Dating back to their adoption in August 2015, as mandated by Dodd-Frank’s Section 953(b), the pay ratio rules have led a strange existence. For a while, companies generally ignored them because their effective date was so far in the future—for calendar-year companies, disclosures are first required in spring 2018 proxy statements regarding 2017 compensation. Furthermore, it was widely speculated that Dodd-Frank would, in the meantime, be revised to modify or eliminate what was broadly perceived to be a fundamentally flawed effort to contain executive compensation. It could even be argued that the SEC itself dragged its feet on pay ratio rulemaking to allow time for this to occur. (See this Doug’s Note.) Yet, as the effective day eventually rounded into view, highlighted by new guidance from the Division of Corporation Finance regarding some of the rule’s vaguer points, the reality of looming implementation overtook most companies.
But now, the long-awaited cracks in pay ratio’s foundation may be appearing. Last week, Acting SEC Chairman Michael Piwowar issued yet another statement (see this Doug’s Note regarding his earlier conflict minerals statement) directing the SEC staff to take a fresh look at the rule. Chairman Piwowar noted that companies “are now actively engaged in the implementation and testing of systems and controls designed to collect and process the information necessary for compliance.” (One certainly hopes that is the case, given the potentially enormous scope of the task.)
Chairman Piwowar then stated his understanding that some companies “have begun to encounter unanticipated compliance difficulties that may hinder them meeting the reporting deadline.” While it would be quibbling to question whether such compliance difficulties are truly “unanticipated,” it nevertheless seems accurate to say that the process probably won’t go smoothly and that the resulting proxy statement disclosures are likely to be all over the board.
He is, therefore, seeking public comment within the next 45 days on any “unexpected challenges” that companies have experienced and whether relief is needed and has directed the SEC staff to take those comments into consideration. Finally, Chairman Piwowar acknowledged that any further staff action regarding pay ratio will need to be taken as soon as possible to allow companies time to “plan and adjust their implementation processes accordingly.”
What does this mean?
First of all, this does not mean that the pay ratio rules have ben modified or repealed in any fashion or that the implementation deadline has been extended or tolled. Rather, it would seem to indicate that, consistent with many other signals from the Trump administration, Section 953(b) may be high on the Dodd-Frank hit list for potential modification or elimination, or that the SEC rule itself could be delayed or modified.
Unfortunately, given the uncertainty as to the consequences and timing of Chairman Piwowar’s statement and of other legislative initiatives, companies have no choice but to continue their efforts to implement the pay ratio rule as it is currently written. You might also want to keep your fingers crossed in hopes of substantive relief, preferably sooner than later.
All the best,