The controversial “pay ratio” rule has finally been approved, requiring companies to disclose the ratio between the pay for the top executives and the median employee. Company executives have argued that this number is hard to calculate and misleading. Investor groups have responded that if the company knows how many employees it has and how much it is paying them, it is not a difficult calculation, and that investors are sophisticated enough to understand the significance of the disclosures.
The Securities and Exchange Commission issued its first guidelines for calculating pay ratios that compare executive compensation to that of the company’s median employee. Companies are required to report this information in their proxy, registration and information statements, as well as annual reports for the first fiscal year beginning January 1, 2017. The rule is mandated by the Dodd-Frank law and was adopted in August 2015.