Regulatory: Why the SEC’s proposed pay-ratio rule will increase compliance costs

Critics argue that accumulating and analyzing the relevant data will be a vast and expensive undertaking

Counsel to reporting companies should carefully consider the SEC’s proposed pay ratio disclosure rule, because it may significantly increase your company’s compliance costs and may require substantial time and resources to configure your data retrieval systems in a way to optimize your eventual reporting obligations. On Sept. 18, 2013, the Commissioners of the SEC voted 3−2 along party lines to propose new regulations mandated by Section 953(b) of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that requires certain U.S. public companies to disclose the median of the total annual compensation of all its employees (excluding the company’s principal executive officer or PEO) and the ratio of that median to the total annual compensation of its PEO. The proposed rule is controversial for a number of reasons, as evidenced by the newest commissioner of the SEC who stated, “[The SEC] should not be spending money and limited resources on any rulemaking that unambiguously harms investors, negatively affects competition, promotes inefficiencies and restricts capital formation.”

The proposed regulations would come in the form of a new paragraph in Item 402 of Regulation S-K (paragraph 402(u)) and would require all issuers, excluding emerging growth companies, smaller reporting companies and foreign private issuers, required to disclose executive compensation pursuant to Item 402 of Regulation S-K to further disclose the median of the annual total compensation of all employees and the ratio of that median to the annual total compensation of the PEO. Annual total compensation is to be determined for the fiscal year of the issuer in accordance with Item 402, the same criteria used to determine annual total compensation of executives that such issuer is currently required to disclose. The proposed law would capture all employees of the issuer and its subsidiaries, including full-time, part-time, temporary, seasonal and, perhaps most controversially, non-US employees. An “employee” for purposes of the regulation is defined as an individual employed as of the last day of the issuer’s last completed fiscal year.

Contributing Author

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Robert J. Gavigan

Robert J. Gavigan is a partner in the Corporate group of Cohen & Gresser LLP.

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Contributing Author

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Andrew M. Por

Andrew M. Por is an associate in the Corporate group of Cohen & Gresser LLP.

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