Dodd Frank, Compensation Ratios, and Agency Discretion (Part 5)

So where does this leave the implementation of Section 953(b)?  Most of the concerns expressed by issuers (the frequency of disclosure, the complexity of the formula) can be addressed in the rulemaking process.  The Commission has considerable discretion in fashioning a provision that provides the information required by Congress without imposing unnecessary costs or complexities on public companies.

The remaining issue concerns the definition of employee.  Some prefer that the ratio be calculated without including part time and overseas employees.  Resolution has significant consequences.  The inclusion of part time and foreign workers (particularly those in low wage countries) will likely lower the median compensation paid to employees and increase the ratio. 

The plain meaning of "employee" would seem to encompass all categories, including part time and foreign.  Moreover, the failure to include them would allow companies to more easily manipulate the ratio by moving low paid employees into these categories, something arguably inconsistent with congressional intent. 

In resolving this issue, the burden would seem to be on those supporting exclusion of these categories to show that this was a result that Congress intended.  The statute does not directly speak to the issue, nor does contemporaneous legislative history. 

The sponsor of the legislation has indicated that these categories of employees are to be included.  See Letter from Senator Menendez (Jan. 19, 2011) (“Specifically, I want to clarify that when I wrote "all‟ employees of the issuer, I really did mean all employees of the issuer. I intended that to mean both full-time and part-time employees, not just full-time employees. I also intended that to mean all foreign employees of the company, not just U.S. employees.”).

This issue will likely attract considerable commentary in the rulemaking process and, at least in the first instance, seems to be a matter where the SEC has the least amount of regulatory discretion.

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.