New SEC Rule will Require Public Companies Disclose Difference Between CEO and Employee Salaries

Today the Securities and Exchange Commission voted to adopt a final rule requiring that public companies disclose the "pay ratio" measuring the difference between the compensation for their CEOs and their average rank-and-file employees.  While executive compensation is already publicly disclosed within companies' SEC filings, this additional requirement will provide newly public insight into how much companies pay their workforce.  

Under the rule, public companies starting with their first fiscal year beginning on or after January 1, 2017 will be required to disclose in their annual reports (and other filings already requiring executive compensation disclosure): 

  • The median of the annual total compensation of all its employees, except the CEO;
  • The annual total compensation of its CEO; and
  • The ratio of those two amounts. 

These annual reports are already readily searchable online through the SEC's EDGAR database:

The final rule brings into effect a long-gestating requirement of the Dodd-Frank Wall Street Reform law, and will provide companies some leeway in determining their methodology for calculating their pay ratios.  For instance a company can elect to identify its median employee and salary through a statistical sampling instead of a complete employee census.  However, whatever math a company uses to calculate its pay ratio, it will be required to describe its methodology as part of the disclosure.  

For more detail, see the SEC's announcement on today's decision: