Boss-Employee Pay Gap Going Public?
In September, the Securities and Exchange Commission (SEC) took steps to enact the Dodd-Frank mandate, requiring more transparency about executive compensation. Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires companies to disclose the median annual total compensation of all employees apart from the chief executive officer (CEO), the CEO’s total annual compensation, and the ratio between these two numbers. Proponents of the rule say it enhances accountability while opponents call it a rotten mandate. How will the new rule affect your business?
Dodd Frank, the SEC and employee compensation
The financial crisis focused attention on the gap between top executive and employee compensation. According to the Economic Policy Institute , executive pay rose from 20 times an average employee’s salary in 1965 to 277 times in 2012. The top 200 U.S. executives ‘ median pay package increased by 16 percent from 2011 to $15.1 million in 2012. Presently, public companies are required to disclose the total annual compensation of their top five executives. However, they are not required to publish information about the compensation of other employees.
SEC commissioners voted three to two in favor of requiring publicly traded companies to disclose the median of the total compensation for all employees, excluding the CEO and the ratio between that number and the CEO’s annual compensation. Companies may use a statistical sampling to calculate the median. Part-time workers and foreign-based executives must be included in the calculation. Emerging growth companies, smaller reporting companies and foreign private issuers are not affected by the new rule.
Whether or not the new rule goes into effect, companies can expect increasing scrutiny of their executive compensation. CEO packages are likely to include less cash and more stock options. An experienced business law attorney can help your company stay in compliance with this changing legislation and the ensuing regulatory oversight.
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