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Dodd-Frank: Disclosure of Median Comp – of What Utility?

By | August 6, 2010

I have been thinking about the new Dodd-Frank requirement for public companies to report the ratio of the median annual total compensation of all the company’s employees (other than the CEO) to the CEO’s annual total compensation.  This is a provision that requires SEC regulatory guidance before it becomes effective, but may be in place for the 2011 proxy season.

Think of the problems you face in determining the “annual total compensation” under SEC regulations for your named executive officers.  Multiply that by the number of employees you have.  Will the SEC provide ways to simplify these calculations when the rules are issued?

And think about the number of employees that you have.  Think about your normal headcount; then ask your payroll department how many W-2s you issue each year.  Each W-2 represents an employee.  If you have a lot of turnover, chances are your median compensation number will be lower than you might think, since it may include a number of employees who did not work a full year and so did not earn a full year’s wage for their position.  Will the SEC allow for that compensation to be annualized?  Will that simplify or complicate the calculation?

What if you have employees in foreign countries?  Add them to this mix and the calculations will be even messier and the significance of the ratio even less clear.

Will investors understand the limitations of the ratio?  Will the ratio have any meaning at all?  Time will tell.

Contact Audrey Fenske for more information.