Dodd Frank, Compensation Ratios, and Agency Discretion (Part 2)

Section 953(b) was sponsored by Senator Menendez of New Jersey and originally part of separate legislation.  The requirement to disclose compensation ratios was inserted into the Senate version of Dodd-Frank during committee deliberations.  The provision did not, however, generate any significant legislative history. 

Section 953(b) implemented the compensation ratio with some specificity.  The ratio had to be based upon a median rather than a mean.  Calculation of the employee median had to exclude the compensation paid to the CEO.  More directly, the statute spoke to the method of caculating median employee compensation and the frequency of disclosure.  The provision did so, however, not by explicitedly including the requirements in the statute but by cross referencing regulations adopted by the Commission. 

Specifically, Section 953(b) provided that ratio disclosure must appear in Item 402 of Regulation S-K (or its successor), the SEC provision defining executive compensation. Congress also referred to SEC regulations in defining the breadth of the disclosure requirement. Section 953(b) provided that ratio disclosure was to appear “in any filing of the issuer described in section 229.10(a).”  Finally, Section 953(b) prescribed the method for calculating employee compensation by referencing Item 402(c)(2)(x), the subsection that defined the CEO‟s total compensation.

We will discuss the impact of these references in the next post.  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.