SEC approves plan to reveal CEO-worker pay gaps

Kevin McCoy | USA TODAY

Want to know the difference between your annual salary and the total yearly compensation of your company's chief executive? Financial enlightenment may soon be at hand.

A sharply divided Securities and Exchange Commission decision on Wednesday set the stage for potential final approval of the so-called "pay ratio" disclosure, a controversial rule required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

While SEC Commissioner Luis Aguilar said the rule would help investors make better financial decisions, Commissioners Daniel Gallagher and Michael Piowar said the sole purpose was to name and shame high-earning corporate bosses under a proposal that would lead to irrelevant and misleading comparisons of firms.

Adopted by a 3-2 vote that will start the clock on a 60-day public comment period, the proposed rule would require many publicly-traded firms to disclose:

• The median of the annual total compensation of all employees except the chief executive officer.

• The CEO's total annual compensation.

• The ratio of the two amounts.

Companies that are publicly-traded in the U.S. already disclose annual compensation of top executives in proxy filings submitted to the SEC before annual stockholder meetings. But those disclosures are often complex and difficult for an average investor to decipher. The new proposal would require disclosure of a more direct comparison.

SEC Chairwoman Mary Jo White noted that the proposal has "generated significant interest" — evidenced by more than 20,000 public comment letters for and against approval. She said the pre-vote input influenced the SEC staff to draft a proposal that would "provide companies (with) significant flexibility in complying," rather than stipulating a one-size-fits-all reporting regimen.

The proposal would allow companies to identify median compensation of rank and file workers by using either the full employee headcount or a statistical sample. Firms would also be allowed to use reasonable estimates when calculating total annual compensation and any element of that compensation.

The employees covered by the proposal include all full-time, part-time, seasonal and non-U.S. workers working for a company and any of its subsidiaries in the U.S. and abroad as of the last day of the firm's prior fiscal year. Companies would also be required to make public the calculation methodology they used. The disclosures would be required in registration statements, proxy and information statements and annual reports filed with the SEC.

The proposal would not cover emerging growth firms, smaller reporting companies or foreign private issuers.

Invoking the opening of Charles Dickens' A Tale of Two Cities, Piowar said the proposal showed the worst times of the SEC's rule-making process. The proposal would harm investors, stifle corporate competition and inhibit capital formation while leading to irrelevant and misleading comparisons of companies, said Piowar, who added, "shame on us for putting special interests before investors."

Similarly, Gallagher said "there are no, count them, zero economic benefits" from the proposal. The only justification was to generate "the most eye-poppingly huge ratio possible," he said, arguing that the proposal would place a costly and unjustified reporting burden on companies.

However, Aguilar noted that the difference between total annual CEO compensation and average employee pay has grown significantly wider in recent decades, a time when he said stratospheric pay for chief executives may have provided incentives for corporate risk-taking that can harm investors.

The proposal is "in the interest of shareholders of public companies," said Aguilar.

Citing studies that say the pay gap may lead to lower worker productivity, Public Citizen, a non-profit consumer advocacy group said the proposal would provide a relatively easy disclosure system for Corporate America.