Section 953(b) of the Dodd-Frank Act required the SEC to develop disclosure rules requiring issuers to disclose the ratio of the “median” total annual income for “all employees” to the annual income of the CEO. BNA is reporting that new SEC Division of Corporation Finance director Keith Higgins has stated that the “real challenge” of writing the mandated rule is developing a methodology for calculating the “median” annual total pay of the issuer's workers. Higgins also reportedly predicted that calculating employee pay will involve some statistical sampling.
I observed in Corporate Governance after the Financial Crisis:
This requirement is going to be hugely burdensome:
[It] means that for every employee, the company would have to calculate his or her salary, bonus, stock awards, option awards, nonequity incentive plan compensation, change in pension value and nonqualified deferred compensation earnings, and all other compensation (e.g., perquisites). This information would undoubtedly be extremely time-consuming to collect and analyze, making it virtually impossible for a company with thousands of employees to comply with this section of the Act.
Statistical sampling likely would somewhat reduce that burden, but will raise new questions, such as: Did Dodd Frank authorize sampling? The statutory language is the median of all employees, which may require a rule that counts everybody (recall the Supreme Court cases about the census using sampling?).
Will the SEC finally do a sufficiently robust economic analysis of the costs and benefits to avoid adding to the string of rules that have been struck down?
Will there be safe harbors for firms that use the mandated statistical sampling but still end up with incorrect disclosures?