Take Action: Comments on SEC Pay Ratio Rule Due 12/2/2013

The deadline for submitting comments on the SEC’s proposed pay ratio disclosure is coming up quickly on December 2, 2013. SEC general comment instructionsSubmit Comments on S7-07-13 Pay Ratio Disclosure. Get your comments in soon, before Thanksgiving. Another advantage to earlier submittal is that those who wait for the deadline are likely to borrow from previous submission. The earlier you submit, the more likely you are to influence others. For example, I am impressed by comments from the following:

A more engaged and better informed investor will arguably create more competition for investor capital and increasingly higher investment returns for better-managed companies on the foundation of more reasonably-compensated executives. Similarly, a worker can take general satisfaction in their remuneration and be more productive, motivated, and loyal alongside knowledge that their CEO’s compensation doesn’t represent in one year the equivalent of said worker’s earnings over ten lifetimes.

Especially in the early days of 953(b) enforcement, the SEC should employ some statistical sampling of its own to examine how responsibly individual corporations are behaving with their median calculations… Those calling for more delays are merely playing games with our regulatory process. The delays they seek have little to do with improving the information that 953(b) seeks to deliver. The delays they seek will simply give them more time to lobby for 953(b)’s repeal.

We already have two investor clients who factor the relationship between executive an employee pay into their assessment of executive compensation policies. Given that the disclosure of a ratio is not currently a requirement this is a calculation that we undertake for them, based on publicly available disclosures. However, given that investors do want the information, it would clearly be preferable for companies to calculate and disclose the data themselves.

The ratio of CEO-to-worker pay at individual companies is material information for investors. High pay disparities inside a company can hurt employee morale and productivity, and have a negative impact on a company’s overall performance. Moreover, disclosure of the median employee pay will help investors better understand companies’ overall compensation approach to developing their human capital.

Almost all of about 80,000 comments submitted favor the rule drawn up in accordance with Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The SEC did a good job of meeting Congressional intent, while giving companies flexibility in their methodology to minimize costs.

The proposed rules would require the company to disclose the median of the annual total compensation of all employees (excluding the CEO). Say on pay rules already require disclosure of the annual total compensation of the CEO. The proposed rules would require companies to also report the ratio of these two amounts, as well as methodologies and material assumptions, adjustments and estimates.


Opposition to the proposed rule has reportedly come from the American Benefits Council, American Insurance Association, Business Roundtable, National Association of Manufacturers, National Retail Federation, Financial Services Roundtable, the Securities Industry and Financial Markets Association, IBM, McDonald’s, AT&T, the New York Stock Exchange, the U.S. Chamber of Commerce, and the Center on Executive Compensation.

There is a widespread misconception that this information is readily available at the touch of a button,

a group of 23 trade associations said in a comment letter. They complain about valuing future benefits, stock potions, different standards of living abroad, etc. Fortunately, their thinly veiled threats of overturning the rule in the DC District Court will carry less weight now that Obama can move appointments through the Senate.


Primary support comes from unions, civil rights groups, consumer advocacy groups, social justice groups, liberal think tanks, and others, including AARP, the AFL-CIO, AFSCME, the Alliance for Justice, the Americans for Democratic Action, the Center for Economic and Policy Research, the Center for Economic Progress, Common Cause, the Communications Workers, the Consumer Federation of America, the Economic Policy Institute, the International Federation of Teamsters, the NAACP, the United Food and Commercial Workers and retail investors.

Governance reforms gain momentum with SEC pay-ratio disclosure proposal (Reuters, 10/9/2013) cites the report by the Financial Crisis Inquiry Commission in 2011, which squarely put the blame on executive pay as a cause of the financial crisis. A study by the Institute for Policy Studies shows that the pay gap between CEOs and the average American worker has widened, from 195-to-1 in 1993, to 354-1-1 in 2012.

Reporting to the new rule might be expected to encourage companies to rethink and potentially narrow the gap in their pay structures, advocates say. Although the SEC’s flexible approach aimed at reducing economic impact might undermine the rule’s usefulness because it will make it difficult to compare between companies, I would adoption of expect “best practices” will make such comparisons meaningful within a few years.  Hopefully, ISS, Glass Lewis, GMI Ratings and others will use the information to flag outliers.

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