Finalizing a new rule requiring corporations to disclose exactly how much more their CEO makes than regular employees will be one of the Securities and Exchange Commission’s top priorities for 2015, a source at the SEC said.
While there is no timetable to finish the rule, which is required as part of the Dodd-Frank financial reform law, it could be done soon. SEC Chairwoman Mary Jo White told the Senate last year the commission was trying to finish it before the end of 2014, so the agency presumably is in the final stages.
The SEC’s proposed version, released in September 2013, would require public companies to disclose the median annual compensation for all employees, excluding the CEO. Companies also would be required to disclose the CEO’s annual total compensation — including bonuses, stock options and other benefits — and provide the ratio between that and the employees’ median.
It has been a highly contentious issue, prompting more than 128,000 responses during the SEC’s public comment period and numerous comments from lawmakers as well.
Proponents such as Sens. Robert Menendez, D-N.J., and Elizabeth Warren, D-Mass., argue that investors should have the information to help them evaluate whether shareholders are benefiting from the company’s leadership.
But Republicans such as Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, have questioned the need for it at all. In a November letter to White, he warned: “Prioritizing completion of the pay ratio rule will continue the SEC’s practice of misallocating limited resources to non-essential projects.”
A major issue has been defining how the pay would be calculated. The SEC’s proposed rule would give companies flexibility in determining the methodology they would use.
For example, it would allow large companies to use statistical sampling rather than doing a census of all employees. It also would be flexible in defining who qualifies as an employee, giving companies leeway in cases involving, for example, seasonal or part-time workers. The methodology itself would have to be disclosed.
Menendez and Warren have supported the proposed rule, calling it a “balanced proposal” and pushing the SEC to finish it as quickly as possible, arguing that would be an important tool for shareholders to evaluate a company.
A letter to White on Dec. 16 signed by Menendez, Warren and 13 other Democrats asked her to commit to finishing the rule “before the end of the first quarter of 2015.”
