A Tale Of Two Paychecks; Ralph Lauren Makes 1,900 Times More Than You And The SEC Thinks You Should Know

http://blogs.orrick.com/securities-litigation/files/2012/10/iStock_000018891928XSmall-100x80.jpgOn September 18, 2013, the SEC voted to propose a new rule that would require public companies to disclose the ratio of compensation of its CEO to the median compensation of its employees.

The new rule, required under the Dodd-Frank Act, gives companies flexibility to determine the median annual total compensation of its employees in any way that best suits their particular circumstances when calculating the ratio.  SEC Chair, Mary Jo White stated that the SEC is very interested in receiving comments to the proposed approach and the flexibility it provides.

SEC Commissioner Michael S. Piwowar, in a strongly worded statement, expressed his dissatisfaction with the proposed rule.  Quoting from Charles Dickens’ A Tale of Two Cities – “it was the best of times, it was the worst of times” – Piwowar declared that the pay ratio disclosure proposal “represents what is worst about our current rulemaking agenda.”  Piwowar’s concerns were twofold.  First, that the pay ratio disclosure could harm investors.  Piwowar expressed his concern that investors using pay ratios to compare companies risked being distracted from material investment information and mislead by the conclusions offered by the ratios.  Additionally, he noted that investors may also be harmed if pressure to maintain a low pay ratio curtails expansion of business operations into regions with lower labor costs.  Second, he was troubled by his observation that the pay ratio rule could have a negative effect on compensation, efficiency, and capital formation because the competitive impacts of the disclosure would disproportionally fall on U.S. companies with large workforces and global operations and could influence how companies structure their business, leading to inefficiencies, higher cost of capital and fewer jobs.

In defense of the proposed rule, Commissioner Luis A. Aguilar, stated that it was his hope that the enhanced compensation disclosures would help company shareholders and independent directors counter the upward bias in CEO pay caused by the practice of benchmarking, where a public company targets its executive compensation to the 50th, 75th, or even 90th percentiles.  He commented that if “comparing CEO compensation solely to the compensation of other CEOs can lead to an inefficient upwards spiral then comparing CEO compensation to the compensation of an average worker may help offset that trend.”

The proposal has a 60-day public comment period and all 162-pages of the proposed rule are available for viewing on the SEC’s website.