US SEC proposes disclosure of CEO-worker pay difference

WASHINGTON Wed Sep 18, 2013 6:05pm EDT

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011.

Credit: Reuters/Jonathan Ernst

WASHINGTON (Reuters) - U.S. corporations will need to disclose how the paychecks of their chief executive officers compare with those of their workers under a new proposal released on Wednesday by a sharply divided U.S. Securities and Exchange Commission.

With CEOs of many U.S. companies earning hundreds of times more than their workers, unions and labor advocates are championing the SEC's CEO pay-ratio rule. They say disclosures would help investors identify top-heavy compensation models.

But business groups such as the U.S. Chamber of Commerce and the Center on Executive Compensation oppose the measure, calling the data costly to compile and of little use to investors.

Among U.S. companies with the highest-paid CEOs are Oracle, Walt Disney, Viacom and Starbucks, whose CEOs in 2012 earned between $28 million and $96 million, according to the compensation data provider Equilar.

The SEC declined to address the chief complaint by companies and trade groups who wanted corporations with global operations to be allowed to report median pay only for U.S. employees.

The 2010 Dodd-Frank Wall Street reform law requires the disclosures and gives the SEC little wiggle room for changes demanded by critics. Still, the SEC tried to minimize compliance costs by giving companies flexibility in methods of calculating the total compensation of employees.

For instance, companies could use statistical sampling, an option that the SEC's Chief Economist Craig Lewis said could reduce compliance costs. The SEC would also permit annualized figures for permanent employees who did not work a full year, such as new hires.

Companies say investors have little appetite for such information, citing failed efforts by shareholder activists to adopt resolutions requiring CEO pay-ratio disclosures.

SEC Chair Mary Jo White said the deep divisions over how to implement this rule were evident in the more than 20,000 comment letters the agency had received on the subject.

"The staff has drafted and recommended a proposal that would provide companies significant flexibility in complying with the disclosure requirement while still fulfilling the statutory mandate," White said of the plan.

The opinions of the five SEC commissioners reflected the divisions between organized labor and corporate America. The newest Republican Commissioner, Michael Piwowar, said before the vote that the SEC had no business even considering the rule.

"Proponents have acknowledged the sole objective of the pay ratio is to shame CEOs, but the shame from this rule should not be put on CEOS- it should be put on the five of us," he said.

"Shame on us for putting special interests ahead of investors."

Commissioner Luis Aguilar, a Democrat who supports the measure, said the disclosures are important. "As owners of public companies, shareholders have the right to know whether CEO pay multiples reflect CEO performance."

He added that "Pay ratio disclosure can provide a valuable new perspective for executive compensation decisions."

PAY GAPS

Equilar's analysis of 2012 data showed the highest-paid CEO was Oracle's Lawrence Ellison with $96.1 million.

The CEO ratio pay proposal is one of two major outstanding regulations mandated by Dodd-Frank that the SEC tackled at Wednesday's public meeting. The agency also approved a long-awaited rule to bring the financial advisers of municipalities under federal oversight.

After the collapse of the big investment bank Lehman Brothers five years ago, the 2007-2009 financial crisis prompted public outrage over high CEO pay at Wall Street firms bailed out by taxpayers. Congress passed the Dodd-Frank law in response.

A recent report by the left-leaning Institute for Policy Studies, which analyzed data on the highest-earning CEOs over a 20-year period, found that those whose companies collapsed or received government bailouts have held 112 of the top 500 slots.

The report said the pay gap between CEOS and the average American worker has grown from 195-1 in 1993 to 354-1 in 2012.

Compensation consultants warned about drawing conclusions based on pay ratios, even among companies that are direct competitors.

"An employer with a workforce that has a larger proportion of lower-paid employees, or that has significant overseas operations in lower-paid locations, may have a pay ratio that suggests greater disparity in pay than other employers even where the CEO compensation is lower," said Regina Olshan, a partner with Skadden, Arps, Slate, Meagher & Flom LLP.

"Further, those same companies will likely have a greater administrative burden to comply with the disclosure requirements."

Proponents of the CEO pay ratio rule lauded the measure.

"The simple fact is that large pay disparities between CEOs and their employees affect a company's performance," said AFL-CIO President Richard Trumka. "When the CEO receives the lion's share of compensation, employee productivity, morale and loyalty suffer."

Timothy Bartl, president of the Center on Executive Compensation, said he will fight for Congress to overturn that provision in Dodd-Frank.

"The Center strongly opposes the pay ratio requirement will continue to work for its repeal in Congress," he said.

(Reporting by Sarah N. Lynch; Additional reporting by Lisa Lambert; Editing by Karey Van Hall, Leslie Gevirtz, Lisa Von Ahn and David Gregorio)