In a three to two vote held Wednesday, SEC Commissioners proposed a rule requiring U.S. public companies to disclose the ratio of total CEO pay to median employee pay. The rule was included as part of the Dodd-Frank financial overhaul legislation, initially implemented in 2010, and which is still being phased in. The new rule would require companies to disclose the median pay of all employees, excluding the CEO, as well as the ratio of the CEO’s pay compared to that median employee figure.
Business groups like the U.S. Chamber of Commerce have come out against the new rule, saying the information is not useful to investors and that gathering such information will be time-consuming and costly. The SEC has acknowledged the difficulties inherent in collecting the new data; companies that employ a far-flung foreign workforce may have a hard time of it. While the SEC maintains that foreign and subsidiary employees must still be included in the median employee pay figure, the regulator has provided companies some leeway in their calculations, including scrapping a lengthy median pay formula and permitting the use of statistical sampling.
The proposed rule has received a good amount of attention from the public, with the SEC receiving more than 20,000 letters commenting on the matter. Prior to the vote Commissioner Michael Piwowar voiced his concern, stating “Proponents have acknowledged the sole objective of the pay ratio is to shame CEOs, but the shame from this rule should not be put on CEOs – it should be put on the five of us,” speaking of the five SEC Commissioners, he continued, “Shame on us for putting special interests ahead of investors.” Another SEC Commissioner, Luis Aguilar, came out in support of the measure, saying “As owners of public companies, shareholders have the right to know whether CEO pay multiples reflect CEO performance.”
Given that the calculation may not be uniform across U.S. companies, and in recognition of the vast structural differences that may be present from one company to the next, it is unclear whether these new data points will be of meaningful comparative use by most shareholders. However, once fully implemented, the new disclosures may help shine a light on companies with ratios significantly higher than peers. The new rule is subject to a 60-day comment period. A company would be required to comply with the rule for its first fiscal year commencing on or after the effective date of the final rule.