The Securities and Exchange Commission has adopted a final rule that requires publicly traded companies to disclose the ratio of the compensation of its CEO to the median compensation of its employees.
Here are 10 things to know about the new rule.
1. The new rule is mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
2. It aims to provide greater transparency and make it easier for investors to determine if executives are being appropriately compensated. "The rule provides companies with substantial flexibility in determining the pay ratio, while remaining true to the statutory requirements," SEC Chairwoman Mary Jo White said in a news release.
3. The rule in no way limits how much a CEO is paid, according to The New York Times.
4. The new rule will require disclosure of the pay ratio in registration statements, proxy and information statements and annual reports that call for executive compensation disclosure.
5. Companies will have flexibility in meeting the rule's requirements. For example, a company will be allowed to choose its methodology for identifying its median employee and that employee's compensation, including through statistical sampling of its employee population or other reasonable methods, according to the SEC.
6. The new rule also permits companies to make the median employee determination only once every three years and to choose a determination date within the last three months of a company's fiscal year.
7. In addition, the rule allows companies to exclude non-U.S. employees from countries in which data privacy laws or regulations make companies unable to comply with the rule.
8. The rule does not apply to smaller reporting companies, emerging growth companies, foreign private issuers, MJDS filers or registered investment companies, according to the SEC.
9. However, the rule does allow transition periods for new companies, companies engaging in business combinations or acquisitions, and companies that are no longer smaller reporting companies or emerging growth companies.
10. Companies will be required to provide disclosure of their pay ratios for their first fiscal year beginning on or after Jan. 1, 2017.