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Pay Ratio Regulations Coming Soon. Are You Ready?

By Jonathan R. Tung, Esq. on October 27, 2015 | Last updated on March 21, 2019

'Tis the Season for Corporate Oversight. In house can likely feel the mounting tension in the air ...

The latest blow to corporate and financial opacity was adopted by the SEC on August 5, 2015 -- and many people didn't even know about it. On that day, the SEC voted to implement Sec. 953(b) of the Dodd-Frank Act, which requires companies to disclose a pay-ratio gap (chasm?) between the CEO's total compensation and the median annual total compensation of all other company employees.

This new change in Federal Law is likely a source of tension among business executives who are eager to deflect attention away from the fact that the average S&P 500 CEO makes 216 times more than the average employee of the same company.

Probably now is a good time for IH to advise their clients to adopt a positive attitude about this change in federal law even though the most obvious CEO's response would be to foam at the mouth.

Great Recession & Dodd-Frank

Dodd-Frank was signed into law in mid 2010 by President Obama in response to the subprime mortgage crises of 2008 and signaled what is considered by many the largest set of reforms on the financial industry since the Great Depression. Those years were probably busy years for IH counsel and they were likely instrumental in coining the term "too big to fail."

Look Forward to January 2017

Opponents of the reforms will forever look to October 19 as a day that will live in infamy, but the truth is that compliance will not really come into effect until January of 2017, leaving companies and IH some time to plan damage control. Also, this is time for prophylaxis since it's never good to have the SEC visiting you ...

Since this is the first time companies have ever been federally required to report this sort of information publically, it's terra incognita for IH and even poses potential problems for accountants.

Mike Stevens of Alston & Bird told InsideCounsel that part of the trouble involves determining who is the "median employee." Mr. Stevens suggests factors to consider in preparation for these embarrassing disclosures.

1. The Size of the Employee Pool
2. What is "Compensation?" Does This Include Equity?
3. How is "Compensation" Data Collected?
4. Ensuring Data Uniformity -- Get Your Numbers all From ONE Source

Other considerations certainly are worth mentioning, too. If the company is large enough, IH should probably advise their clients that reporting requirements mandate that the employee base must be defined in the last three months of the year. Solution? Define the base earlier on with fewer seasonal workers so the gap between the CEO and the holiday workers doesn't take the public's breath away.

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