The 2010 Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) included a provision requiring public companies to disclose the pay gap between chief executives and rank-and-file employees. The pay ratio calculation compares the annual total compensation of the chief executive officer (CEO) to the median of the annual total compensation of all employees. Annual total compensation includes base salary, bonuses, stock and option awards, long-term cash incentive pay, change in pension value, non-qualified deferred compensation earnings and certain other compensation, including perquisites. While the concept appears to be simple, it is riddled with complexities in determining pay amounts across a broad workforce, particularly for global employers. For this reason specific guidance has been delayed, and public companies have yet to be required to disclose this ratio in their proxy filings.
The US Securities and Exchange Commission (SEC) has now released proposed pay ratio rules. These rules are subject to public comments, which are due within 60 days of their publication in the Federal Register. The regulations are to be effective for fiscal years commencing after final rules are published, so they will not affect the 2014 proxy season.