Investors and companies at odds over SEC’s CEO-to-worker pay ratio proposal

Investors and companies are lining up against each other over the U.S. Securities and Exchange Commission’s (SEC) proposal under the Dodd Frank regulatory response to the financial crisis to require disclosure of the CEO-to-worker pay ratio. Institutional investors including ERAFP, the €14bn 100% SRI pension fund for French civil servants, local authorities and the public hospitals sector, Bâtirente, the C$1.4bn (€1bn) pension fund for construction workers in Quebec, and ICCR, the $100bn coalition of more than 300 faith-based investors, have written to the SEC to support the proposal. A joint letter from ERAFP, Bâtirente and the Canadian Shareholder Association for Research & Education (SHARE), whose clients include many of the country’s pension and mutual funds, said: “As long-term investors in publicly traded corporations, we believe that requiring disclosure of the CEO-to-worker pay ratio data will be beneficial for investors. Unless pay ratio is disclosed, it cannot be priced by investors on capital markets.” The ICCR’s comments to the SEC said: “High pay disparities inside a company can hurt employee morale and productivity, and have a negative impact on a company’s overall performance. Moreover, disclosure of the median employee pay will help investors better understand companies’ overall compensation approach to developing their human capital.”However, in a major pushback, the influential National Investor Relations Institute (NIRI), which has 3,300 members representing over 1,600 publicly held companies, told the SEC that plans to introduce the proposed rule to implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, would provide no material benefit to most investors while imposing significant costs on companies. NIRI said: “This rule, as proposed, will result in disclosures by issuers that are likely to be misleading or inconsistent, or both, with a high probability that the disclosures would confuse most investors and not contribute to their understanding of corporate pay practices.” It said it believed that compliance costs would be exorbitant, especially for firms with overseas employees. The SEC has proposed exemptions to smaller companies and suggested that the median pay ratio be limited to inclusion in annual reports and other regulatory filings. In their letter, ERAFP, Bâtirente and SHARE, said investors would receive an incomplete picture of a company’s pay practices if international and part time employees were excluded from the disclosure. PIRC, the UK proxy advisor, said in its submission to the SEC that there was shareholder demand for median pay ration information: “We already have two investor clients who factor the relationship between executive an employee pay into their assessment of executive compensation policies.”
The SEC proposal is available here.