the financial system in the wake of the 2008 crisis, required the SEC to promulgate this rule. After a long public comment period, the SEC finally passed this rule last Wednesday. The rule requires most public companies with annual revenue over $1 billion to publish in their annual financial statements “the ratio of the annual total compensation of the chief executive officer to the median of the annual total compensation of the company’s employees.” The rule will not take effect until 2017, with the 2018 financial statements likely being the first year that these ratios are disclosed.

The rule, however, does not put any restrictions on the amount that a company may pay its CEO. Instead, it merely requires that companies calculate the median wage of their employees, and then compare it to the amount earned by their CEOs. Calculating the median wage of employees, however, might not be a simple task for some companies. The rule requires companies to calculate the median wage not just of employees working in the United States, but around the globe. The rule allows companies to make cost-of-living adjustments to account for the fact that an employee’s wages will go further in, say, Mississippi than New York. It also allows companies to exclude up to five percent of their employees who do not work in the United States from the median calculation. The SEC estimates that calculating this median figure will cost U.S. companies about $73 million annually. 

The SEC most likely issued this rule in response to growing concerns over income inequality. As we have noted, this concern has also prompted a movement to increase the minimum wage, among other things. It seems likely that the issue of income inequality will only continue to increase in prominence, as several presidential candidates have made it a central part of their campaign. 

For advice on how your company should comply with this rule, we suggest that you contact an experienced attorney.