The little-known provision requires publicly traded companies to disclose exactly how much the CEO makes, as well as the median employee salary and the ratio between the two, in their annual financial statements. Supporters of the rule, included in section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, say it is intended to encourage companies to narrow the considerable gap between executive and worker compensation.
Business groups have tried -- and failed -- to repeal the rule. Now, as the U.S. Securities and Exchange Commission inches closer to a deadline to impose the provision, those organizations are reigniting their fight.
Business Groups Oppose Disclosure
In a letter sent to SEC Chair Mary Schapiro last month, almost two dozen business groups asked the agency to engage in expanded public outreach and consideration of alternatives before moving forward with implementing the proposed rule. The signatories, including the U.S. Chamber of Commerce, the American Petroleum Institute and the National Retail Federation, argue that producing compensation information for what is sometimes tens of thousands of employees would be difficult and costly for multi-national corporations to comply with.
Obtaining the data will be difficult and time-consuming as the definition of compensation among countries will vary widely, and companies will face difficulties attempting to rationalize compensation with currency fluctuations, the letter states.
The letter writers insist investors who rely on corporate disclosures are not interested in how much a CEO makes compared to the median employee, meaning the extra information would not ultimately convey any information about the health of a company.
Instead, they have advised the SEC to convene a roundtable discussion with experts, among other recommendations, so the agency can receive a full understanding of the potential consequences of the disclosure requirements.
Some business groups say there is no legitimate reason for the compensation disclosure provision to even exist within the context of the rest of the Dodd-Frank law. In an interview with The Hill, Tom Quaadman, the vice president of the capital markets center for the U.S. Chamber of Commerce, dismissed it as a political talking point that has made its way into legislation.
Backers of the provision, naturally, disagree. In a March 2011 letter to the SEC, the Institute for Policy Studies said the requirement is needed because extreme pay differentials between CEO's and their employees can lead to lower morale, higher turnover rates, and reinforce a celebrity CEO culture that is not conductive to high executive performance.
To keep their pockets stuffed, executives will nurture the hierarchies that frustrate enterprise empowerment. They will devote themselves to making their companies bigger, not better, the Institute wrote. Corporations that lavish multiple millions on their executive superstars, even if those millions [are] mere 'peanuts' in the grand corporate scheme of things, create great fortunes for their executives. They do not create great enterprises.
U.S. CEOs' Median Pay 343 Times Workers' Pay
CEO's of some of the largest U.S. corporations made about 343 times more than their workers' median pay in 2010, according to an analysis by the American Federation of Labor, the widest gap between executive and employee pay in the world. CEO compensation has skyrocketed since 1990, when chief executives only made about 42 times more than the average blue collar worker.
Critics of the Dodd-Frank provision are at work to repeal it. Although the House Financial Services Committee approved legislation sponsored by U.S. Rep. Nan Hayworth, R-N.Y., that would do away with the requirement, The Hill reports the repeal effort is unlikely to make headway in an election cycle where income inequality has become a major political issue.
In July 2011, dozens of attornies and compensation consultants urged the SEC to repeal 953(b) or, failing at that, to wait at least two years before implementing the provisions. However, a calendar available on the SEC Web site indicates it expects to issue guidelines for that provision during the first half of 2012 that will be adopted by the end of the year.