The Growing Backlash Over CEO ‘Pay Ratios’

Several dozen business groups, including the American Insurance Association, Business Roundtable, National Investor Relations Institute, and the U.S. Chamber of Commerce recently wrote Mary Schapiro, chair of the Securities and Exchange Commission, regarding Section 953(b) of the Dodd-Frank Act. This section requires publicly held companies to disclose in their filings the annual total compensation of their CEO, as well as the ratio of his or her pay to the median compensation of the rest of the organization’s employees.

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The signatories ask the SEC to “engage in expanded public outreach and consideration of alternatives before moving forward with a public release of proposed rules implementing Section 953(b). Among other recommendations, they advise the SEC to convene a roundtable discussion with experts in order to better understand any unintended consequences of the disclosure requirements. They also recommended that the SEC submit its proposed rule to the government’s Office of Information and Regulatory Affairs (OIRA), in order to better understand its likely costs and benefits. (OIRA, established by Congress in the 1980 Paperwork Reduction Act, reviews the collection of information by the federal government, among other functions.)

The letter also says, “it is unclear how the pay ratio disclosure will be material for the reasonable investor when making investment decisions.” Given that many companies have thousands of employees planted across the globe, complying with the regulation will be difficult and time-consuming, the letter notes.

This isn’t the first time opponents of the provision have asked the SEC for relief from 953(b). In July of 2011, a group of several dozen attorneys and compensation consultants wrote the commission, expressing support for the repeal of 953(b). Failing that, the letter writers asked for at least two years to implement the provisions, and that the compensation calculations be limited to U.S. employees only.

Others have a slightly different take on the issue. In a brief titled “Why CEO-to-Worker Pay Ratios Matter For Investors,” the AFL-CIO Office of Investment writes, “CEO pay comes out of the pocketbooks of shareholders. Top executives at large public companies now keep for themselves an average of 10% of their companies’ net profits; approximately double the rate in the early 1990s.”

The Institute for Policy Studies, which calls itself a progressive, multi-issue think tank, also supports disclosing executive compensation. In a March, 2011 comment letter to the SEC, the organization states, “Extreme pay differentials between CEOs and their workers undermine enterprise effectiveness for three main reasons:

• They reinforce rigid corporate hierarchies and bloated bureaucracies that discourage workers from being creative contributors to enterprise success.
• They lead to lower morale and higher turnover rates that undermine productivity.
• They reinforce a “celebrity CEO” culture that is not conducive to high executive performance.”

In its latest calendar, the SEC indicated that it expects to issue proposed rules for Section 953 of Dodd-Frank during the first half of 2012, and adopt the rules during the last half of the year.