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Regulatory Update

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The Securities and Exchange Commission (SEC) recently issued a long-expected proposed rule on pay ratio disclosure. The SEC was required to issue this rule by the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as Dodd-Frank.

The proposed rule requires publicly traded companies to submit annually to the SEC their CEO’s compensation, the compensation of the median employee and the ratio between those two figures. The idea behind the Dodd-Frank provision was to provide investors with a way to assess the difference between the pay of the workers and the CEO’s at individual companies and to compare these data across companies.

SHRM, in responding to the proposed rule in December, pointed out some of the challenges associated with determining the median worker compensation and made suggestions for ways the rule could be improved. SHRM recommended that the rule’s application be limited to U.S.-based employees because of the significant challenges of aggregating compensation data from a variety of incompatible payroll systems. SHRM also recommended that employers be able to annualize the compensation of part-time, seasonal and temporary employees as a way to avoid distortion of the pay ratio that would occur by including, for example, a large number of employees hired for the holiday season or other temporary terms.

In its proposed rule, the SEC attempted to provide flexibility in methods employers could use to determine median pay. While SHRM commended the SEC for this flexibility, we recommended that, in addition, the SEC should establish a specific formula or algorithm that would serve as a safe harbor for employers who chose to use it. SHRM’s comment letter is available online and by clicking HERE.

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