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SEC Proposes Dodd-Frank Pay Ratio Regulations

The SEC was charged with issuing regulations in numerous areas under the 2010 Dodd-Frank legislation. Three years after enactment, the SEC had not yet issued regulations relating to (1) pay ratio rules, (2) compensation clawback provisions, and (3) company hedging policies.

The SEC yesterday issued a 162 page set of proposed regulations on pay ratio rules. Below is a brief summary.

Dodd-Frank Requirement.  Dodd-Frank requires that an issuer disclose annually (1) the median of the total annual compensation of all employees, (2) annual total compensation of the CEO, and (3) the ratio of the median employee compensation to the CEO’s compensation.

Identifying Employees.  “Employees” would include all worldwide full-time, part-time and temporary workers employed by the issues and its subsidiaries.

Median of Total Annual Compensation.  Total compensation would be determined in accordance with current SEC proxy rules applicable to executive officers for the Summary Compensation Table; a company can use reasonable estimates to calculate elements of total annual compensation of all employees. Companies can use a statistical sampling or other reasonable method in determining the “median”. For example, employers can use amounts derived from the issuer’s payroll or tax records in determining the median.

Required Disclosures.  A company must briefly describe its methodology for making its determinations, including material assumptions, adjustments, estimates and any changes in methodology from year-to-year.

Effective Date.  The rules would be effective for public companies depending on the date final rules are adopted by the SEC. The rules have a 60-day comment period, so there is no assurance the rules will be adopted in 2013. If the rules are adopted in 2013, the disclosure would be effective with respect to 2014 compensation (and included in the 2015 proxy statement). If the rules are not effective until 2014, disclosure would be required with respect to 2015 compensation (and included in the 2016 proxy statement).

SEC Comments.  The SEC Commissioners adopted the rules on a 3-to-2 vote.  The dissenters argued that the pay ratio computation “is sure to cost a lot and teach very little.”