We expect the SEC to issue proposed rules on the so-called "CEO pay ratio rules" of the Dodd-Frank Act, as the SEC has announced an open meeting for this Wednesday, at which it "will consider whether to propose rules to require companies to disclose the median annual total compensation of all employees and the ratio of that median to the annual total compensation of the company's chief executive officer as mandated by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act." We will, of course, provide a link and summary shortly after the proposed rules are published. However, since it has been more than three years since President Obama signed into law the Dodd-Frank Act, let's refresh our recollection of exactly what Section 953(b) provides:
ADDITIONAL DISCLOSURE REQUIREMENTS.—
IN GENERAL.—The Commission shall amend section 229.402 of title 17, Code of Federal Regulations, to require each issuer to disclose in any filing of the issuer described in section 229.10(a) of title 17, Code of Federal Regulations (or any successor thereto)—
- the median of the annual total compensation of all employees of the issuer, except the chief executive officer (or any equivalent position) of the issuer;
- the annual total compensation of the chief executive officer (or any equivalent position) of the issuer; and
- the ratio of the amount described in subparagraph (A) to the amount described in subparagraph (B).
- TOTAL COMPENSATION.—For purposes of this subsection, the total compensation of an employee of an issuer shall be determined in accordance with section 229.402(c)(2)(x) of title 17, Code of Federal Regulations, as in effect on the day before the date of enactment of this Act.
- IN GENERAL.—The Commission shall amend section 229.402 of title 17, Code of Federal Regulations, to require each issuer to disclose in any filing of the issuer described in section 229.10(a) of title 17, Code of Federal Regulations (or any successor thereto)—
The SEC previously announced that it "understands that the challenge of writing a rule to compare the compensation of CEOs with that of employees is devising a method to calculate the median of the annual total compensation of all employees of the issuer," other than the CEO. Using the Summary Compensation Table method of calculating the total compensation of every employee [Item 402(c)(2)(x)] will be literally impossible for most corporations. The big question on the minds of executive compensation professionals until the SEC publishes the proposed rules is whether the SEC is comfortable taking advantage of recent court cases appearing to give it more interpretive authority in light of Congress' half-baked drafting of Section 953(b).
We expect that the Director of the SEC's Division of Corporation Finance Keith Higgins will discuss these new proposed rules during his remarks to the CompensationStandards.com conference in Washington, D.C. beginning September 23. Your blogger also will be making two presentations at this conference, but my remarks may not be quite as widely anticipated as Keith's.
Given the comment period and the usual lead time provided by the SEC, it seems highly unlikely that these rules could be proposed and finalized until late 2014, effective for the 2015 proxy season (for calendar year filers), at the earliest – and more likely will be effective for the 2016 proxy season.