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SEC Approves Rule Mandating Companies to Compare Worker and Executive Pay

— August 6, 2015

Dodd-Frank strikes again, as the Security and Exchange Commission (SEC) adopted a rule on Wednesday to require most public companies to report the comparison of pay between employees and Chief Executive Officers. The commission voted 3-2, with the two Republican commissioners objecting the mandate to include the comparison in a company’s annual audited financial statement beginning in 2017. The disclosure is actually required by the 2010 Dodd-Frank financial reform legislation; however support for the requirement has been split along ideological lines. Business groups have supported the Republican commissioners, arguing that the rule is only meant to embarrass executives and not help investors. SEC Chair Mary Jo White had been under fire from unions and Democrats in Congress for her failure to implement the rule in a timely manner. In a statement prior to Wednesday’s vote, White called the rule “both flexible and faithful to the terms and objective of the statute.” Dissenting commissioner Dan Gallagher, however, called the rule “nakedly political.”

Due to its potentially divisive nature, debate over the rule has been heated, and fueled largely along partisan lines. The agency has received over 280,000 comments about the requirement since it presented the idea to the public two years ago. Business lobbyists like the U.S. Chamber of Commerce and the Business Roundtable are expected to sue over the mandate. According to high-ranking Chamber member David Hirschmann in a Wednesday statement, “we will continue to review the rule and explore our options for how best to clean up the mess it has created.” The Chamber also wrote a statement saying, “At best, pay ratio is a misleading, politically inspired, and costly disclosure that fails to provide investors with useful, comparable data.” Republican lawmakers have already introduced legislation in Congress to remove the provision from Dodd-Frank, causing the other Republican commissioner, Michael Piwowar, to call the decision to advance the measure at this time “peculiar.” Gallagher said the requirement “may be the most useless of our Dodd-Frank mandates.” In addition to the political arguments, business groups and other opponents of the cite the costliness of researching and calculating the ratio, believing it to be wasteful and time consuming given that the only people interested in the matter are a small group with a political agenda.

Supporters laud the measure, albeit much overdue in the minds of many. New Jersey Democratic Senator Robert Melendez, who was responsible for inserting the requirement into the Dodd-Frank bill during its passage, said “We have middle-class Americans who have gone years without seeing a pay raise, while CEO pay is soaring.” Firebrand Progressive Senator Elizabeth Warren (D-MA) penned a strongly-worded letter to SEC Chair White, urging her to cease the delay in implementing the rule. According to the left-leaning Economics Policy Institute, CEO pay of the largest 350 companies has increased 997 percent between 1978 and 2014, while average non-supervisory pay rose by a mere 10.9 percent. Statistics from the Department of Labor actually show that the ratio between CEO and employee pay has “dropped” to 205-1, from a high of 257-1 in 2013. While the rule does nothing to limit CEO pay or lower the ratio, companies will likely use the rule in comparison with each other, in order to avoid the appearance of excess.

Despite being loathe to the mandate, the SEC did reward the efforts of business lobbyists to a small degree. The SEC will only require companies to update the ratio once every three years, as well as exclude up to five percent of its foreign workers. The commission will also allow companies to insert a cost of living adjustment, weighing disproportionate geographic economic factors. Still, the company will be required to disclose the pre-cost of living adjustment figures as well. Also, the company can choose any date within the last three-months of its fiscal year, allowing it to potentially avoid including lower-paid, seasonal workers. Also, large companies will be permitted to use statistical sampling to arrive at their calculations instead of auditing each individual employee. Despite being minor concessions in the eyes of its opponents, the AFL-CIO believes that the SEC gave up too much ground, with union executive Heather Slavkin Corzo saying, “There are definitely weaknesses that we are concerned about.” At the earliest, companies will begin reporting the ratio in annual statements beginning in early 2018; however many believe that the matter will still be tied up in the courts by then.



Bloomberg Business – David Michaels

New York Times – Peter Eavis

U.S. News and World Report/AP – Marcy Gordon





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