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Statement on Pay Ratio Disclosure

Commissioner Kara M. Stein

Aug. 5, 2015

As my colleagues have done, I would like to thank the staff for all of their hard work and time spent with my office. In particular, I would like to thank Felicia Kung, John Fieldsend, Raquel Fox, Bryant Morris, Brooks Shirey, and Simona Mola Yost for all of their efforts.

Today, the Commission is considering adoption of a final pay ratio rule. This rule would require public companies to disclose the median employee’s compensation compared to the chief executive officer’s compensation in the form of a ratio. This rule, originally proposed in September of 2013, is required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank”). Over five years after the passage of Dodd-Frank, I am pleased that we are finally completing this rule as directed by Congress.

Pay ratio disclosure should provide a valuable piece of information to investors and others in the marketplace. It will allow investors to evaluate how this metric changes from year to year for individual companies. It also will provide valuable information to investors about how a company manages human capital. As investors increasingly focus on corporate governance and executive compensation issues, the pay ratio disclosure will provide another piece of information that is useful on many fronts, such as say-on-pay votes.

This final rule seeks to remain true to the statutory mandate of providing a pay ratio that reflects the median of all employees, while at the same time providing companies with flexibility. This flexibility has been provided to companies in a thoughtful way and is carefully tailored to address implementation concerns, without undermining the intended benefits of the rule.

First and foremost, companies will be afforded the latitude to use statistical sampling to identify their median employee. They generally will be required to locate their median employee only once every three years. They also may exclude a de minimis percentage of their foreign employees when determining their median employee. In addition, companies may exclude employees in certain foreign jurisdictions where complying would cause a violation of a country’s data privacy laws. All of these measures should make it easier to make the required disclosure while having a marginal impact on the actual pay ratio.

At the same time, I have been particularly attentive to minimizing the risk that such flexibility compromises the intended benefits of this rule. For example, under the final rule, companies have the option, but are not required, to make a cost-of-living adjustment when identifying their median employee. Such cost-of-living adjustments have the potential to distort the pay ratio and introduce a level of subjectivity that could undermine the intended benefits of the rule. However, under today’s rule, if a company elects to make this cost-of-living adjustment, it also is required to display its unadjusted ratio and show how it reached its cost-of-living conclusions.

Moreover, if a company seeks to rely on the foreign data privacy exemption that I mentioned, it has to file a legal opinion with the Commission supporting this reliance. The opinion requirement should go a long way toward ensuring that this exemption is not abused or turned into an unintended loophole.

I am pleased to support this rule. I look forward to completing the numerous remaining Dodd-Frank executive compensation rules that are still pending. Thank you again to the staff for all of your hard work.

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