Treasury's Call to Repeal Pay Ratio Reporting Won't Alter Need to Comply

Required disclosure of the CEO pay ratio is still on the books—and likely to remain there

By Stephen Miller, CEBS Oct 12, 2017
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The Trump administration last week called for scrapping a requirement that publicly traded companies show how much their CEOs are paid compared with average workers, a disclosure scheduled to take effect in 2018. Nevertheless, executive pay advisors say that the requirement is still the law and is likely to remain so.

with some exceptions, public companies with headquarters in the U.S. are required to disclose the ratio of CEO pay to median employee pay in their 2018 proxy statements—reporting on fiscal year 2017—under the Dodd-Frank financial reform law, passed in 2010. Most public companies have been working through the calculations involved for several months.

The administration's recommendation to repeal CEO pay ratio reporting was made in a Treasury Department report released Oct. 6. The report, which assesses the impact of the Obama administration's regulations on U.S. financial markets, stated that: 

"Unfortunately, amendments in Dodd-Frank to the federal securities laws have imposed requirements to disclose information that is not material to the reasonable investor for making investment decisions, including … [reporting of the] pay ratio (Section 953(b). … If the intent is to use the law to influence business conduct, then this effort will be undermined by imposing such requirements only on public companies and not on private companies. In addition, such requirements impose significant costs upon the public companies that are widely held by all investors.

"Treasury recommends that … Section 953(b) of Dodd-Frank be repealed and any rules issued pursuant to such provisions be withdrawn….."

Public companies should stay compliant with the reporting requirement, said Steve Seelig, senior regulatory advisor for executive compensation at consultancy Willis Towers Watson in Arlington, Va.

In June, he noted, the U.S. House of Representatives voted along party lines to pass the Financial CHOICE Act, which "basically would repeal all aspects of Dodd-Frank, including the CEO pay ratio." The Senate, however, "has not moved it forward, and it doesn't look like they're going to take the time to vote on it just because it's what the executive branch wants. It's not clear that the Senate has the time or inclination to do so, with the packed legislative slate that they're dealing with."

"We don't think anything is going to change in the short term," said Gregg Passin, a New York City-based senior partner at Mercer, an HR consultancy. "We're urging our clients to continue preparing their pay ratio and related disclosures."

"Time is short until companies will need to file their 2018 proxy statements," generally in the first quarter of the new year, added Susan Eichen, a Mercer partner in New York City.

Regulatory Relief Not Expected

The U.S. Securities and Exchange Commission (SEC), which issued a final rule in 2015 for implementing the CEO pay ratio, recently published liberalized guidance for pay ratio reporting but said it is not going to take future any action to delay implementation.

Passin noted that under the SEC's current rule, public companies already are excluded from pay ratio disclosure if they are what is known as "smaller reporting companies," with less than $75 million in common stock held by public investors, or "emerging growth companies" that recently went public and have total annual gross revenues of less than $1 billion.

As for additional relief, "the SEC, like the FCC, is an independent federal commission that is able to disregard the preferences of the president and his Treasury secretary," Seelig noted.

His advice to public companies: "Stay on schedule with your pay ratio calculations and prepare to disclose the CEO pay ratio in 2018 proxy statements."

[SHRM members-only toolkit: Designing Executive Compensation Plans]

Most Companies Working Toward Compliance

A September survey of about 100 public companies by Mercer found that:

  • About 70 percent of respondents said they are at least moderately prepared to comply and have calculated an estimated ratio, compared with 60 percent in 2016.
  • Less than 10 percent said they felt unprepared, compared with 25 percent of respondents in the 2016 survey who had not determined a methodology yet.
  • Nearly half of respondents that have already estimated a ratio put it at less than 200:1, well below the AFL-CIO's estimated average for S&P 500 companies of 347:1.

"There are still some laggards that haven't started preparing their disclosure, but they tend to be small or midsized companies that don't operate globally," Passin said. "It's still likely they're going to get it done on time. Otherwise, they'll risk being fined by the SEC."

"We've been telling companies that they should be pretty far along by now with their calculation, and hopefully they'll be done with it before Thanksgiving, or at the latest before Christmas," Seelig said. "We hope companies are heeding that advice, although we know some might wait until after the year is over."

Relief Beyond Next Year?

Could Congress or the SEC provide public companies with relief beyond next year? "There's really no way of knowing at this point," Eichen said. "The SEC is working on a disclosure streamlining project, so it's possible at some point that pay ratio reporting may be an item they revisit."

There currently are two seats vacant on the five-member SEC, with the administration's nominees awaiting confirmation, Seelig noted. The new commissioners could be more willing to pare down the CEO pay ratio disclosure.

However, "once something is out there and shareholders come to expect it, then it becomes hard to take it back," Passin said.

Related SHRM Articles:

New Guidance Eases—but Won't Delay—the CEO Pay Ratio Reporting, SHRM Online Compensation, October 2017

Preparing for CEO Pay Ratio Disclosures, SHRM Online Compensation, October 2016

How to Counter Employee Perceptions of Income Inequality, SHRM Online Compensation, May 2016

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