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Financial reporting insight: SEC approves CEO pay rule

September 26th, 2013

The Securities and Exchange Committee has recently proposed a rule that will require companies to disclose the pay gap between chief executives and “rank-and-file employees,” according to the Wall Street Journal. This rule puts executive compensation back into the spotlight, and is expected to be approved by the SEC as early as next month.

According to the WSJ, the proposal is meant to “resolve concerns of large multinational companies” that have complained that tallying pay for a “far-flung, global workforce” is prohibitively expensive. Critics of the rule, including large corporations and Republican lawmakers, say that the requirement is onerous and unnecessary. In the view of critics, the data will be costly to compile and will not effectively serve the main purpose of financial reporting requirements and regulations, which is to protect and inform investors.

According to a SEC press release relating to the matter, the new rule required under the Dodd-Frank Act would not prescribe a specific methodology for companies to use in calculating a pay ratio comparing the compensation of their CEO to the median compensation of their employees. Companies will have the flexibility to determine the median annual total compensation of its employees in a way that best suits its particular circumstances.

 

Information from the Wall Street Journal and sec.gov was used in this article.