On September 18, 2013, in a 3-2 vote of commissioners cast along party lines, the Securities and Exchange Commission (the “SEC”) proposed rules to implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). Section 953(b) directs the SEC to promulgate rules to require public companies to disclose the median annual total compensation of all employees other than the chief executive officer (“CEO”), the annual total compensation of the CEO, and the ratio of these two amounts (the “pay ratio rules”). Total compensation is to be calculated in the same manner as in the summary compensation table. The proposed pay ratio rules would provide flexibility for registrants to use statistical sampling and estimates to identify median employees and would allow registrants to determine the statistical methodology that is appropriate to their unique circumstances. The SEC reports having received over 20,000 comment letters on Section 953(b) even before announcing its proposed rules, and in the proposing release solicits public comment on a wide range of topics. In view of the many questions that remain under consideration, it seems likely that final pay ratio rules will not be adopted until sometime during 2014.
There has been significant debate on the merits of compelling pay ratio disclosure, as exemplified by the supporting and dissenting statements of the SEC commissioners at the open meeting on September 18, 2013. Critics argue that pay ratio disclosure would be incendiary, unclear, misleading and potentially harmful for investors, that the ratio would not take the CEO’s performance into account, that compliance will be costly, and that the disclosure requirement may give a competitive advantage to registrants that are not subject to the rules (or, as discussed below, less burdened by the rules). Supporters of pay ratio disclosure counter that the information will increase transparency and help investors to assess whether companies are investing in their employees, or focusing only on compensating top executives. These supporters note that CEO pay has spiraled relative to rank-and-file employee pay. According to a study published by Bloomberg.com, average CEO compensation at the companies in the Standard & Poor’s 500 Index has increased 20% since 2009, and is now 204 times that of rank-and-file employees. According to the Economic Policy Institute, this ratio was just 20 to 1 in 1965.
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