In recent testimony before a United States Senate Committee, SEC Chairman Mary Schapiro rattled off the list of significant new responsibilities the Commission is tackling in connection with U.S. financial reform legislation. She noted that the SEC must conduct more than twenty studies, create five new offices and act on more than 100 rulemaking provisions, many of which require action within one year.
Here, we take a brief look at one of the one of the new requirements for public companies: pay ratio disclosure. When the SEC breathes life into Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, public companies tapped to comply will disclose the ratio of their CEO’s total compensation to the median pay of all other employees at the company.
This requirement, like so many others mandated under the new legislation, is already under attack. The concerns expressed fall into the usual two categories: that the requirement is too difficult for companies to produce and that the results will be too complex for investors to understand.
For Robert Menendez, the requirement’s sponsor in the U.S. Senate, however, the hope is that the presentation of pay ratios will encourage companies to stem the tide on pay disparity: “Disclosure will help encourage fair pay for workers at a time when middle class pay has stagnated while CEO pay has skyrocketed.” (“The Real Say on Pay”, Editorial, The New York Times, September 1, 2010).
Other fans of the pay ratio see it as the basis for a much needed wake-up call to governments. In a recent Los Angeles Times Commentary, Sarah Anderson and Sam Pizzigati note that “We already deny government contracts to companies that discriminate, by race or gender, in their employment practices because we don’t want our tax dollars subsidizing such inequality. We need to apply this same reasoning to extreme economic inequality”.
According to Chairman Schapiro “We currently anticipate that the staff will submit proposed rules for the Commission’s consideration by the middle of next year.” (Testimony of SEC Chairman Mary Schapiro, October 1, 2010). Shareholders of U.S. companies will therefore probably begin seeing pay ratio disclosure in company materials for meetings that take place in 2012.
In Canada, a proposal asking our largest banks to disclose their pay ratios has been voted on many times in recent years. Le Mouvement d’éducation et de défense des actionaires (MEDAC) filed proposals asking for pay ratio disclosure at Canada’s five largest banks in 2007, 2008 and 2010. Shareholder support has been modest in each year, but it is growing over time. Votes for disclosure of CEO pay as a multiple of ‘average’ employee pay at the banks increased from an average of just 4.1% in 2007 to 7.9% in 2010. The largest show of support for the proposal came in 2010 at Bank of Montreal, when the votes for were 9.9% of those cast.
Canada’s DIY approach to governance best practice means that companies will have to volunteer to provide a pay ratio. Shareholders simply do not have the data they need to work it out for themselves.