This GMS Flash Alert reports that the U.S. CEO Pay Ratio disclosure rules mandated by the Dodd-Frank Act will soon take effect and the requirements will impose new disclosure burdens on companies.
The U.S. CEO Pay Ratio disclosure rules mandated by the Dodd-Frank Act1 will soon take effect and the requirements will impose new disclosure burdens on companies, which will have to properly disclose CEO compensation, median employee total annual compensation, and the ratio of CEO pay compared to median employee pay. Moreover, there will be heightened scrutiny of executive compensation policies by employees, shareholders, and the public.
The disclosure requirements are expected to have wide-reaching implications for a company’s:
U.S. companies will be affected by these requirements and will have to properly disclose CEO compensation, median employee total annual compensation, and the ratio of CEO pay compared to median employee pay. These requirements could result in heightened scrutiny of their executive compensation policies.
Companies will need to understand how to develop a process, a work-plan, and weigh median employee methodology options, amongst other things, as a means of properly fulfilling their responsibilities under the CEO pay ratio disclosure rules.
In August 2015, the U.S. Securities and Exchange Commission (SEC) adopted final rules2 implementing the CEO pay ratio disclosure requirements under the Dodd-Frank Act. Under the rules, companies will be required to disclose: (i) CEO compensation; (ii) median employee total annual compensation; and (iii) the ratio of CEO pay compared to median employee pay.
Companies are required to provide the new pay ratio disclosures for the first fiscal year commencing on or after January 1, 2017. As a result, companies with a fiscal year ending December 31, 2017, will need to disclose the pay ratio information (reflecting 2017 compensation) in their 2018 proxy statements.
The rules provide companies with flexibility to determine the “median” employee to recognize the inherent differences in business and talent models while satisfying the filing requirements. Companies can choose the compensation variable to determine median employee (e.g., payroll records, cash compensation, total compensation), whether to use full employee population (which includes those employees seconded overseas by the U.S. company) or a statistical sample of the population, and the point in time to determine the “median” employee (between fiscal year-end and the following three months) among other decisions.
Flexibility creates a demand for analysis and decision-making to report the pay ratio that is most reflective of each company’s pay and staffing model. It is recommended that companies begin discussing their concerns in respect of their obligations under the CEO pay ratio disclosure rules with their qualified compensation, statistics, and payroll professionals – the new rules apply in just a few short months.
1 Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111–203, H.R. 4173).
2 See “SEC Adopts Rule for Pay Ratio Disclosure“ on the SEC website.
For additional information or assistance, please contact your local GMS or People Services professional or one of the following professionals with the KPMG International member firm in the United States:
Tel. + 1 (212) 954 1942
Tel. + 1 (617) 988 1557
Tel. + 1 (202) 533 8011
The above information is not intended to be "written advice concerning one or more Federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 as the content of this document is issued for general informational purposes only.
The information contained in this newsletter was submitted by the KPMG International member firm in the United States.
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