The 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act included a provision requiring publicly traded companies to report the “pay ratio” — the ratio of CEO compensation to worker compensation in that company. Corporate lobbying groups have been fight this rule tooth-and-nail. The Securities and Exchange Commission (SEC) today (finally) proposed specific rules that will make this actually happen.
Here is the relevant section of the law:
H.R.4173 SEC. 953. EXECUTIVE COMPENSATION DISCLOSURES.
(1) IN GENERAL- The Commission shall amend section 229.402 of title 17, Code of Federal Regulations, to require each issuer to disclose in any filing of the issuer described in section 229.10(a) of title 17, Code of Federal Regulations (or any successor thereto)–
(A) the median of the annual total compensation of all employees of the issuer, except the chief executive officer (or any equivalent position) of the issuer;
(B) the annual total compensation of the chief executive officer (or any equivalent position) of the issuer; and
(C) the ratio of the amount described in subparagraph (A) to the amount described in subparagraph (B).
Translation: The law requires all public companies to disclose their chief executives’ total compensation, the median compensation of all other employees, and the ratio between the two. This gives investors and the public clues to whether — and the extent to which — the company is being looted from the top. It also lets investors and the public make more standardized comparisons with other companies.
Today the SEC voted 3 to 2 to approve a proposal put together by staff with specific ways this rule will be implemented. The two Republicans on the commission voted to block implementation of this rule and keep this pay ratio secret. (They said this is a bad law because it could bring “shame” on some CEOs, and therefore the SEC should ignore the law and not develop rules at all.)
In a nod to lobbyists and Wall Street, the rules allow companies to use “sampling” and “estimates” instead of actually compiling all of the data as required by the law. (It is not clear whether the rules will require companies to disclose methodology used to come up with samples and estimates, so it might be difficult to compare one company’s ratios to another’s.) But the rules do not let companies keep part-time workers or employees based in other countries out of the calculations.
It only took the SEC three years after the law’s passage to come up with this proposal to make these companies do something the law requires. The SEC had a draft of the rules ready within 6 months of the law’s passage but according to the Washington Post, “scores of companies — including IBM, McDonald’s, AT&T and the New York Stock Exchange — urged the agency to slow down.” Republicans are also trying to repeal the law in Congress.
Next up is a public comment period, before the rules are finalized.