Tuesday, December 9, 2014

Possible Delay of Pay Ratio Regulations -- Practical or Political?

Right before Thanksgiving, the House Committee on Financial Services sent a letter to the Chair of the SEC asking that guidance on the so-called Dodd-Frank Pay Ratio rule (Section 953(b)), and therefore implementation as well be delayed. The letter called this implementation a low priority. No similar correspondence has come from the Senate or any of its committees.

Gee, what a surprise that is. House committees are controlled by Republicans currently while Senate committees are in the hands of Democrats for few more weeks. Dodd-Frank was another bill and then law praised by Democrats and loathed by Republicans. The letter points out that the law does not specify a time by which the SEC must promulgate a rule on this issue. Additionally, the letter tells the SEC that the pay ratio disclosure has little value and that knowing the pay ratio for publicly traded companies back in the 2006-2008 timeframe would have done nothing to avert the financial crisis.

Let's regroup for a moment. For those who don't know, Section 953(b) of the Dodd-Frank law requires that registrants disclose a single number -- the ratio of the pay of the median-paid employee in the company to that of the CEO. Pay for this purpose is pay as defined in the executive compensation section of the proxy. I have argued that while such relative information may be useful to some that this calculation is the wrong one and needlessly burdensome. Last year, the SEC issued a proposed rule on the pay ratio calculation. While it provides a means of simplification for many companies, companies that do take advantage of the sampling techniques proposed will not find them simple by any means.

So, is the single number valuable? I don't think so. If one insists that such a comparison is valuable, then to me, it would be far more instructive to show CEO compensation and a chart of commonly held jobs within the company showing a compensation range for actual or hypothetical full-time employees(if no full-time actual employees exist for such job classifications) for each of those jobs alongside the CEO compensation.

Advocates of the pay ratio point out companies in the fast food industry. They note that CEOs make many millions of dollars while most fast food workers earn minimum wage or only slightly more. In this case, is the pay ratio valuable? To me, it's not. Running a multi-billion dollar business and defining its strategy to compete and grow has no similarities to monitoring a drive-thru window. Comparing the compensation of two such individuals makes no sense to me.

Currently, the SEC has three Democrats and two Republicans. The Chair is a Democrat. The commissioners still have meaningful Dodd-Frank work to do whether they make 953(b) a priority or not.

I don't know what they will do, but thus far, they have not shown a predisposition to act quickly on ensuring that the pay ratio is disclosed for registrants.

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