CEO Pay Ratio Rule Rankles Both Sides of Heated Debate

CEO Pay Ratio Rule Rankles Both Sides of Heated Debate

Two years after issuing a proposed rule for the controversial “CEO pay ratio” provision of the Dodd-Frank Act, the Securities and Exchange Commission today released a final rulemaking that left many interested parties unsatisfied.

The new rule will force most publicly held companies to disclose, starting with their 2017 proxy statements, how their chief executive’s compensation compares with that of the median pay among all other employees. As required by the JOBS Act, the rule does not apply to emerging growth companies.

In comment letters filed with the SEC, companies — mostly large, multinational ones — had raised strong objections to the proposed rule. Most were variations on two themes. For one, they said determining median pay within their work forces would be a difficult, costly process.

The rationale for that stance was generally two-fold: that most global companies use a patchwork of often incompatible payroll systems in the countries where they operate; and that definitions of “compensation” are significantly different from country to country, given variability in the treatment of social benefits, health care, and taxes. There were also claims that further burdens would be imposed by the proposed (and now final) requirement to include part-time workers in the calculation of median pay.

The other objection theme was that the existing required CEO compensation disclosures were sufficient to allow investors to make informed decisions on buying stocks and voting their shares.

Multinational companies, of course, are not happy with the ruling. For large companies doing business in dozens of countries, the cost of calculating the pay ratio could run into the hundreds of thousands of dollars, says Alan Johnson, managing director of compensation consulting firm Johnson Associates. Altogether, the SEC estimates, the aggregate cost in the first year for all companies subject to the rule will be $1.2 billion. Read more on CFO.