Corporate pay ratio plan proves divisive

Chicago TribuneMarch 27, 2014 

Almost 1,000 “unique” letters have been sent to the Securities and Exchange Commission since September about the issue. An additional 127,000 form letters have also rolled in.

They come from backers and opponents of a new rule that will require most public companies to disclose the ratio of the total annual compensation of their chief executive to the median pay of “all” of a company’s employees.

The SEC is responsible for coming up with the final rules, which were mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The financial reform legislation called for, among other things, the disclosure of a new ratio comparing a company’s median annual compensation for employees to that of its chief executive. In September, the agency proposed rules and said it was welcoming public comments on them.

SEC chairwoman Mary Jo White testified last month before the Senate Banking Committee about Dodd-Frank, including the pay ratio disclosure.

“The commission has received numerous comments on the proposal, and the staff is working to prepare recommendations for the commission on a final rule,” she said in her prepared testimony.

In the past, compensation disclosures have focused on the pay of top executives and boards of directors at public companies. In the future, if the median of the annual total compensation of all company employees is $45,790, for example, and the annual total compensation of a CEO is $12,260,000, then the pay ratio disclosed would be 1-to-268, meaning the CEO’s annual total compensation is 268 times that of the median of the annual total compensation of all employees.

Industry groups, individual companies, law firms and executive compensation consultants have raised concerns about the complexity of the requirements and the cost to calculate the ratio. They also say it’s not important or helpful to investors.

Smaller companies, typically those with less than $50 million in revenue, would be exempt. Also, the SEC doesn’t spell out a specific methodology for companies to identify a median employee. It said, for example, that companies may choose to identify the median using all their employees or by using statistical sampling.

Still, compliance costs for some companies could be “substantial,” the SEC said in its 162-page document with the proposed rules.

At least one company has put a $2 million price tag on the work.

“All” employees, the SEC said, suggests any full-time, part-time and seasonal worker on the payroll of the company and its subsidiaries, including those who work overseas, who were employed as of the last day of the company’s last completed fiscal year.

“It’s a tremendous undertaking for any large international company with no concomitant benefit to its shareholders,” Bob Murphy, a former SEC lawyer who is senior counsel at the Dykema law firm in Washington, told the Chicago Tribune.

Still, he believes that the final rules will be adopted this year “substantially as proposed,” with the pay ratio disclosure required in 2016 proxy statements.

“I think that there is very little chance that it won’t get adopted this year,” Murphy said. The annual meeting season is about to get into full force, but it will likely be a couple of years before the ratio begins showing up in proxy statements, agrees Aaron Boyd, governance research director for Equilar Inc., a Redwood City, Calif.-based executive compensation research firm.

The News Tribune is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service