What Is the Pay Ratio Rule and Why Should You Care

The controversial topic of pay inequities between workers and their CEO continues to fuel intense debates. The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act turned the spotlight on the pay gap by requiring public companies to disclose information that compares the CEO’s compensation with the median pay of other employees. Have you communicated your pay ratio to all investors and stakeholders properly

business meeting showing hands, graphs and laptop — The passage of the Dodd-Frank Act pulled back the curtains on the pay-ratio rule, requiring the disclosure of compensation data.

It’s a cliché but you can’t compare apples to oranges, and it applies to the pay ratio rule. One company and its employees have their distinct structure; thus, you can’t and shouldn’t compare one business pay ratio to another business, even if both are in the same industry.

What changed with the adoption of Dodd-Frank? Even before the Act, regulations required the disclosure of CEOs’ annual compensation. The major change for companies now is that they must disclose data that reveals the pay gap between workers and the CEO. Businesses must perform meticulous calculations to arrive at the median annual pay of all employees – and reveal the ratio between the two figures.

Determining which employees to include in the formula is a complex process. Once companies obtain the data, they advance to the reporting phase. It’s important to note that certain reporting companies are exempt from the disclosure obligation, including those that qualify as a smaller reporting company, emerging growth company, or foreign private issuer.
It is incumbent on businesses to be able to prepare, publish, and defend the ratio. Read the article to find out how to track and disclose your ratio