- On December 5, 2016
Bloomberg recently published Don’t Stop Readying Your Pay Ratio Just Yet. The article discusses the requirement that public companies disclose the ratio between their CEO’s pay and their median employee, and speculates about what effect, if any, President Trump’s inauguration might have on the possible repeal of this provision of the 2010 Dodd-Frank legislation.
First, a primer for those who are unfamiliar with the CEO Pay Ratio…
Introduction to the CEO Pay Ratio
The CEO Pay Ratio is a provision of Dodd-Frank which requires all public companies (excluding some smaller reporting companies and other excluded entities) to disclose:
- the median of annual total compensation of all employees,
- the annual total compensation of the CEO, and
- the ratio of those two amounts.
Companies may identify the median employee using annual total compensation under the current executive compensation rules or using their own methodology, which may include the total employee population, statistical sampling or another reasonable, consistently applied methodology.
This primer and even more details as well as details of the CEO Pay Ratio guidance can be found in this decent overview: Pay Ratio Disclosure Guidance from the SEC (and a Reminder). SEC guidance on even more esoteric questions can be found here.
Will the CEO Pay Ratio be Repealed?
The Bloomberg article includes perspectives from many in the Executive Compensation advisory space, including Mike Melbinger and Alan Johnson. Generally, while some believe that there is a chance the rule will be repealed, no one is recommending that companies abandon their efforts to continue gathering the data to comply with the disclosure requirement.
A repeal of the ratio reporting rule would probably be a relief to many companies. The rule requires companies, starting in 2018, to disclose in Securities and Exchange Commission filings their 2017 compensation ratios.
But for now, “I would not count on it being repealed or changed,” Michael Melbinger, a Chicago-based partner in Winston & Strawn LLP’s employee benefits and executive compensation practice, told Bloomberg BNA.
At this point, the only thing “we know for sure is that the CEO pay ratio rule has been specifically attacked,” Andrew Liazos, the Boston-based head of the executive compensation practice at McDermott Will & Emery LLP
We generally favor disclosure and transparency, so stakeholders can make more-informed decisions about which companies to work for or invest in. However, the CEO Pay Ratio provides a very poor cost-benefit tradeoff. Compliance costs for companies are significant, while the additional information provided by CEO Pay Ratio disclosures will have limited benefit to stakeholders. Comparability of the Ratio between companies is limited because of the flexibility with which companies are able to implement the rules. And the Ratio has even less comparability across industries, due to differences in business models. And as with all executive pay disclosures, media outlets are sure to distort the Pay Ratio disclosures in the interest of stoking public indignation. If public focus on the CEO Pay Ratio becomes too heated, companies may take action to improve their Ratio by outsourcing or automating lower-skilled positions.
However, as poor as this regulation is, we recommend that all companies who will be subject to the CEO Pay Ratio disclosure continue on the path of collecting the data necessary to complete the calculation and share such data with the Executive team and Compensation Committee. The risks of not being prepared to complete the disclosure far outweigh the risk of completing a calculation that may potentially be unnecessary (if the rule is eventually repealed.)
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