Is an Internal Pay Equity Disclosure Proposal On the Way?

News Brief

By Cydney Posner

Rumor has it that, notwithstanding efforts in the House to repeal the internal pay equity disclosure provision of Dodd-Frank (see my article of 6/20/13) and some alleged "slow walking" of the rule proposal by the staff (see my article of 7/8/13), the SEC is on the verge of proposing rules that would implement pay disparity. http://www.businessweek.com/news/2013-07-17/sec-said-near-proposal-to-force-disclosure-of-ceo-to-worker-pay (Noted in today's thecorporatecounsel.net blog.)

Under Dodd-Frank, the SEC was required to amend Item 402 of Reg S-K to require each company to disclose, in a wide range of its SEC filings, including registration statements, annual reports and proxy statements:

  • the median of the annual total compensation of all employees of the company, except the CEO;
  • the annual total compensation of the CEO; and 
  • the ratio of the two amounts above.

The article reports that the "provision would require companies to calculate and disclose their CEO's compensation as a multiple of average worker pay, said the people [familiar with the matter], who spoke on condition of anonymity because the commission's agenda has not been made public.….The SEC could vote to introduce the regulation as soon as Aug. 21, said one of the people. If the proposal is approved, the vote would open a lengthy public-comment period before the commission would vote on a final version."

The article observes that opponents of the rule say "the information will be difficult to compile and isn't material to investors….Business groups such as the U.S. Chamber of Commerce have questioned the costs imposed by a rule, information that must be considered by the SEC in any rulemaking. [A] vice president of the Chamber's Center for Capital Markets Competitiveness, said business groups asked the SEC last year to hold a roundtable to solicit views before proposing a rule….'If they take a straight-jacket approach, you are not only going to have a bad rule, but it could harm investors….It's the type of rulemaking that has not passed legal scrutiny before.'" And that's before the rule proposals have even been released!

On the other hand, "[p]roponents of the rule, including unions and activist investors, say mandatory disclosure would help inform shareholders on advisory ‘say-on-pay' votes at companies' annual meetings. Across the Standard & Poor's 500 Index of companies, the average multiple of CEO compensation to that of rank-and-file workers is 204, up 20 percent since 2009, according to data compiled by Bloomberg. The numbers are based on industry-specific estimates for worker compensation….The AFL-CIO has told the SEC it could reduce the costs of compliance by allowing companies to calculate median pay using statistical sampling. The union also insists foreign and part-time workers should be included in any calculation…."

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