United States

SEC guidance on pay ratio disclosure


In 2015, the SEC issued Release No. 33-9877, Pay Ratio Disclosure, which amended Item 402 of Regulation S-K to add paragraph (u) requiring disclosure of:

  • The median of the annual total compensation of all employees of the registrant, except the chief executive officer
  • The annual total compensation of the registrant’s chief executive officer
  • The ratio of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer
  • A brief overview of the appropriateness of the methods used to identify the median employee and calculate annual total compensation, together with the estimates, adjustments and material assumptions used
  • Any significant changes in the methodology, assumptions, adjustments or estimates from those used in the previous period, the reasons for the change, and an estimate of the impact of the change on the median and the ratio

Registrants must provide pay ratio disclosure for the first full fiscal year beginning on or after January 1, 2017 in any annual report, proxy or information statement or registration statement that requires executive compensation disclosure pursuant to Regulation S-K Item 402. In light of the approaching compliance date and concerns raised about the implementation of the disclosure requirement, the SEC recently issued:

The pay ratio rule affords significant flexibility to registrants in determining appropriate methodologies to identify the median employee and in calculating the median employee’s annual total compensation. In that regard, the recent guidance expresses certain clarifying SEC views including, among others, that:

  • If a registrant uses reasonable estimates, assumptions or methodologies in the preparation of its pay ratio disclosure, the SEC would not pursue enforcement action unless the disclosure was made or reaffirmed without a reasonable basis or was provided other than in good faith.
  • A registrant may use internal records, such as tax or payroll records, to determine its employee population and to identify the median employee
  • A registrant may make the determination as to who is an ‘employee’ for purposes of the disclosures by using a widely recognized test under another area of law (e.g., employment law or tax law) that the registrant otherwise uses for determining whether a worker is an employee or independent contractor.
  • The SEC staff “would not object if a registrant states in any required disclosure that the pay ratio is a reasonable estimate calculated in a manner consistent with Item 402(u).”