It was two years ago that the Securities Exchange Commission (SEC) issued guidance that implemented the pay ratio disclosure requirement promulgated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). Under the Dodd-Frank Act and the SEC guidance, companies are required to disclose, as a ratio, a comparison of the annual total compensation of the chief executive officer (CEO) and that of the company’s “median” employee. Public companies voiced their concerns as to how to calculate the ratio leading up to the effectiveness of the disclosure requirement. The SEC responded with its guidance by relaxing certain aspects of the disclosure rule. It has now been two years since the disclosure requirement has been effective. Many have suggested that the result of the pay ratio disclosure is data that is both difficult to compare across companies and not helpful to shareholders in determining whether employees are fairly compensated.

A review of the data from the past two proxy seasons seems to suggest certain trends. First, a company’s capitalization, number of employees, and industry type seem to be key factors in determining how high or low a pay ratio is. Second, as anticipated, high pay ratios have made headlines. Although the headlines have not necessarily affected employee compensation directly, the results seem to have led to efforts to legislate pay. There are suggestions that the ratios have also affected employee morale and customer choices. Thus, regardless of whether a pay ratio disclosure assists a shareholder to determine if compensation is appropriate, it has had some effect.

The Data

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