Dodd Frank, Compensation Ratios, and Agency Discretion (Part 4)

We are discussing the rulemaking authority of the Commission with respect to the implementation of Section 953(b), the provision that provides for mandatory disclosure of compensation ratios.

The Section provides that employee compensation is to be determined in accordance with Item 402.  Specifically, the provision provides:

• 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.

Item 402(c)(2)(x) in turn provides that compensation is to be computed based upon

• "[t]he dollar value of total compensation for the covered fiscal year (column (j)). With respect to each named executive officer, disclose the sum of all amounts reported in columns (c) through (i).

Section 953(b), therefore, requires companies to include the same categories of payments in computing employee compensation as is used in computing CEO compensation.  Moreover, on this specific issue, Congress gave the Commission no discretion.  The statute provides that the Commission must use the version "in effect on the day before the date of enactment of this Act."

This has caused some to assert that the formula is too complicated for determining employee compensation.  Perqs, for example, may be harder to determine and compute for employees than for CEOs. 

To the extent true, however, the Commission in fact has considerable discretion to modify the formula in a way that makes it easier to determine.  While it is true that the Commission must use the language in effect on the day before enactment, that applies only to Item 402(c)(2)(x).  This provision defines the applicable categories that are included in total compensation.  What it does not do is limit the SEC's discretion in determining how each category should be computed with respect to employee compensation. 

The Commission retains the regulatory discretion to amend the other subsections of Item 402(c).  Thus, for example, the SEC could amend subsection (c)(2)(ix) (which defines the information required in column (i)) to specifically define the method of calculating perquisites when it comes to employees.  The Commission could, for example, impose a high threshold (CEOs have a threshold of $10,000), allow for averaging, or define certain types of benefits that can be excluded (those shared with other employees or those required by law).

In other words, unnecessary difficulties with the formula for calculating median employee compensation can be fixed in the rulemaking process by the Commission.  The Commission can do so by amending the provisions of Item 402(c)(2).

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.