A proposed regulation that would require corporations to disclose the ratio of the median total compensation of all company employees compared with that of the company's CEO could mean headaches for employers.

The requirement, which has yet to be finalized, appears as a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The U.S. Securities and Exchange Commission's proposed regulation implementing the pay-ratio proposal would include seasonal, part-time and non-U.S. employees in the calculation of median employee compensation and take a broad view of what constitutes compensation.

There is no firm date for complying with the proposed rule, which was published in the Federal Register last fall as the SEC sought comment on proposal.

“The proposed rules would give companies a fair amount of flexibility in identifying the median employee. They could use SEC disclosure standards to calculate compensation, but they could also use payroll or tax records, or any other reasonable method, so long as they apply it consistently,” Eugene W. McDermott Jr., a partner in the Providence, R.I., office of Edwards Wildman Palmer L.L.P., said in an email.

%%BREAK%%

“But once they identify that "median' employee, they have to calculate the ratio using his or her total compensation under SEC reporting standards, using the same method used to report CEO, chief financial officer and other executive officer compensation,” Mr. McDermott said. “That includes salaries, bonuses, the fair value of stock or option awards, incentive plan payments, increases in the present actuarial value of pension benefits, perquisites and all other compensation.”

Coming to a conclusion about the effect of the proposed regulation would be “very premature,” said Peter Taffae, managing director at wholesale brokerage Executive Perils Inc. in Los Angeles. But historically, he said, similar regulations have exposed corporations to greater vulnerability.

“There's a question of the level of compliance — the interpretation of what comprehensive compliance is and, once that's decided, how to comply to reach that objective,” Mr. Taffae said. “Time will tell, but the more general it is, the harder it's going to be to have comprehensive compliance. Anything less than comprehensive compliance means you're potentially vulnerable to litigation.”

“My take is that there's still a lot to be determined in terms of how the rule will play out in its final adopted form, assuming the SEC adopts the rule,” said Neil P. Casey, a partner at White & Williams L.L.P. in New York. He noted that companies have already expressed concern about the costs of complying with the rule.

“Coupled with that is whether it actually provides meaningful disclosure to investors,” Mr. Casey said.

%%BREAK%%

He also said that while the SEC has said it is trying to provide companies with flexibility in complying, which can be useful, “it can also lead to companies taking different approaches, so you may not have an apples-to-apples comparison even between companies that are in the same industry.”

In addition, he said non-U.S. employees in the calculation could mean problems with foreign privacy laws.

Additionally, companies with a large seasonal or part-time workforce will have to “confront the fact that the employee part of the ratio will be low, making the executive compensation part look high,” said Kevin LaCroix, executive vice president of R-T Specialty L.L.C. in Beachwood, Ohio. “The companies that have a large non-U.S. employee base will have the same issue.”

“The purpose of the proposed disclosure is to try to control executive compensation,” but it might have the opposite effect, said Dan Bailey, member at Bailey Cavalieri L.L.C. in Columbus, Ohio. The pay ratio disclosure will allow shareholders and companies to better compare executive compensation at one company with anther similar company, he said.

“CEOs and boards at most companies expect and want their CEO compensation to be above average, not below average, so the more information you provide to allow companies to evaluate how they compare with other companies, the more likely companies will want increase their CEO compensation to compare favorably,” Mr. Bailey said.

%%BREAK%%

“There's nothing about disclosure itself that necessarily means more lawsuits — information is neutral,” said Mr. LaCroix.

“My concern is that the same sequence of events will occur with the pay ratio disclosure that we saw with the say-on-pay provision of Dodd-Frank. Companies that had negative shareholder votes, even though it was an advisory vote, had to deal with follow-on shareholder litigation,” Mr. LaCroix said.

“There will be comparisons; and for those companies that are different, there will be shareholder concerns and possibly more shareholder litigation,” he said.