Pay Ratio Rules: Practical Compliance Challenges

On July 21, 2010, in response to the financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was signed into law. In passing Dodd-Frank, legislators hoped to curb the risk-taking behaviors that were blamed, in part, on certain executive pay practices. Included in the law is Section 953(b), which directs the Securities and Exchange Commission to promulgate rules requiring that public companies disclose the median annual total compensation of all employees other than the chief executive officer, the annual total compensation of the CEO and the ratio of these two amounts (the proposed pay ratio rules).

While Section 953(b) appears simple on its face, for most public companies, especially those with global operations, the determination of the median total compensation for all employees would be very costly and likely require an overhaul of compensation data and employee record-keeping systems. Further, as the SEC suggested in its economic analysis of Section 953(b) rulemaking, the benefits of the disclosure are uncertain. There are no obvious benefits on the face of the statute, and the specific market failure or problematic pay practice that the legislators attempted to address with Section 953(b) was not made clear in the legislative record.

Originally published in Bloomberg BNA’s Pension & Benefits Daily on October, 28, 2013.

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