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The CEO Pay Ratio Rule: A Workable Solution For Both Issuers and Investors

Commissioner Luis A. Aguilar

Aug. 5, 2015

Today, the Commission takes another step to fulfill its Congressional mandate to provide better disclosure for investors regarding executive compensation at public companies.  As required by Section 953(b) of the Dodd-Frank Act,[1] today’s rules would require a public company to disclose the ratio of the total compensation of its chief executive officer (“CEO”) to the median total compensation received by the rest of its employees.[2]  The hope, quite simply, is that this information will better equip shareholders to promote accountability for the executive compensation practices of the companies that they own.

The Congressional mandate under Section 953(b) has proven to be one of the most controversial rules that the Commission has been required to undertake under the Dodd-Frank Act.  Since Congress first required the Commission to promulgate this rule just over five years ago, the Commission has received over 287,000 comment letters, with over 1,500 individual letters and the rest form letters.[3]  The diverse views expressed by these commenters reflect that Congress tasked the Commission with navigating a highly divisive subject—a boon or a bane, depending on one’s perspective.[4]  Many of these commenters urged adoption of the pay ratio rule, and cited the benefits from such a disclosure.[5]  For example, they pointed to the ability of investors to use CEO-to-worker pay ratios as an additional metric in evaluating and voting on executive compensation matters, including “say-on-pay” votes.[6]  Other commenters noted that this disclosure could provide visibility into other hard-to-measure indicators of a company’s long-term health, such as the effectiveness of its corporate governance.[7]  At the same time, a number of other commenters expressed general skepticism that pay ratio disclosure would provide any benefits,[8] or otherwise expressed concern with the potential complexities, and associated costs, of complying with this Congressionally-mandated disclosure.[9]

These diverse views reflect that while the CEO-to-worker pay ratio is a seemingly simple requirement—after all, the primary output of today’s rule is just a ratio, like 296:1[10]—getting to the ratio may require some effort.  Pursuant to Section 953(b), issuers will need to determine the median employee, by annual total compensation, by considering “all employees of the registrant.”  Indeed, Congress did not expressly carve out any categories of employees, whether they are part-time, temporary or seasonal, or employees situated in the U.S. or abroad.[11]  For some companies, unless the information for “all employees” is already readily attainable, this could require them to incur costs in creating compatible payroll systems across foreign borders, or across various business areas, in order to extract the necessary data.[12]

In drafting the rule being considered today to fulfill the Dodd-Frank mandate, the Commission and its staff went to great lengths to consider all viewpoints, including how best to stay faithful to the values of the rule, while mitigating the potential challenges faced by issuers in its implementation.  The end result provides a thoughtful and reasonable approach to fulfilling the Congressional mandate that permits issuers to have a great deal of flexibility in the methods of compliance with the pay ratio disclosure—and, at the same time, tries to ensure that the resulting disclosure will be useful to investors. 

For example, in calculating the CEO-to-worker pay ratio, today’s rule permits issuers to do the following:

  • To choose a reasonable method to identify the median employee that is appropriately tailored to their business, including identifying the median employee using statistical sampling or any consistently applied compensation measure (such as payroll records);[13]
  • To exclude from the pay ratio calculation a de minimis amount of non-U.S. employees;[14]
  • To exempt from the pay ratio calculation non-U.S. employees from certain jurisdictions when foreign privacy laws make it illegal to provide the information necessary to calculate the pay ratio;[15] and
  • To calculate the median employee only once every three years, instead of every year, providing certain conditions are met.[16]

These and other discretionary decisions were made to help ameliorate some of the complexities of implementing the statutory mandate while retaining the value of the disclosure to investors.

Ultimately, today’s pay ratio rule should be viewed as a complement to other executive compensation rules mandated by the Dodd-Frank Act that promote corporate accountability and enhance the information available to investors.  For example, today’s rules complement the Commission’s recently proposed rules that would require public companies to show the relationship between the executive compensation actually paid and the financial performance of the issuer.[17]  Furthermore, today’s rules also provide investors with additional information to inform their Dodd-Frank-mandated “say-on-pay” advisory votes.[18]  In this way, today’s rules are intended to promote better shareholder engagement on executive compensation issues.[19]


In conclusion, today’s pay ratio adopting release incorporates many discretionary decisions made by the Commission consistent with the Dodd-Frank statutory mandate.  These decisions were designed to facilitate compliance with the rule in a manner that is reasonable and workable for issuers, while still providing for increased transparency and greater accountability in executive compensation matters.   For these reasons, I will support today’s rules.    

Lastly, I would like to thank the staff from the Division of Corporation Finance, the Division of Economic Research and Analysis, and the Office of the General Counsel for their hard work on this rulemaking.  I appreciate the important work you do to protect investors.

