CEO Pay Ratio-How is it Expressed? 1 to ###

As companies begin to file proxy statements that detail their Pay Ratio disclosure under Item 402(u) of Regulation S-K, a quick recap of the final rule and what it requires might help companies.

Item 402(u) states:

“(u) Pay ratio disclosure.—

(1) Disclose:

(i) The median of the annual total compensation of all employees of the registrant, except the PEO of the registrant [A];

(ii) The annual total compensation of the PEO of the registrant [B]; and

(iii) The ratio of the amount in paragraph (u)(1)(i) [A] of this Item to the amount in paragraph (u)(1)(ii) [B] of this Item. For purposes of the ratio required by this paragraph (u)(1)(iii), the amount in paragraph (u)(1)(i) of this Item shall equal one, or, alternatively, the ratio may be expressed narratively as the multiple that the amount in paragraph (u)(1)(ii) of this Item bears to the amount in paragraph (u)(1)(i) of this Item.”

[Bracketed, bold text and emphasis added. Note that final rule calls for a ratio of A to B.]

Now, up in the commentary section of the adopting release for the final Pay Ratio DIsclosure Rule, the SEC described the required disclosure a bit differently:

“c. Final Rule

After considering the comments, we are adopting the final rule as proposed. The final rule adds new paragraph (u) to Item 402 and requires disclosure of:

(A) the median of the annual total compensation of all employees of the registrant (except the registrant’s PEO);

(B) the annual total compensation of the registrant’s PEO; and

(C) the ratio of the amount in (B) to the amount in (A), presented as a ratio in which the amount in (A) equals one, or, alternatively, expressed narratively in terms of the multiple that the amount in (B) bears to the amount in (A).”

[Emphasis added.]

The ratio required in the commentary section is B to A, while the ratio actually required by the language set out in the final rule is A to B.

A bit of a disconnect, right?  So the language in the commentary that suggests that the ratio can be expressed as ### to 1 does not appear to be applicable to the final rule that the SEC adopted. The clear language of the final rule requires the ratio to be expressed as 1 to ### if a number/ratio or narratively as, “the CEO’s annual total compensation is ### times that of the median of the annual total compensation of all employees other than the CEO.”

So take a minute to review your proposed Pay Ratio Disclosure to ensure it complies with how Item 402(u)(1)(iii) is actually written, i.e., that it requires the ratio of the median of the annual total compensation of all employees other than the PEO/CEO (equal to 1) to the annual total compensation of the PEO/CEO, 1 to ###.

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