SEC Publishes Final Rule on Pay Ratio Disclosure
The SEC adopted a final rule that requires a public company to disclose the ratio of the compensation of its CEO to the median compensation of its employees, as mandated under Section 953(b) of the Dodd-Frank Act. The adopted rule requires any such company to disclose (i) the median of the annual total compensation of all its employees, except the CEO; (ii) the annual total compensation of its CEO; and (iii) the ratio of those two amounts. Although the rule allows the company to choose a methodology based on its own facts and circumstances to identify the "median employee," this same methodology will have to be utilized in the determination of the executive compensation.
The disclosure requirement will apply to all companies that are required to provide executive compensation disclosure under Item 402(c)(2)(x) of Regulation S-K. A company will be required to report the pay ratio disclosure for its first fiscal year beginning on or after January 1, 2017.
Commentary: The view of many in the executive compensation space is that the purpose of executive disclosure mandates should be to bring information to investors (and hence to the public) that is relevant to their choice to invest in the marketplace, and thereafter to ensure that companies are managed adequately. Since CEO compensation is public and has been for decades, the pay ratio provides no new information at all. Instead, it simply repackages the information for what one of the dissenting commentators called "naming and shaming."
The American people understate consistently the ratio of CEO to median worker pay by a factor of over 10. This leads some disclosure supporters to argue that there is a political need to aggregate such information. There is scant research demonstrating that a lower numerical ratio alone would prompt a greater consensus for social change. The argument manifests a disconnect between traditional uses and requirements of pay disclosure and the stated purpose of the pay ratio.
Additionally, the disclosure of the new information is not required to be offered in any context, which means that its utility is likely to be constrained. For example, divorced from historical data on the rise in market capitalization of a company on a percentage basis as compared to the rise in the pay ratio, or from the labor force requirements of the entity in intra-entity comparisons (one would assume that the large-scale employers of low-wage employees have larger ratios than employers with a high-skill base, for example), the ratio has at least as much chance of being misused as it does of being used for positive purposes.
Click here to view the hearing summary by Delta Strategy Group.
See: SEC Final Rule; SEC Press Release; Chair White's Opening Statement at Open Meeting on Pay Ratio; Commissioner Aguilar's Supporting Statement; Commissioner Gallagher's Dissenting Statement; Commissioner Piwowar's Additional Dissenting Statement; Financial Services Committee Chair Hensarling's Statement.
Related news: SEC Staff Provides Additional Analysis Regarding Proposed Pay Ratio Disclosure Rules (with Lofchie Comment) (June 4, 2015); Senator Warren Lets Loose on SEC Chair White (with Lofchie Comment) (June 2, 2015); SEC Adopts Rule for Pay Ratio Disclosure (with Lofchie Comment and Delta Strategy Group Summary) (August 6, 2015).