[1] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, H.R. 4173 (July 2010) (the “Dodd-Frank Act”)

[2] See Pay Ratio Disclosure, SEC Release No. 33-9877 (Aug. 5, 2015), available at (hereinafter “Pay Ratio Release”).

[3] See Comments on Pay Ratio, available at (last visited on July 23, 2015).

[4] A “boon” has been described as something favorable and beneficial, like a blessing or benefit, while a “bane” has been described as something destructive, poisonous or harmful.  See Merriam-Webster’s Dictionary, available at, and     

[5] For example, many commenters stated that they would find the pay ratio disclosure helpful when making voting and investment decisions.  See, e.g., Letters from AFL-CIO Office of Investment (Dec. 2, 2013), available at  (“Pay ratio disclosure will also help investors evaluate CEO pay levels when voting on executive compensation matters such as ‘say-on-pay’ resolutions.”); Bricklayers & Trowel Trades International Pension Fund (Nov. 27, 2013), available at  (“By providing the median pay of all employees and the total compensation of the CEO, 953(b) is a valuable tool to further transparency and to provide important data upon which investors - including our fund - can rely in making investment decisions.”); and New York State Comptroller (Nov. 27, 2013), available at (“The [pay ratio rule], as presently formulated, would increase transparency by providing useful information for investors to consider when making investment decisions,”); see also Form Letter Types C, D, E and F. available at (last visited on July 23, 2015).  In addition, some commenters indicated that today’s rules also could help to offset one of the possible contributors to the inefficient upward trajectory of CEO pay: benchmarking.  See, e.g., Letter from Americans for Financial Reform (Dec. 2, 2013), available at  (“In enacting 953(b) and mandating the disclosure of the pay ratio as well, Congress sought to address investor concerns that the old disclosure requirements encouraged companies to focus on peer to peer comparisons when setting CEO pay, the practice of which helped lead to increasingly higher levels of CEO pay.”)  See also Pay Ratio Release at III.C.1. (Economic Analysis/Economic Effects from Mandated Disclosure Requirements/Benefits) (noting that “some commenters suggested that the new disclosure could offset an upward bias in executive compensation resulting from the practice of benchmarking executive pay solely against the compensation of other executives to the extent that current benchmarking practices are inefficient.”)  This practice involves hiring compensation consultants to target executive pay based on comparisons of compensation practices at similarly situated companies.  The oft-noted justification for this practice is the supposed need to provide competitive pay to hire or retain talented executives who otherwise will take their talents elsewhere.  As commentators have noted, however, there is an inherent flaw in this practice:  companies routinely set their executive pay targets at or above the median of their peer groupSee, e.g., Gary Shorter, The “Pay Ratio Provision” in the Dodd-Frank Act: Legislation to Repeal It in the 113th Congress, Congressional Research Service (Oct. 28, 2013), available at; Anders Melin, Jeremy Scott Diamond, How Companies Justify Big Pay Raises for CEOs, Bloomberg Business (June 4, 2015), available at (indicating that companies use “peer” companies that are larger than themselves as justification for increasing CEO pay); Peter Whoriskey, “Lake Wobegon” effect: When all CEOs are above average — pay wise, The Seattle Times (Oct. 15, 2011), available at (noting that “Researchers have found that about 90 percent of major U.S. companies expressly set their executive pay targets at or above the median of their peer group. This creates just the kinds of circumstances that drive pay upward.”).  To these observers, benchmarking thus contributes to an upward bias in pay that is both inefficient and not always in line with a company’s performance. 

[6] See, e.g., Letters from State of Washington Investment Board (Nov. 26, 2013), available at (“Investors will be able to use CEO-to-worker pay ratios as an additional metric in evaluating say-on-pay votes and other executive compensation issues.”); LiUNA! (Oct. 10, 2013), available at  (“The information that is gleaned from the worker-to-CEO pay ratio is invaluable information for the annual or tri-annual, say-on-pay vote that corporations are mandated to conduct.”); PGGM (Dec. 2, 2013), available at;  and California State Teachers’ Retirement System (Dec. 2, 2013), available at (“The pay ratio will provide an additional metric for evaluating and voting on executive compensation practices and say-on-pay proxy proposals.”).

