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In Comment Letters on Pay-Ratio Disclosure Rule, Companies Press Case for a for Simpler Requirement

December 9, 2013

Investors who submitted comments on the SEC’s proposal that asks companies to disclose the ratio of CEO pay to median employee pay said it strikes the right balance between the information shareholders will receive and the flexibility companies can use for gathering the data. Businesses believe that producing the ratio amounts to little more than a costly exercise that won’t give investors much benefit. In their view, the agency should suspend its work on the rule and get more information before it finalizes the requirement.

Comment letters from investors largely supported the SEC’s proposal that calls for companies to provide the ratio of CEO compensation to median employee pay, saying it strikes the right balance in providing investors with the needed information and giving some flexibility to companies for calculating the ratio.

Businesses submitted comments that said the SEC hadn’t struck the right balance, and they asked the agency to suspend its rulemaking or provide greater flexibility for complying with the requirement out of their concerns about the cost of compliance.

The comments were in response to Release No. 33-9452, Pay Ratio Disclosure, which was issued in September 2013 to fulfill a mandate from the Dodd-Frank Act. By the December 2 comment deadline, more than 116,000 individuals had submitted form letters asking for a strict interpretation of the rule.

According to the AFL-CIO’s calculation, the ratio between the pay for CEOs of U.S. companies and the average worker was 354-1 at the end of 2012. Some investors say the ratio is an important piece of information because companies that provide excessive compensation to executives at the expense of other employees and shareholders are creating risks that may hurt employee morale and productivity and increase turnover.

The proposed requirement is highly controversial for business groups, which began challenging it before the SEC issued the proposal. In response to complaints about the difficulty of calculating the ratio, the SEC is allowing companies some flexibility in producing the data.

The proposal doesn’t specify a single method for calculating the median, but public companies can choose a process that fits their structure and compensation programs. For example, the proposed rule lets a large company use a statistically representative sample of its workforce rather than the entire population.

Companies also won’t have to calculate the exact compensation when identifying the median. Instead, a company could apply any “consistently used compensation measure,” such as the amounts reported in payroll or tax records. While companies would still have to calculate annual total compensation, the SEC would let them use “reasonable estimates” when making the calculation. They would be required to disclose the method used to determine the median employee pay, as well as estimates used in calculating the ratio.

The SEC’s suggested alternatives didn’t mollify companies who want a much simpler requirement.

The U.S. Chamber of Commerce in a December 2 letter challenged the need for the rule and said it provides no benefits to investors.

The rule “harms investors by contributing to disclosure overload and increasing the complexity of the decision-making process for investors,” said David Hirschmann, president and CEO of the chamber’s Center for Capital Markets Competitiveness. He said the rule will hurt American companies trying to compete in a global economy. As drafted, it also puts companies in legal jeopardy because of conflicting international rules on privacy.

Hirschmann said the SEC should consider suspending its rulemaking until it holds public roundtables and gets useful recommendations on each of the proposals’ various items. Otherwise, the agency should defer its formal rulemaking in favor of a pilot program.

While big multinational companies, such as Microsoft Corp., General Mills Inc., or Johnson & Johnson, didn’t ask the SEC to put the rule on hold, they asked for several changes to ease compliance with it.

The SEC should let companies exclude minor elements of compensation, such as benefits, perks, and allowances, Microsoft said. The approach would capture the substantial majority of compensation and avoid an extra burden and require “relatively minimal work.”

Companies should also have the flexibility to use dates other than the last day of their fiscal year to determine the population from which to identify the employees that are included in the median compensation total, Microsoft said.

General Mills said only full-time employees should be included in the calculation.

Democratic lawmakers didn’t buy the argument that it would be too costly for companies to figure out the ratio and urged the SEC to finalize the rule quickly.

“Firms that set up advanced computers for high frequency trading or that master the concept of just-in-time inventory should be able to figure out the median salary using basic software,” wrote 32 members of the House of Representatives, including Rep. Maxine Waters (D-CA), ranking member of the Financial Services Committee. “Companies already track how much they spend on personnel including salary and benefits. Companies with unusually complex benefit plans are provided other options to find their ratio, including statistical sampling. We find no credibility to the assertion that the costs and burdens of documenting this will be too high.”

The lawmakers also opposed a watered-down version of the rule.

“The SEC may not use cost-benefit analysis to either block implementation of Section 953(b) or to support a rule that is inconsistent with the language of the provision,” they wrote on December 2.

In addition, 13 senators, including Democrats Robert Menendez of New Jersey and Elizabeth Warren of Massachusetts, wrote that too often investors and corporate boards lack benchmarks for evaluating chief executives’ pay packages beyond a comparison with what top managers at other companies receive. No company wants a below-average CEO, and reliance on peer compensation can drive pay higher.

In the senators’ view, the trend toward bigger CEO paychecks is producing no clear benefit for shareholders. They think that better information about CEO pay will provide investors with a valuable tool to set compensation at an appropriate level.