House Bill Proposes Repeal of Dodd-Frank Internal Pay Equity Disclosure

News Brief

By Cydney Posner

You might remember the as-yet-to be-implemented–by-the-SEC provision of Dodd-Frank (Section 953) that required disclosure regarding internal pay equity? In that provision, Dodd-Frank required the SEC to amend Item 402 of Reg S-K to require each company to disclose, in a wide range of its SEC filings, including registration statements, annual reports and proxy statements:

  • the median of the annual total compensation of all employees of the company, except the CEO; 
  •  the annual total compensation of the CEO; and 
  •  the ratio of the two amounts above.

Under Section 953, total compensation must be determined in accordance with Item 402(c)(2)(x) of Reg S-K (that is, the provision governing the disclosure of "total compensation" in the Summary Compensation Table). There are numerous components of compensation in the SCT, including salary, bonus, stock awards, option awards, non-equity incentive plan compensation, change in pension value and nonqualified deferred compensation earnings and all other compensation. Needless to say, the calculation of these components just for the five NEOs currently required to be reported in the SCT can be very complex. As a result, there was substantial concern regarding the burden on companies of collecting and analyzing this data for all employees, especially for those companies with hundreds of thousands of employees located all over the world.

Today, The Wall Street Journal is reporting that the House Committee on Financial Services has advanced a bill, H.R. 1135, that seeks to repeal the pay-ratio disclosure requirement. The vote was 36-21, and the bill will now head toward a floor vote in the House.

According to the WSJ, "Rep. Bill Huizenga (R., Mich.), who sponsored the bill, said the provision would be ‘a logistical nightmare for all public companies,' because they would have to calculate pay for all employees in the manner they currently do for their top five executives and disclose it in every SEC filing. Companies have complained it would be costly to accurately report the compensation of their median employee, amid concerns about how to calculate part-time employees, overtime, benefits, 401(k) matches and differences in the way employees are compensated overseas."

The WSJ reports that, because the provision had no specific time limit for implementation, the SEC has delayed rulemaking, in part reflecting concerns on the part of some Commissioners: "SEC Commissioner Troy Paredes, for example, said last year that he was concerned the bill would not be ‘workable in practice' because employee pay data is not often standardized….Chairman of the House Financial Services Committee Rep. Jeb Hensarling (R., Texas) said he didn't believe investors needed this type of ratio to be disclosed and that the cost of regularly calculating compensation for every employee outweighs the benefits…. ‘I assume there is an infinite number of ratios some investors would find helpful to their decisions….' Companies might as well be required to calculate the ratio of workers with or without college degrees, the ratio of old versus young workers, or the ratio of office supplies purchased from big box retailers to local suppliers, he joked."

House Financial Services Committee Ranking Member Maxine Waters (D., Calif.), is reported to have sought, unsuccessfully, "to amend the proposal to require only annual disclosure, limit it to domestic employees and give the SEC more discretion in how it sets the rule." According to the WSJ, she was concerned a repeal would simply allow "companies to hide embarrassing information."

Although the bill seems likely to pass in the House, it could face a much tougher battle in the Senate.

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