Among the more contentious rules the Securities and Exchange Commission has yet to finalize is a requirement that public companies to disclose a ratio of CEO pay to that of their median employee.
This week, 15 Democratic senators wrote to SEC Chairman Mary Jo White to demand that the rule, a Dodd-Frank Act requirement that has lingered in the proposal stage for more than a year, be brought to a vote by the end of the first quarter of 2015. “Pay ratio disclosure helps investors evaluate the relative value a CEO creates, which facilitates better checks and balances against insiders paying themselves runaway compensation,” they wrote.
The SEC issued its proposed rule in 2013. In calculating the comparison, it calls for companies to produce a median compensation figure for all workers, domestic and overseas. In a concession to opponents of the rule, it would to allow the use of statistical sampling, based on payroll data, to derive that figure.
The proposal has received more than 32,000 comment letters. Thousands of them are from investor advocates, many in form letters, urging the Commission to move forward. Business leaders also weighed in, detailing complexities and costs inherent in what might sound like a straightforward matter.
The National Investor Relations Institute, an association of corporate IR officers, was among those fretting over the alternative way to compare pay. The absence of SEC-endorsed methodologies to define statistical sampling could open the door for proxy advisory firms or activist investors to apply their own and “further confuse other investors, or propose more onerous methodologies that may become the default standard, and undercut the flexibility for issuers,” it wrote in a letter to the SEC.
In another coment letter, Raymond Link, CFO of FEI Company, a Nasdaq listed supplier of scientific instruments with an international workforce, estimated that compliance for his company will require more than 1,000 man-hours, at a cost of $250,000, to develop the database and methodology the SEC's proposed rule requires. On an annual basis, 500 man-hours would be needed to support the ongoing effort, at a cost of more than $100,000.
SEC officials have said that the volume of comment letters, many of them offering suggestions and alternatives, has slowed its review process. Among the numerous suggestions under review that were culled from comment letters:
The rule's pay ratio calculation should be limited to full-time, U.S.-based employees.
Given the difficulty of gathering worldwide employee data and the reality that many companies will have to rely on estimates, the SEC should treat pay ratio disclosures as “furnished,” rather than “filed.”
If the SEC extends the mandate to non-U.S. employees, companies should receive at least two years to prepare before they have to include those overseas employees in their calculations.
If part-time and seasonal employees are included, the SEC should permit companies to annualize the pay data of those employees to provide more meaningful comparisons.
“We appreciate the balanced proposal the SEC issued last year,” the senators wrote. “Notably, the proposed rule provides companies with flexibility in how they make and report the required calculations, in order to address any concerns regarding compliance costs." They also praised the fact that the proposal does not include exemptions [for non-domestic or part-time workers] that could “dilute the disclosure’s effectiveness or create troubling incentives to offshore jobs or otherwise undermine job quality.”
Nevertheless, further delays are unwarranted, they wrote. Their bottom line: “move forward with a final rule as soon as possible.”
The letter was signed by senators Elizabeth Warren (D-Mass.), Robert Menendez (D-N.J.), Al Franken (D-Minn.), Ed Markey (D-Mass.), Mazie Hirono (D-Hawaii), Jack Reed (D-R.I.), Jeff Merkley (D-Ore.), Dick Durbin (D-Ill.), Tom Harkin (D-Iowa), Bernie Sanders (I-Vt.), Sheldon Whitehouse (D-R.I.), Richard Blumenthal (D-Conn.), Barbara Boxer (D-Calif.), Carl Levin (D-Mich.), and Tammy Baldwin (D-Wis.).