After a highly controversial public comment period, a divided 3-2 Securities and Exchange Commission (SEC) announced a proposed rule implementing Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This section, known as the pay ratio disclosure requirement, requires most public companies to annually and publicly disclose:
The median of total compensation of all employees, exceptthe Chief Executive Officer (CEO);
The annual total compensation of the CEO; and
The ratio of the median of total compensation of all employees to the total compensation of the CEO.
Total compensation includes salary, bonus, stock options, long-term incentive pay and changes in pension. While the effective date of this rule is still years away (2015 or 2016), public companies may start to identify methods of calculating the pay ratio, the processes needed to gather the information required to determine the pay ratio and the costs associated with doing so.
This new disclosure requirement constitutes the SEC's response to investor concerns about the rapid growth of executive compensation at the expense of shareholders and rank-and-file employees. While public companies already disclose the pay of top executives (e.g., the CEO and the Chief Financial Officer), under the proposed rule companies will need to disclose pay of all employees, including:
Temporary and seasonal employees;
Employees of subsidiaries; and
Employees based in foreign countries.
The pay ratio provides transparency to investors, allowing them to assess pay practices amongst competing companies.
Proponents of the rule argue investors and board members will be in a better position to make financial and compensation-related decisions (e.g., determine the fairness of an employer's pay practices) and hold key management more accountable. In addition, some proponents feel the pay disclosures will improve overall employee morale and productivity, which may be frequently undermined by top-heavy compensation practices.
Opponents contend that the rule will needlessly publicly shame employers with high-earning CEOs. Opponents are also concerned that: (i) it will be onerous for companies to calculate the median of the annual total compensation of all employees (because employee pay data is often not standardized); and (ii) the expense and effort required to gather the requisite data and to calculate the pay ratio will outweigh any possible benefit to investors. While the SEC built flexibility into the process (e.g., a company may choose its own method to calculate the median total compensation of all employees - one that fits the size and structure of the company, such as sampling and other estimation methods), opponents are still suspect of the proposed flexibility, especially for large global companies.
The public comment period for the proposed rule ends 60 days following the proposal's publication in the Federal Register (approximately mid-November 2013). If employers have concerns about the proposed rule, suggested revisions and/or comments to the proposed rules may be submitted to the SEC by its online form, email or mail.