The “Pay Ratio” Rule Will Shed Little Light, but a Lot of Heat

Within weeks, the Securities and Exchange Commission is slated to adopt its final guidelines on implementing a new rule that will require most public companies to disclose the ratio of the total annual compensation of their CEO with the median pay of “all” of a company’s employees.

Not surprisingly, business chiefs aren’t excited about this seeming inevitability. It’s not that they’re loath to disclose how much money they make; that information is readily available in public company documents. But many CEOs believe the ratios themselves will be misleading and will be used only for shaming, union organization and political purposes.

Required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that was enacted in the wave of “reform” legislation after the financial crash of 2008, the ratio-disclosure rule drew more than 128,000 public-comment letters after the SEC proposed it a year ago. More than 1,000 of those letters were uniquely written, and not form letters.

“By requiring the pay ratio to be disclosed alongside other material information, the SEC creates a preconceived bias that the pay ratio provides legitimate information.”

Such information long has been formulated by anti-corporate interests to use in opposing specific companies and capitalism itself, and was a staple of communications by the Occupy Wall Street protesters a couple of years ago. Since by most measures CEO pay as compared to employee pay has risen over the years, the measures make effective rhetorical points.

But CEOs and their allies oppose use of the ratios for a number of reasons. “The pay ratio disclosure is useless and potentially harmful because it purports to communicate information about a company’s CEO compensation and human resources strategy when in reality it cannot,” Dennis Zeleny, a top-level corporate-strategy consultant and former head of HR for Caremark CVS and Sunoco Oil, among other Fortune 500 companies, told CEO Briefing.

But “by requiring the pay ratio to be disclosed alongside other, actually material information, the SEC creates a preconceived bias that the pay ratio provides legitimate information.”

One problem with the ratio rule as currently formulated, for instance, revolves around the fact that it’ll be complex to formulate the figures and could cost companies millions of dollars to do so. The SEC so far hasn’t spelled out a specific methodology for companies to identify a “median” employee—for instance, that companies may choose to identify that person using all their employees, or by statistical sampling, according to the Chicago Tribune.


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