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Dodd-Frank: From "Say on Pay" to "Internal Pay Equity"

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Jarrett Dieterle
Legal Intern, Manhattan Institute's Center for Legal Policy

The Manhattan Institute's Center for Legal Policy has been monitoring the interplay between shareholder activism and executive compensation in its Proxy Monitor reports. Currently, under the 2010 Dodd-Frank law, companies must submit their executive compensation packages to their shareholders for an advisory "say on pay" vote.

In addition to say on pay votes, Dodd-Frank also empowers the SEC to require companies to report the gap between their CEO's salary and the median salary of their other employees:

The Dodd-Frank Act will require proxy statements for annual meetings to include new disclosure regarding (i) the relationship between executive compensation and the company's financial performance; (ii) the median of total annual compensation of all employees, excluding the CEO; and (iii) the ratio of the median employee annual total compensation to the CEO's annual total compensation. [Via fredlaw.com].

This new rule, termed the "Internal Pay Equity" provision, has yet to be promulgated by the SEC, but is expected to be issued by the end of the month and adopted by the end of this year. While "say on pay" votes appear to have had little effect on executive compensation levels, supporters of the forthcoming internal pay equity provision hope it will be more successful at stemming the rising tide of CEO pay:

The rule's supporters--a group that includes labor unions, institutional shareholders and left-leaning activists--say it would force companies to consider rank-and-file workers during boardroom discussions over CEO pay and could put the brakes on executive compensation, which has been rising faster than inflation and the average worker's pay.

The so-called internal pay equity provision, passed as part of the July 2010 Dodd-Frank package of financial reforms, is intended to expose the income disparity within public companies and help investors better evaluate the firms.

A potential side-effect of the internal pay equity provision is the cost to companies of having to calculate median employee pay levels.

Companies say they have a rough sense of their internal pay ratios, but they argue that their global workforces and varied payroll systems make calculating the median cumbersome, if not virtually impossible. What's more, they say, disclosing pay ratios would make them easy targets for CEO-pay critics.

If the SEC enacts the internal pay equity rule by the end of this year as planned, starting next year it will be possible to determine the rule's effect - if any - on CEO pay as well as the costs companies incur complying with it.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.