What Does 'Reasonable' Mean Under the SEC's New Pay Ratio Disclosure Rules?

U.S. public companies, other than emerging growth and smaller reporting companies, are tackling their first pay ratio disclosures. The SEC's pay ratio rule, mandated by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and adopted as Item 402(u) of the SEC's Regulation S-K, is applicable for the first fiscal year beginning on or after Jan. 1, 2017. This means that calendar year-end companies will be making the disclosures in their 2018 proxy statements.

The pay ratio rule requires disclosure of:

• The median of the annual total compensation of all employees of the company, except the principal executive officer (PEO);
• The annual total compensation of the PEO; and
• The ratio of these two amounts.

A company must select a specific date within the last three months of the fiscal year (by Dec. 31) for determining the employee population from which the median employee will be identified.