Dodd Frank, Compensation Ratios, and Agency Discretion (Part 1)

One of the sleeper provisions in Dodd-Frank was Section 953(b).  The provision, once implemented, requires public companies to disclose ratios that compare CEO compensation to the compensation of the median employee. We have posted on this provision before.

What we have not discussed is the implementation process.  The SEC has indicated that it intends to make a rule proposal about compensation ratios by the end of the year.  In considering an appropriate rule, reports have sufraced suggesting that some within the Commission view the Section as providing little administrative flexibility.  This has been a problem because some have argued that, under Section 953, the formula for calculating employee compensation is difficult to impliment and the ratio must be disclosed multiple times a year.  

In fact, the provision was written in a manner that provides extraordinary discretion to the SEC in formulating an appropriate approach.  Section 953(b) in at least three places refers not to other statutes but to regulations adopted by the Commission.  These references provide unexpected flexibility for the SEC in adopting any rule that implements the requirement.  We will explore this discretion in the next couple of posts. 

For a more detailed discussion on this issue and Section 953(b), see Dodd-Frank, Compensation Ratios, and the Expanding Role of Shareholders in the Governance Process.