Differing Perspectives On The SEC’s Proposed CEO Pay Ratio Rule And Who Speaks For CalPERS?


Last Wednesday, a divided Securities and Exchange Commission issued proposed amendments to Item 402 of Regulation S-K.  Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act required the SEC to amend the rule to mandate disclosure of the median of the annual total compensation of all employees of an issuer (excluding the chief executive officer), the annual total compensation of that issuer’s chief executive officer and the ratio of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer.

The SEC itself was unable to divine any purpose or benefits for the requirement and said so directly in the proposing release:

We note that neither the statute nor the related legislative history directly states the objectives or intended benefits of the provision or a specific market failure, if any, that is intended to be remedied.

In what may also be a first, the SEC acknowledged that the disclosure that it proposes to mandate might actually be misleading:

We note, however, that using the ratios to compare compensation practices between registrants without taking into account inherent differences in business models, which may not be readily available information, could possibly lead to potentially misleading conclusions and to unintended consequences.

The California Public Employees Retirement System was much more sanguine about the requirement.  On the same day that the SEC met to approve the proposed rule amendments, CalPERS issued a press release welcoming it and urging companies to do so as well:

Companies should welcome the new opportunity to articulate their approach to  value creation through the transparency of their compensation practices across their workforce.  That is good for business and good for shareholders.

Commissioner Daniel M. Gallagher on the other hand wasn’t so welcoming.  In his dissenting statement, he said:

The pay ratio computation that the proposed rules would require is sure to cost a lot and teach very little.  Its only conceivable purpose is to name and, presumably in the view of its proponents, shame U.S. issuers and their executives.  This political wish-list mandate represents another page of the Dodd-Frank playbook for special interest groups who seem intent on turning the notion of materiality-based disclosure on its head.

There are no – count them, zero – benefits that our staff have been able to discern.

New Commissioner Michael S. Piwowar also didn’t mince any words:

The Commission should not be spending any of its limited resources on any rulemaking that unambiguously harms investors, negatively affects competition, promotes inefficiencies, and restricts capital formation.

Finally, I was puzzled by CalPERS’ statement.  The press release purported to announce CalPERS’ position on the proposed rule, but I couldn’t recall it being on the agenda of the Board of Administration or any of its committees.  When I checked with CalPERS’ press office, I was told that neither the Board nor any of its committees had in fact approved the statement.  Rather, statements such as these are issued by the CEO or his/her designee based on CalPERS’ communications policy.  In the interests of full disclosure, shouldn’t releases issued in this manner state: “This release represents the views of CalPERS’ staff and has not been adopted or approved by the Board of Administration”?


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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