The SEC staff issued its first guidance on the CEO pay ratio rule on October 18, 2016, publishing five Compliance and Disclosure Interpretations. The rule requires annual disclosure of the ratio between the annual total compensation of a company’s principal executive officer and its median employee.
Generally the rule requires companies to (1) select a date for identifying their employee pool, (2) determine the compensation of these employees, (3) identify the median employee, (4) calculate the median employee’s annual total compensation and the CEO’s total annual compensation, and (5) disclose a ratio of these two amounts.
The new C&DIs focus in particular on the first three steps, including the use of a “consistently applied compensation measure” to identify the median employee. For most public companies, the first required disclosures will be made in annual proxy statements filed in 2018. While this seems distant, companies are preparing now due to the rule’s operational complexity and the significant attention that the eventual disclosures will receive by the media, labor organizations, employees and others. We expect that the SEC staff will provide further guidance as more companies begin preparing in earnest.