Behind the Scenes Look at the Internal Pay Equity Disclosure Rule

News Brief

By Cydney Posner

Following is a link to an article in the Washington Post that provides some insight into some of the activity behind the scenes in connection with the Dodd-Frank internal pay equity disclosure rule.  You might remember that the provision required the SEC to amend Item 402 of Reg S-K to require each company to disclose the ratio of the median of the annual total compensation of all employees of the company (except the CEO) and the annual total compensation of the CEO. This provision of Dodd-Frank has yet to be implemented by the SEC and is currently the subject of a bill in the House for its repeal (see my article of 6/20/13).

According to the article, SEC staffers had circulated a term sheet for the pay ratio rule within six months of the passage of Dodd-Frank and had set a deadline for completion by the end of 2011. But when the term sheet "reached the SEC, it triggered questions among the commissioners about how best to carry out the ratio requirement — and whether it was even practical. Then came the lobbying buzz saw….What the agency did not count on was the resistance mounted by big business. A lobbying campaign waged by business executives and the nation's most prominent corporate associations undercut the momentum and effectively brought the agency's work on the rule to a standstill, according to interviews with SEC insiders and others familiar with discussions about the requirement. The efforts of business groups to influence the SEC's work was especially effective because of their success in pressing a court challenge to another part [proxy access] of the financial overhaul legislation— in essence, an extension of their lobbying efforts. The threat of additional lawsuits has hung over the discussion between lobbyists and agency officials about the pay rule, and some opponents have warned that the agency could be sued again if it enforces it." As a result, the implementing rules were essentially "back burnered."

"SEC officials, who had hoped the pay rule would be completed quickly, missed their 2011 deadline. Then they missed another self-imposed deadline a year later." Now we are approaching the third anniversary, and, according to the article, the SEC has missed nearly 2/3 of the Dodd-Frank deadlines. In part, the delays may be attributable to the complexity of many of the provisions and understaffing at agencies. But the pressure from business lobbies has also contributed in many cases: "Lobbyists and former SEC officials described a campaign to weaken or completely block pay disclosure, known as the "pay ratio" rule, that has been fierce and unyielding. Scores of companies and associations have lobbied on the specific provision since Dodd-Frank's passage….Lobbyists have also targeted Congress." Hence the proposal to repeal the provision.

"Agency officials dispute criticism that they have ‘slow-walked' the rule and have repeatedly said their goal is to write a rule that works. They say their emphasis is not speed but effectiveness. Now, with unions and other pay ratio advocates mounting their own lobbying effort to get the SEC to move, the agency's new chairman, Mary Jo White, is vowing to redouble its efforts to complete the rule and other long-delayed regulations. Testifying before Congress in March, she said there is ‘no higher priority.' But, she added, the task ‘truly is daunting.'"

The pay ratio provision was inserted into Dodd-Frank, "when public anger was running high over executive pay," by Sen. Robert Menendez, a New Jersey Democrat with strong union ties, according to the article. "While the bill's sponsors privately expressed doubts about the practicality of the proposal, Sen. Christopher J. Dodd (D-Conn.) agreed to accept it to satisfy Menendez, a key member of the Senate banking committee whose vote he needed, according to several people familiar with the bill's drafting. Dodd said, ‘Let's give it to the SEC and let them figure out how to do it,'? one of the people said. ‘It didn't get much attention.'"

The article reports that "nearly all the lobbying over pay ratio in late 2010 and 2011 was on the corporate side, according to lobbying records, disclosures on the SEC Web site and interviews. Business officials pushed for ways to ease the requirement, such as including only U.S.-based employees in calculating a firm's pay ratio. These lobbyists strongly opposed an approach, suggested by the AFL-CIO and considered by the SEC, to calculate the ratio using ‘statistical sampling,' a method that could reduce the burden on companies by requiring them to determine compensation for only a small fraction of their employees."

"Corporate officials said calculating the ratio, which would affect all 9,000 public U.S. companies, is tremendously complicated and of little value to investors. These officials noted that most large firms operate in multiple countries, which have different systems for calculating compensation and benefits, and that currency fluctuations make comparisons harder. Smaller firms have high employee turnover and lack the staff to make the calculation, they said. But advocates for the rule point out that other organizations have calculated a ratio. Last week, for example, the Economic Policy Institute released a report saying that, by one measure, the average chief executive made 273 times what a typical worker made last year. Advocates contest the notion that calculating the ratio is impractical."

When the SEC's proxy-access rules were tossed out by the court, it represented a "victory [for the plaintiffs] that significantly influenced the agency's work." Because the court "blasted the SEC for failing to fully consider the economic impact of the regulation[, the] decision cast a pall, forcing the agency to devote far more time to analyzing the costs of its proposals, including the pay ratio. ‘Doubling and redoubling effort on cost-benefit analysis became necessary, and ultimately slowed the work of the agency,' said Mary Schapiro, who was SEC chairman at the time."

According to the senior vice president of an industrial manufacturer, "the SEC ‘recognizes that as soon as pay ratio goes into place, someone is going to challenge it. This is one that people are going to come after.' One month after the SEC missed its first self-imposed deadline in December 2011 for finishing the pay provision, opponents sent Schapiro a sharply worded letter. In it, more than 20 leading corporate associations urged her to ‘use caution,' highlighting what they described as the burdensome costs of the pay ratio rule. That same week, an SEC official said the deadline had been moved back a year. ‘It's the threatening side of lobbying,' said a person familiar with the negotiations over pay ratio. ‘There's the side of lobbying where people are trying to help you get it right, and there's the side that threatens, as in, ‘We'll sue you if you do this.'?"

Earlier this year, SEC Commissioner Luis Aguilar "posted an online statement suggesting that corporations reveal the ratios on their own. It took one day for the Center on Executive Compensation, a business trade group, to fire off a stern letter. The group said it was ‘disappointed' and urged Aguilar to retract his statement."

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