Additional Compensation Disclosures required by Dodd-Frank Act

The Dodd-Frank Act, signed into law in July 2010 by President Obama, requires publicly traded companies to disclose the following additional information in their proxy.

Pay for Performance

A disclosure regarding the relationship between a company’s financial performance, including changes in shareholder return and the executive compensation actually paid.

Comparison of Compensation

A comparison of the dollar amount of the median of annual total compensation of all employees (excluding the CEO) and the total annual compensation of the CEO, with a ratio of CEO total compensation to the median total of all employees.  Total Compensation is expected to be defined according to the SEC rules for calculating total compensation for named executive officers in the Summary Compensation Table in the current proxy disclosure rules, but we will have to wait for the SEC rules to be certain.

The final rules regarding these disclosures is the responsibility of the SEC but the Agency has no deadline for publishing the new rules.  A recent comment from SEC Chairwoman Mary Schapiro indicated that the final rules would not likely be in place for the 2011 proxy season.

One challenge (and burden) for all companies will be the requirement to calculate the total compensation of each employee under the same rules as named executives in the proxy to then be able to calculate the median value.  This will require computing the value of equity awards, bonuses, perquisites, changes in the value of pension plans for all employees (full and part-time) and a conversion to US dollars of foreign subsidiaries employees’ compensation.   The Act does not limit these disclosures to the proxy statement but includes disclosure in a number of SEC filings (i.e. registration statements and quarterly and annual financial statements).

It’s obvious that this new disclosure provision of the Act will require an inordinate amount of time and effort to comply.  Furthermore, it will also likely require a good bit of narrative for companies to explain their methodology and computation of all employees total compensation, especially when the ratio comparing CEO’s pay to the median of all employees is seen to be excessive or out of line with peers.

What will this new disclosure reveal about a company’s compensation strategy and philosophy?   Will companies change their compensation strategy as a result of this disclosure?  Will it influence the type of compensation offered in order to reduce or minimize the total compensation value calculation?  What does the proposed ratio really tell us about the value of a CEO’s compensation? These are but a few of the questions that come to mind in light of the “unintended consequences” of the new Act.

We are working with clients on methods for collecting necessary data for disclosure and preparing draft proxy statements for Committee review.  We recommend companies begin to prepare early for these new disclosure rules that will become required once the SEC publishes the final rules.

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