SEC Staff Provides Additional Analysis Regarding Proposed Pay Ratio Disclosure Rules
Commentary by Steven Lofchie
The SEC Division of Economic and Risk Analysis issued an additional analysis related to the proposed rules for pay ratio disclosure. The new analysis considers the potential effects of excluding different percentages of employees from the pay ratio calculation.
The analysis is posted on the SEC's Web site as part of a comment file on rules proposed by the SEC in September 2013. These rules would require the disclosure of the median of (i) the annual total compensation of all employees of the issuer, (ii) the annual total compensation of the chief executive officer of the issuer, and (iii) the ratio of the median of the annual total compensation of all employees of the issuer to that of the chief executive officer of the issuer.
According to SEC staff, the analysis is intended to inform evaluations of the potential effects of excluding different percentages of certain categories of employees on the accuracy of the pay ratio calculation; e.g., employees in foreign countries, or part-time, seasonal or temporary employees, as suggested by commenters.
Comments on the analysis may be submitted to the comment file (File No. S7-07-13) for the proposed rules. They should be received no later than July 6, 2015.
See: SEC Analysis; SEC Press Release.
Related news: Members of Congress Send Letter to SEC Chair White Regarding Finalization of Pay Ratio Disclosure Rules (March 18, 2015); SEC Publishes Pay Ratio Disclosure Rule (Fed. Reg.) (October 1, 2013); SEC Proposes Rule for Pay Ratio Disclosure (with Lofchie Comment) (September 18, 2013).
Commentary
The SEC's failure to adopt a final version of this rule was one of Senator Warren's motivations for issuing her letter that blasted SEC Chair White.
Ironically, the economic analysis (linked below) illustrates the fruitlessness of the information that will be produced by the rule. Surely, financial regulators can find better uses for their time. Leaving aside the utter waste of regulatory resources involved, how much money will issuers spend to comply with a rule that is of no value to shareholders? Here’s a suggestion: the SEC should allow issuers to conduct a shareholders' vote to see if the shareholders actually want this information. If they do not, then the SEC should issue an exemption from the requirement. After all, if the information has no value to shareholders, then what is its purpose?
Additionally, I continue to predict that the end result of the disclosure will be the exact opposite of what its proponents want; i.e., companies that are more successful will have CEOs whose pay is relatively higher than that of the CEOs of less successful companies. That is because more successful CEOs are paid better.