Disclosure of Compensation Ratio Proposal Up For Review and Public Comment by SEC

As federal agencies work towards instituting more regulatory measures from the 2010 Dodd-Frank Act, the Securities and Exchange Commission (SEC) proposed a rule on September 18, 2013, mandated under Section 953(b) of the Act, which details new requirements for compensation ratio disclosure. Under the new proposal, public companies would be obligated to disclose (in addition to the compensation disclosures currently required) the median of annual compensation of all employees (as defined in the proposed rule) and the ratio between the company’s Chief Executive Officer (CEO) compensation and the median compensation of their employees.

While the current SEC rules require calculations of compensation to be in accordance with U.S. Generally Accepted Accounting Principles (GAAP) – accounting standards used to compile financial information for public companies – the proposed rules allows firms the flexibility in determining the “methodology” used for identifying the median compensation, so that a company may choose a technique that is “appropriate to the size and structure” of a business and how they compensate their employees. Whichever technique or method that is used by a company, however, would be required, under the newly proposed rule, to be disclosed to the SEC, along with “any material assumptions, adjustments or estimates”. Such disclosure would be provided to the SEC in reports and filings that currently require executive compensation information. The proposal is being published in the Federal Register, and the SEC will be accepting public comments for 60 days from the date of publication.

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