Dodd-Frank, Compensation Ratios, and the Expanding Role of Shareholders in the Governance Process
Harvard Business Law Review Online, Vol. 2, p. 91, 2011
9 Pages Posted: 13 Oct 2011 Last revised: 21 Mar 2012
Date Written: October 12, 2011
The Dodd-Frank Act included a number of provisions designed to reform the executive compensation process. One of the provisions, Section 953(b), requires disclosure of a ratio that compares CEO compensation with the median income of employees. Although hardly noticed at the time of adoption, the provision has since generated opposition, with many of the concerns involving the logistics associated with implementation. Efforts to repeal Section 953(b) have surfaced in Congress.
An analysis of the statutory language, however, shows that Section 953(b) was drafted in a manner that left considerable administrative discretion to the Securities and Exchange Commission, the agency responsible for implementing the provision. Concerns over the frequency of disclosure or the method used to calculate the median compensation of employees can, therefore, be addressed by the SEC during the rulemaking process. Disclosure of the ratio will ultimately be a useful addition to the information provided by shareholders in connection with their advisory vote on executive compensation.
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