As we’ve covered here previously, hidden away in this 2,000 page bill are mandates for say on pay and golden-parachute advisory votes by shareholders, along with how often they will be held, as well as further tightening the rules surrounding compensation committee independence and clawback policies. What is new in this bill is provisions for the disclosure of internal pay equity. These disclosure, originally introduce in the Corporate Executive Accountability Act of 2010, is to be a ratio comparing CEO annual total compensation to that of the median annual total compensation of the average worker worldwide.
There have been many articles written in the last few years about how CEO pay at U.S. public companies has risen from a multiple in the 1950s of about 30 times to 300 times the average worker. Articles have also sized these ratios in other countries, where the multiple is not so extreme.
Organizations like the AFL-CIO have argued that it is outrageous that the average total compensation of a CEO in the S&P 500 was $9.25 million, when millions of workers at organizations such as Bank of America, JP Morgan Chase, CitiGroup, Morgan Stanley, Goldman Sachs, Wells Fargo and General Motors have lost their jobs.
There has been a lot of debate on the potential ramifications of this sort of disclosure, which include the possibility that companies will eliminate or further outsource lower-paid jobs to decrease the fall out of public perception of these statistics. In international companies, collection and disclosure of information could be particularly difficult, where lower salaries and standards of living could drive the ratio higher. It could even discourage the creation of jobs for the same reasons.
In addition to these issues, questions arise regarding exactly HOW to disclose the ratio. There is some question regarding the document types in which this needs to appear. Would it just be proxies? The language could require this ratio to also be included in quarterly reports as well, which brings up the question of whether this figure is to be calculated once a year or updated in every filing in which it appears. For most companies this will not be easy to generate, since most HR and payroll systems are not set up to calculate this, particularly if not all employees are to be included and if international operations and exchange rates need to be considered. The SEC is also going to need to provide more guidance on exactly what total compensation means for both the CEO and the average employee.
There is also some question of how useful this ratio could be with some historical context or trend information included, but pulling this data historically could be even more nightmarish should companies have to try and retrieve this.
In the wake of the bill passing, it is going to be yet another period in which filers will have more work revising their filings, trying to figure out requirements and how to deal with explaining disclosures to their stockholders. If you haven't already started thinking about how you might deal with say on pay and the other potential revisions, now would be a good time to start. If you are a public filer, you should be prepared to discuss the items contained and why you have or have not adopted policies with your shareholders. Communication, as always, will be critical.
Hold on, cause it looks like it might be another bumpy ride.
There has been a lot of debate on the potential ramifications of this sort of disclosure, which include the possibility that companies will eliminate or further outsource lower-paid jobs to decrease the fall out of public perception of these statistics. In international companies, collection and disclosure of information could be particularly difficult, where lower salaries and standards of living could drive the ratio higher. It could even discourage the creation of jobs for the same reasons.
In addition to these issues, questions arise regarding exactly HOW to disclose the ratio. There is some question regarding the document types in which this needs to appear. Would it just be proxies? The language could require this ratio to also be included in quarterly reports as well, which brings up the question of whether this figure is to be calculated once a year or updated in every filing in which it appears. For most companies this will not be easy to generate, since most HR and payroll systems are not set up to calculate this, particularly if not all employees are to be included and if international operations and exchange rates need to be considered. The SEC is also going to need to provide more guidance on exactly what total compensation means for both the CEO and the average employee.
There is also some question of how useful this ratio could be with some historical context or trend information included, but pulling this data historically could be even more nightmarish should companies have to try and retrieve this.
In the wake of the bill passing, it is going to be yet another period in which filers will have more work revising their filings, trying to figure out requirements and how to deal with explaining disclosures to their stockholders. If you haven't already started thinking about how you might deal with say on pay and the other potential revisions, now would be a good time to start. If you are a public filer, you should be prepared to discuss the items contained and why you have or have not adopted policies with your shareholders. Communication, as always, will be critical.
Hold on, cause it looks like it might be another bumpy ride.
While I don't disagree that Executive Pay deserves scrutiny, it should be by the stockholders, and not the government. Isn't it ironic that Dodd and Frank, instrumental in getting us into this mess, are the same two supposedly getting us out?
Posted by: Shan Jenkins | July 21, 2010 at 05:28 PM