[7] See, e.g., Letters from Allied Value, LLC (Oct. 24, 2013), available at  (“Pay ratios will be a useful tool for assessing the integrity of corporate leadership, the viability of corporate incentive structures, and the likelihood of situations deleterious to employee morale.”); and UAW Retiree Medical Benefits Trust (April 14, 2011), available at  (“When assessing the health of our investments, we often look to executive compensation as a window into board effectiveness.”).  See also Pay Ratio Release at III.C.1. (Economic Analysis/Economic Effects from Mandated Disclosure Requirements/Benefits); see, e.g., John Gillespie and David Zweig, Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions, First Free Press (2010), at 126 (“Many observers point to executive compensation as both a litmus test for whether a board is able to stand up to a CEO and as a leading indicator of other, less apparent governance problems involving CEO succession, ethics, business strategy, and risk management.”)  Commenters also suggest that this disclosure could shed light on executive pay practices at public companies that could affect a company’s brand value and reputation, employee morale, employee productivity, and employee retention, among other things.  See, e.g., Letters from Social Investment Forum (Apr. 21, 2011), available at; Calvert Investment Management, Inc. (May 27, 2011), available at; and AFL-CIO Office of Investment (Aug. 11, 2011), available at

[8] See, e.g., Letters from American Benefits Council (Jan. 9, 2014), available at; ExxonMobil (Dec. 2, 2013), available at; and Professor Karl Muth, Northwestern University (Sept. 24, 2013), available at

[9] See, e.g., Letters from the U.S. Chamber of Commerce Center for Capital Markets Competitiveness (May 22, 2014), available at; Center on Executive Compensation (Dec. 2, 2013), available at; Avery Dennison (Nov. 26, 2013), available at; and General Mills (Dec. 2, 2013), available at

[10] In fact, one study found that, in 2013, large public companies’ CEOs were paid an average of 296 times the compensation of rank-and-file workers in their industries.  See Alyssa Davis and Lawrence Mishel, CEO Pay Continues to Rise as Typical Workers Are Paid Less, Economic Policy Institute (June 12, 2014), available at

[11] See Pay Ratio Release at II.B.1. (Discussion/Requirements of Final Rule/“All Employees” Covered Under the Rule).

[12] See Pay Ratio Release at III.C.2.c. (Economic Analysis/Economic Effects from Mandated Disclosure Requirements/Costs/Quantification of Compliance Costs).

[13] See Pay Ratio Release at VI., Part 229, Section 229.402(u), Instruction 4 to Item 402(u).  Indeed, at least one public company commented that they believed their estimated costs of compliance with the proposed pay ratio disclosure dropped over 90% compared to their original estimate that was based solely on the statute (from $250,000-$500,000 pre-proposed rule to $15,000 post-proposed rule).  See Letter from Intel Corporation (Nov. 27, 2013), available at (“This reduction is primarily due to the ability afforded by the proposed rule for registrants to use a consistently applied compensation measure, such as payroll records or W-2 reportable wages and the equivalents for non-U.S. employees, to identify the median employee.”).

[14] See Pay Ratio Release at VI., Part 229, Section 229.402(u)(4).  Although Section 953 (b) applies to “all employees”, the Commission is using its discretionary exemptive authority under Section 36 of the Securities Exchange Act of 1934 and Section 28 of the Securities Act of 1933 to exempt registrants from including a de minimis number of its non-U.S. workforce from the identification of the median employee in today’s rule.  The Commission made this decision after careful consideration of the potential cost savings to registrants and the little impact it was deemed to have on the overall pay ratio calculation.  See Pay Ratio Release at II.B.1.c. (Discussion/Requirements of Final Rule/“All Employees” Covered Under the Rule/Employees Located Outside the United States).  In particular, the Commission’s Division of Economic and Risk Analysis (“DERA”) performed an analysis regarding the potential effect on the pay ratio disclosure of excluding various percentages of employees from the pay ratio calculation, and found that the exclusion of 5% of employees may cause the pay ratio calculation to decrease by up to 3.4% or to increase by up to 3.5%.  See id.  Accordingly, while this de minimis exception is intended to mitigate some of the challenges of implementing the Dodd-Frank statutory mandate, the DERA analysis suggests that the impact to the value of the disclosure should be minimal.

[15] See Pay Ratio Release at VI., Part 229, Section 229.402(u)(4).

[16] See Pay Ratio Release at VI., Part 229, Section 229.402(u), Instruction 2 to Item 402(u).

[17] See Pay Versus Performance, SEC Release No. 34-74835 (Apr. 29, 2015), available at adopted, these “pay versus performance” rules could pair with today’s pay ratio rules to provide investors with a fresh perspective on trends in executive compensation vis-à-vis the company’s performance and vis-à-vis its treatment of the rank-and-file workers.  For example, investors may be interested in knowing if a company’s pay ratio disclosure shows an upward trend in CEO pay vis-à-vis the rank-and-file at that company as compared with the performance of the company during the same period.

[18] See Shareholder Approval of Executive Compensation and Golden Parachute Compensation, SEC Release No. 33-9178 (Jan. 25, 2011), available at

[19] See Pay Ratio Release at I.A. (Background/Section 953(b) of the Dodd-Frank Act).

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