CEO-to-Worker Pay-Ratio Disclosure Proposed by Divided SECDave Michaels
A divided U.S. Securities and Exchange Commission proposed that public companies disclose how much more their chief executives earn than rank-and-file workers.
SEC commissioners voted 3 to 2 at a meeting in Washington today to seek comment on a requirement vilified by the agency’s two Republican members, who called it a political sop for left-leaning interest groups. The disclosure rule, championed by unions and some congressional Democrats, is mandated under the 2010 Dodd-Frank law.
In an attempt to make compliance less costly for companies, the SEC proposed that businesses can use sampling and other estimation methods to determine the median pay of workers, the figure to which CEO pay is to be compared. The agency also offered a shortcut that allows companies to estimate median compensation without having to conduct complicated pension-benefit calculations for every worker.
“It’s great to know the new regime has worked together to come up with something that is far less onerous than it could have been, based on what we were hearing in public statements before,” said Steve Seelig, a senior technical adviser at compensation consultant Towers Watson & Co.
The plan doesn’t allow companies to exclude part-time workers or employees based in foreign countries from the calculation. Business groups had complained that it’s technically challenging to reconcile pay practices in other countries with U.S. disclosure rules.
Senator Robert Menendez, a New Jersey Democrat who wrote the Dodd-Frank provision requiring the disclosure, had warned the SEC against exempting 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.
“We have middle class Americans who have gone years without seeing a pay raise, while CEO pay is soaring,” Menendez said today in a statement. “This simple benchmark will help investors monitor both how a company treats its average workers and whether its executive pay is reasonable.”
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.
CEOs at eight companies, J.C. Penney Co., Abercrombie & Fitch Co., Simon Property Group Inc., Oracle Corp., Starbucks Corp., CBS Corp., Ralph Lauren Corp. and Nike Inc., were paid more than 1,000 times the average worker pay in their industries, according to the data. The ratios were based on company disclosures for CEOs and data for rank-and-file workers wages and benefits by industry gathered by the U.S. Bureau of Labor Statistics and the Bureau of Economic Analysis.
“When the CEO receives the lion’s share of compensation, employee productivity, morale and loyalty suffer,” Richard Trumka, president of the AFL-CIO labor federation, said in a statement. “In contrast, reasonable CEO-to-worker pay ratios send a positive message to the workforce that the contributions of all employees are important to running a successful company.”
The use of sampling could make the process of gathering payroll data less costly and ease resistance from some business groups to the rule.
“Given this flexibility, we believe that even a registrant with a large number of employees will be able to provide the disclosure in a relatively cost-efficient manner,” said Keith F. Higgins, the director of the SEC’s corporation Finance division.
The SEC’s two Republican commissioners blasted the proposal and said the five-member commission should not have voted to propose it. Daniel M. Gallagher and Michael Piwowar, said the pay-ratio disclosure is designed to “shame” CEOs and public companies.
“The shame of this rule should not be put upon CEOs but upon the five of us for putting special interests ahead of investors,” Piwowar said. “Shame on us for letting special interests detract from our core mission.”
Democratic SEC commissioner, Luis A. Aguilar, said at today’s meeting that disclosure is in the best interest of shareholders, who can use the data to judge whether a CEO’s pay is commensurate with a company’s performance.
“If comparing CEO compensation solely to the compensation of other CEOs can lead to an inefficient upward spiral, then comparing CEO compensation to the compensation of an average worker may help offset that trend,” Aguilar said.
The proposal has attracted considerable lobbying in the three years since Dodd-Frank became law, and today’s vote opens a 60-day comment period that will solicit more views. 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, IBM Corp., and Exxon Mobil Corp.
“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,” said Vineeta Anand, chief research analyst for the AFL-CIO’s office of investment.
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 voted unanimously 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 and comply with rules issued by the Municipal Securities Rulemaking Board.
The final rule exempts appointed board members of municipal governments from having to register with the SEC, according to a summary provided by the SEC. Only advice pertaining to the investment of proceeds from an issuance of securities is covered by the rule, the summary states.