Last year's Dodd-Frank Act included a provision to give shareholders in publicly-traded companies the power to vote on executive compensation.
The financial reform bill also required certain companies, including publicly-traded companies, companies issuing debt instruments and companies required to file reports with the Securities and Exchange Commission, to report the ratio between executive compensation and worker salaries.
A newsletter from Culpepper and Associates, a provider of compensation survey data, "CEO-Employee pay ratios: Navigating the minefield of the new pay disclosure requirement," published last October summed up the rule:
Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act will require all U.S. public companies, companies that are not publicly traded but have public debt, and other companies required to file reports with the U.S. Securities and Exchange Commission to disclose the following three compensation metrics:
- The annual total compensation of the chief executive officer.
The annual total compensation for the chief executive officer is currently available in the Summary Compensation Table in SEC Form DEF 14A Filings (i.e., definitive proxy statements).
- The median annual total compensation for all employees
(except the chief executive officer).
- And, a ratio of these two metrics.
Last week a bill made it out of the House Financial Services Committee repealing this compensation-reporting provision.
From the Web site of the law firm, Wolters Kluwer, "Legislation repealing pay ratio provision of Dodd-Frank passed out of House Financial Services Committee:"
The Burdensome Data Collection Relief Act, HR 1062, would remove Section 953(b) of Dodd-Frank, which directs the SEC to adopt rules requiring disclosure of the median of the compensation of the company’s employees and the ratio between the median of the annual total compensation of the employees and the annual total compensation of the issuer's chief executive officer. The vote was 33-21…
The Committee received testimony about the burden and complexity this provision poses to public companies, with very little, if any, corresponding benefit to investors.
Obviously, opposition to corporate excesses falls squarely down party lines. Critics of the bill sponsored by Nan Hayworth, R-N.Y., contend that increased transparency would benefit not only investors but taxpayers as well.
For instance on Salon, in the story "Do companies want to hide CEO pay?" David Sirota writes:
…it's likely CEOs don't want these ratios being published because they would fuel shareholder activism that is already threatening to curtail executive abuse.
Remember, last year, Congress granted shareholders 'say on pay' powers, allowing them to cast non-binding votes on executive pay packages. These votes, however, happen in an information vacuum whereby shareholders only see executive pay data, but not how that data compares to the rest of a company's compensation rates. Should firms now have to publicize that comparison, executives know that downward shareholder pressure on their salaries will only intensify.
The second reason CEOs don't want these ratios being published may involve the ongoing discussion about corporate tax reform.
As the deficit has exploded, incriminating facts have leaked out showing that many corporations pay more to their executives than they pay in taxes (and many firms pay no corporate income tax at all). One of the easiest solution to this problem is to base corporate tax rates on a company's pay gap.
On the Web site, Intrepid Report, senior writing fellow at Demos, Michael Winship published a story, "The rich are different from you and me. They make more money -- and lemonade."
The annual 'Executive Excess' survey from the progressive Institute for Policy Studies last September found that back in the ’70s, only a handful of top American executives earned more than 30 times what their workers made. In 2009, 'CEO’s of major US corporations averaged 263 times the average compensation of American workers.' And a USA Today analysis earlier this year found that while median CEO pay jumped 27 percent last year, workers in private industry saw their salaries grow by just 2.1 percent.
So how are many of those corporations addressing this gross inequity? By trying to cover it up.
Arguments for the repeal of Section 953(b) in the Dodd-Frank Act include the difficulty large global corporations will have complying with the rule and the vagaries of defining "annual total compensation" in regard to CEO pay packages. Not to mention the impossibility of accurately quantifying the myriad levels of worker salaries -- as if worker salaries are something that corporations keep up with anyway.
Between contract workers, part-time workers and seasonal workers, all the number crunching will be hard and the ratio between CEO pay and the median worker's salary could look worse than it actually is.
What do you think -- should companies be required to publish the difference between what the CEO makes and the median worker salary? Who should determine the benefit from increased transparency -- companies or the investing public?
The more information investors have about the companies they own, the better. A growing segment of the population believes in investing their money with socially responsible corporations or companies with sustainable business models. More information is more power.
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