Enacted in response to the 2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) places vastly greater oversight and restrictions on the U.S. finance and banking sectors. The aim: To regulate and minimize the kinds of risky, deceptive practices that led to the collapse of the U.S. housing market and economic recession.
As the most far-reaching financial reform effort ever passed into law, Dodd-Frank has as many proponents as it has detractors – especially in our heated 2016 election cycle. Though the legislation was signed into law in 2010, Dodd-Frank remains a hot-button political topic due its continuing evolution: Many of the Act’s 2,300 pages’ worth of provisions are still being finalized, and many new rules have been proposed in the years since the law was signed.
Future changes are likely to come down the Dodd-Frank pike in coming months and years, as well. President-elect Trump made his intentions of repealing Dodd-Frank – or at least dismantling many of its most onerous compliance burdens – known on the campaign trail, though it’s impossible to know at present how his policies will play out.
Evolving or not, many of Dodd-Frank’s new requirements are poised to impact stakeholders across a variety of business functions – and global payroll is one of those affected. In fact, without a holistic approach to global payroll across the enterprise, some financial companies may find it difficult to comply with new Dodd-Frank disclosure requirements.
What Does Payroll Have to Do with It?
Since the 1980s, banks and other financial institutions have paid notoriously high salaries to their executives, salespeople, and other high-level employees.
Since the financial crisis, however, compensation arrangements in the financial sector have come under increased scrutiny – and for good reason: By issuing massive salaries and bonuses to executives and traders who take on undue risk in pursuit of profit, financial institutions encourage high-risk decision making among employees while jeopardizing consumer funds.
Dodd-Frank addresses the issues of pay and incentives most clearly in two distinct areas of the Act: The proposed rules governing bonuses, and the recently finalized ‘Pay Ratio Disclosure’ requirements. For global payroll stakeholders at financial institutions and publicly traded companies, these provisions are critical to understand.
Bonuses – Diminishing ‘Excessive’ Awards
To address Wall Street’s bonus problem, Dodd-Frank Section 956 tasked six different regulatory agencies with issuing rules to prevent the kind of “excessive” incentives that can lead to material losses.
Following an initial proposal in 2011, the six agencies (including the Treasury, FDIC, and SEC) rolled out a more stringent re-proposal in April 2016. The latest version puts different requirements on financial institutions based on size – placing the most onerous bonus-related compliance burdens on institutions exceeding $250 billion in average total consolidated assets.
Included in the proposal are mandatory bonus deferrals: To encourage long-term thinking around incentive pay, covered financial institutions with total assets exceeding $50 billion will be required to defer bonus payments for at least four years – as well as to comply with any agency requests for downward adjustments or forfeitures.
In another move designed to encourage sounder pay arrangements, the April 2016 proposal would also let companies “claw back” awarded bonuses from those employees who draw enforcement actions or take inappropriate risks. For large institutions, the “clawback period” will last seven years – which, when coupled with the four-year deferment requirement, puts individuals’ compensation potentially in flux for up to 11 years.
Though the bonus rules have yet to be fully finalized and adopted, they mark a major shift in the relationship among financial institutions, payroll teams, and regulatory bodies: Prior to Dodd-Frank, no legislation has ever tightened the reigns on bonuses. Payroll stakeholders in the financial sector are wise to start planning now for how they intend to monitor the distribution of deferred bonuses. Ultimately, it will be a key factor in their global payroll compliance efforts.
Pay Ratios – ‘Say on Pay’ at the Organization
Unlike the not-yet-final bonus rules, Dodd-Frank’s Pay Ratio Disclosure requirements are an in-place reality – and they will impact more than just financial institutions. Beginning their first fiscal year on or after January 1, 2017, all publicly traded companies must report to the SEC on how their executive compensation stacks up against their employee compensation.
More specifically, section 953(b) of the Dodd-Frank Act stipulates that public companies must regularly disclose the following in their annual reports, proxy or information statements, and/or registration paperwork:
- the median of the annual total compensation of all employees of the registered company (excluding the chief executive officer);
- the annual total compensation of the chief executive officer; and
- the ratio of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer.
To calculate the pay of the median employee, a company must take into account the salary, overtime compensation, bonuses, and stock awards of all full-time, part-time, temporary, and seasonal workers. For companies that utilize a variety of disparate systems to execute global payroll, adding all of that up won’t be easy.
In fact, the heads of many leading companies pointed out as much to the SEC during the comment period for the proposed pay ratio rules: Cummins said in its comment letter that it has “approximately 30 payroll systems that do not interface with one another” for its 46,000 employees in 55 countries and territories. Ball CEO John Hayes went even further, commenting that “Companies do not typically structure their global human resource systems in ways that provide ready access to the data needed to conduct the calculation proposed by the SEC.”
With 2017 right around the corner, it may be time for companies to invest in the payroll technology that can create that structure for them: A cloud-based global payroll solution can provide organizations with a holistic view of end-to-end payroll across every region and country in which it operates – ideally simplifying payroll data collection and ensuring greater data quality with more standardized processes.
Ultimately, much of Dodd-Frank remains a question mark for U.S.-based employers amid the dawn of a new presidential administration. Yet with more changes to Dodd-Frank likely on the way, organizations are wise to put the right payroll compliance infrastructure in place to make any oncoming reporting requirements more easy to meet.