New Compensation Disclosure Requirements Affect Booming Businesses

The Dodd-Frank Wall Street Reform and Consumer Protection Act became law in July of this year.  I have previously written about some provisions of this far-reaching law such as changes with interchange fees.  Given its more than 2,300 pages and broad scope, the impact on businesses continues to be understood with new revelations still being brought to light.  There is one little-noticed section of the law whose impact could be significant given the mechanics required to implement it.  If you position your company correctly, it could represent a lucrative opportunity for your business.

The section that’s causing the consternation

The section of the Dodd-Frank Act that is causing much consternation is §953(b):

(b)  Additional Disclosure Requirements-

(1)  IN GENERAL- The Commission shall amend section 229.402 of title 17, Code of Federal Regulations, to require each issuer to disclose in any filing of the issuer described in section 229.10(a) of title 17, Code of Federal Regulations (or any successor thereto)--

(A) the median of the annual total compensation of all employees of the issuer, except the chief executive officer (or any equivalent position) of the issuer;

(B) the annual total compensation of the chief executive officer (or any equivalent position) of the issuer; and

(C) the ratio of the amount described in subparagraph (A) to the amount described in subparagraph (B).

(2)  TOTAL COMPENSATION- For purposes of this subsection, the total compensation of an employee of an issuer shall be determined in accordance with section 229.402(c)(2)(x) of title 17, Code of Federal Regulations, as in effect on the day before the date of enactment of this Act.

Concerns being raised regarding §953(b) of Dodd-Frank

The concerns expressed by companies are the difficulty in calculating what appears to be a simple number required in subparagraph (B) and the erroneous conclusions that may be drawn from misinterpretation of the ratio required in subparagraph (C). 

If your company must comply with this requirement, it will need a system that can collect this information to produce the necessary ratios.  For smaller publicly-traded companies with one payroll system and low turnover, the degree of difficulty may be small.  But for larger companies with perhaps tens or hundreds of thousands of employees across many countries, dozens of payroll systems and high turnover the costs could be significant.  Some critics of the measure have indicated that the practical aspects of implementing this regulation were not taken into consideration.

Timetable for enactment of §953

The Securities and Exchange Commission will be very busy implementing the numerous requirements of the Dodd-Frank Act.   Some components of Dodd-Frank require implementation by specific dates.  These are given priority in the SEC’s enactment plan.   With respect to the compensation disclosure requirements, the SEC anticipates proposing rules on how to implement them at some point between April 2011 and July 2011 with enactment taking place sometime later.

It is anticipated that much lobbying will take place between now and then in an attempt to shape how the SEC enacts §953.  It is important for booming business to make their point of view known through the public comment period as well as through organizations that represent your interests.

Direct impact on your business

Even though implementation is not immediate, now is the time for your business to position itself strategically for this regulation.  Your business could be impacted directly in one or more of the following ways:

If your company is considering raising capital in the public markets, this regulation will create additional “headline risk” and costs for your business.  Your company will need to comply with this regulation once publicly-traded.  While there are many factors involved in determining how you seek capital, this regulation makes raising money via the public capital markets more expensive and a little riskier.

If your company must comply with this requirement it will need a system that can collect this information to produce the necessary ratio.  As I stated above, the larger your company, the more complex and expensive it will be to comply with this requirement.

If your exit strategy is the strategic sale of your company to a publicly-traded company, you need to consider the impact of that acquisition on your would-be acquirer’s compensation ratio.  It could be an argument to help your pricing negotiations.  If your profit margins are lower due to higher wages that you pay employees, the argument now exists that this is beneficial to the acquirer as it will help their compensation ratio.  The opposite is true as well.  If your profitability is due to the use of low-wage labor, this is a hindrance to an acquirer whose compensation ratio will suffer by acquiring you.   

Regulatory changes always present opportunities for additional sales if your company positions itself correctly.  Thousands of companies will need to comply with this regulation. This opens the door to: consulting projects, systems development and integration projects, legal advice, accounting advice, financial advice, public relations advice and more.

Some analysts have suggested that publicly-traded companies may consider outsourcing work that is currently done by employees earning low wages. The goal is to improve the compensation ratio.   If your company offers services that will now be outsourced by large companies, this regulation could generate many new contracts for you.  At the very least if you target publicly-traded companies this should be a bullet point added to your standard sales presentation.