CEO-to-Worker Pay Ratio Disclosure Proposal to Be Issued by SEC
By Dave Michaels - Sep 18, 2013 12:01 AM ET
A divided U.S. Securities and Exchange Commission will propose that public companies disclose how much more their chief executives earn than rank-and-file workers.
SEC commissioners meeting in Washington today will vote to propose and seek comment on a requirement that has been opposed by the agency’s two Republican members and more than 20 large business lobbying groups, which say the data will be costly to compile and won’t help investors. The disclosure rule, championed by unions and some congressional Democrats, must be issued under the 2010 Dodd-Frank law.
The SEC will propose that companies can use sampling and estimation methods to determine the median pay of workers, according to two people familiar with the matter, who asked to not be named because the rule isn’t public. The plan won’t allow companies to exclude employees based in foreign countries from the calculation, the two people said.
“To get a precise calculation is going to have lots of obstacles,” said Marc Trevino, managing partner of the executive compensation group at Sullivan & Cromwell LLP. “Part of the reason for the delay has been their recognition this process will be potentially expensive, and my hope is they are using their flexibility.”
Senator Robert Menendez, a New Jersey Democrat who wrote the Dodd-Frank provision requiring the disclosure, has told the SEC the calculation must include non-U.S. employees and part-time workers. “When I wrote ‘all’ employees of an issuer, I really did mean all employees of an issuer,” Menendez wrote in a letter to the SEC shortly after the law was passed and lobbying began to shape the rule.
The law requires public companies to disclose their CEO’s total compensation as a multiple of median total worker pay. The law says total compensation includes salary, bonus, stock and option awards, long-term incentive pay, and change in pension value.
Menendez has said he wrote the provision to ensure that investors know whether a company’s pay practices are “fair” and whether “executives are sharing proportionately in any sacrifices.” Other proponents of the rule, including unions, say a lopsided ratio would help investors detect whether a company may have morale problems among its workforce that can affect productivity and earnings.
Business groups urged the SEC to exclude non-U.S. employees from the proposal, saying it’s technically challenging to reconcile pay practices in other countries with U.S. disclosure rules. SEC Chairman Mary Jo White declined to describe the rule in detail in an interview yesterday but said the SEC staff “has worked very hard to be responsive.”
The use of sampling could make the process of gathering payroll data less costly and ease resistance from business groups to the rule. The law gives the SEC discretion “to allow companies to figure out how to calculate the median,” said Vineeta Anand, chief research analyst at the AFL-CIO’s Office of Investment.
“The real question is whether the commission will actually address the operational difficulties or simply implement the text of the statute,” Trevino said in a phone interview.
At least one SEC commissioner, Luis A. Aguilar, has openly supported the concept behind the rule proposal. Aguilar said in February that the relationship between CEO and worker pay can “create risks to an enterprise, including the risk of employee, customer and shareholder discontent.”
Commissioner Daniel M. Gallagher will probably vote against the proposal, having previously questioned the benefit of making companies disclose a CEO-to-worker pay ratio. Such rules are meant to “affect the behavior of companies and boards rather than provide information that investors would find useful,” Gallagher said in a speech in January.
Commissioner Michael Piwowar also will vote against the proposal, the two people said.
Proponents of the rule, including unions, say the pay ratio will be material to investors who oppose runaway CEO pay. Mandatory disclosure also would help inform shareholders on advisory “say-on-pay” votes at companies’ annual meetings, according to unions that favor the law.
Many companies already track median-pay data in order to benchmark their pay practices to competitors, Anand said. Across the Standard & Poor’s 500 Index of companies, the average multiple of CEO compensation to that of rank-and-file workers is 204, up 20 percent since 2009, according to data compiled by Bloomberg. The numbers are based on industry-specific estimates for worker compensation.
The proposal has attracted considerable lobbying in the three years since Dodd-Frank became law. SEC officials have met with a range of interest groups including the AFL-CIO, Public Citizen, Americans for Financial Reform, the Center on Executive Compensation, Johnson & Johnson (JNJ), IBM Corp. (IBM), and Exxon Mobil Corp. (XOM)
“When you think about how many thousands of pages the Dodd-Frank law is compared to this tiny provision and the amount of outcry and noise and hand-wringing and whining, this tells you just how important this provision is to investors and how desperately companies want to do anything to not disclose it,” Anand said.
The Center on Executive Compensation, whose members include chief human-resource officers, has said sampling won’t solve all of the challenges posed by the directive. The center says it will continue to lobby Congress to repeal the provision.
“We don’t believe it would provide any useful information given that there is a plethora of executive compensation information out there already,” said Timothy Bartl, the center’s president.
The SEC also is scheduled to vote today to impose new rules on companies that provide financial advice to municipalities. The regulation, also required under Dodd-Frank, will require previously unregulated firms to register with the SEC as municipal advisers.
The final rule will narrow the definition of a municipal adviser, exempting appointed board members of municipal entities from having to register with the SEC, former SEC Chairman Elisse B. Walter said in February.
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