Today, the U.S. Securities and Exchange Commission proposed the highly controversial "pay equity" rules mandated by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules, if adopted, would require companies to disclose the median annual total compensation of all company employees and the ratio of that median to the annual total compensation of the CEO. The proposed disclosure would be required in any annual report, proxy or information statement or registration statement that requires executive compensation disclosure pursuant to Item 402 of Regulation S-K. Foreign private issuers, emerging growth companies and smaller reporting companies would be exempt from the disclosure requirement.

There will be a 60-day public comment period on the proposed rules. If adopted as proposed, companies generally would be required to make their first pay equity disclosures in their annual meeting proxy statement filed in the year following the first full fiscal year after adoption of the final rule. Accordingly, we believe the earliest a final rule could apply to calendar year companies is the 2015 proxy season and, if a final rule is not adopted before the end of this year, pay equity disclosures would not be required until the 2016 proxy season.

The SEC received more than 20,000 public comments before even releasing its proposal. Some commentators argued that it would be prohibitively difficult and expensive for a company to collect compensation data for all its employees.

Although the proposed rules do not scale back the definition of all "employees" – which is defined to include full-time, part-time, temporary, seasonal and non-U.S. employees – the Commission has provided companies with the flexibility to determine their own preferred methodology for calculating median employee compensation (which could include representative statistical sampling or other estimation methods), which methodology the company must then disclose.

The Commission voted 3-2 to propose the rules, with Commissioners Piwowar and Gallagher dissenting. Commissioners Piwowar and Gallagher noted that the rule was meant to "shame CEOs" and requested detailed "data-heavy" comment letters on the costs to comply with the rule. Commissioner Aguilar, on the other hand, expressed his support for the proposal, stating that "shareholders have the right to know whether CEO pay multiples reflect CEO performance," and "[p]ay ratio disclosure can provide a valuable new perspective for executive compensation decisions."