SEC Proposes Rule to Disclose CEO-to-Worker Pay Ratios

Unions cheer, but others see heavier compliance burdens and costs

By Stephen Miller, CEBS September 19, 2013

Update: On Aug. 5, 2015, the Securities and Exchange Commission issued a final rule requiring publicly traded companies based in the U.S. to disclose how median employee pay compares with CEO compensation, known as the CEO pay ratio. See the SHRM Online articles SEC Pay-Ratio Rule Spotlights CEO Compensation and Determining CEO Pay Ratio Isn’t So Simple.

The U.S. Securities and Exchange Commission (SEC) voted 3-2 to issue a proposed rule requiring public companies based in the U.S. to disclose how their chief executives’ compensation compares with that of employees overall. The vote, taken on Sept. 18, 2013, split along party lines, with the two Republican commissioners opposing the measure. The rule implements Section 953(b) of the Dodd-Frank financial reform legislation enacted in 2010.

Under the SEC plan, companies would have to disclose in their annual proxy statements the median of the annual total compensation for their employees and the ratio of that median to the annual pay of the CEO. The requirement would apply to companies with SEC filings that require executive compensation disclosure under Item 402 of Regulation S-K, but it exempts emerging growth companies, smaller reporting companies and foreign private issuers.

“This pay data is important to investors because it shines a light on the company pay ladder for all employees, not just the pay of top executives that is already disclosed under current rules,” AFL-CIO President Richard Trumka said in a news release. “When the CEO receives the lion’s share of compensation, employee productivity, morale and loyalty suffer. 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.”

Critics contend, however, that advocates of pay-ratio disclosure are more interested in having a rallying cry for union organizing than in providing a useful metric to shareholders.

“It’s an expensive headline statistic that appears to be designed to embarrass company boards and CEOs without providing positive benefits to corporate governance or shareholders,” Irv Becker, national practice leader for the U.S. executive compensation practice at Hay Group, a consultancy, told SHRM Online.

“The statistic has so much noise’ that it’s rendered meaningless, failing to take into account key differences between strategy, sectors and geographies, among other factors, all of which impact a company’s pay ratio.”

For instance, although the banking and financial sector has become a lightning rod for shareholder protests over excessive executive pay, “higher ratios are likely to be seen in companies that employ large numbers of unskilled or semiskilled workers,” Becker noted.

In an increasingly competitive and complex business environment, “shareholders should be less focused on how much a CEO is paid and more focused on how a CEO’s pay plan is designed,” he advised.

Calculation Challenges

The data needed to calculate pay ratios are not readily available to many companies, added David Wise, vice president at Hay Group. “In order to calculate a median, a company needs to have collected and centralized information on every applicable employee.”

But for either smaller public companies without a centralized infrastructure or larger multinational corporations where employees across the globe are not on one internal system, “the burden and expense of updating systems and developing processes to collect this information will be significant and, ultimately, impact shareholders,” Wise warned.

HR's Compliance Burden

"Although the SEC claimed that today’s proposed rules were designed to give companies flexibility and minimize compliance burdens, HR professionals will still have to spend significant resources to comply with this requirement, which will provide shareholders and potential investors with an ineffective measurement of a company’s financial welfare and executive compensation package,” commented Cara Woodson Welch, vice president for public policy at WorldatWork, an association of total rewards professionals.“We had hoped the SEC would delay action on this rule and not force compensation professionals to comply with such a complicated and unnecessary regulation.”

"The rules are most inflexible and administratively expensive and burdensome in requiring that all employees of a company and its subsidiaries (broadly defined) be taken into account in identifying the median employee, including part-time, seasonal, and temporary employees, no matter where in the world employed," noted James D. C. Barrall, a partner of law firm Latham & Watkins LLP, in a posting on the Conference Board's Governance Center Blog. "Unless these rules are liberalized, they will impose substantial costs and administrative burdens on companies with large numbers of employees, especially if they are employed around the world and in different lines of business with high pay variances."

The rules would apply in a company’s first fiscal year beginning after the final rule becomes effective; in general, the disclosure would be required to be made in the first annual proxy after that year.

Comments letters were due on Dec. 2, 2013.

Stephen Miller, CEBS, is an online editor/manager for SHRM.


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