The Activist Investor Blog
The Activist Investor Blog
Pay Ratio Shame
What do investors need to know about the raging pay ratio debate? Not a great deal, actually, but a few tidbits bear some explaining as investors think about portfolio companies in 2014.
Remember the Dodd-Frank Act? Portfolio managers know well all the new rules and regulations that affect fund operations. We forget, though, the many new exec comp provisions in DFA. Well, the SEC has begun to implement those provisions.
Previously, we covered one of those current issues in exec comp, namely which amount corporations should report - expected, reportable, or reported comp. These which will form a basis for new corporate disclosure around pay-for-performance. Now, we address another issue, about the prospective new requirement to report the ratio of CEO pay to median employee pay.
Simple law
DFA sets forth a straightforward pay ratio law (Section 953). Most companies will need to disclose:
❖the median of the annual total compensation of all employees
❖the annual total compensation of the CEO
❖the ratio of the median to the annual total CEO comp.
Congress evidently intended to shame companies into modulating exec comp packages. They would inevitably show that BoDs give the best-paid CEOs hundreds of times what they give rank-and-file employees. Unfortunately, as we’ve seen too often lately, some executives have little shame when it comes to their comp.
Complicated regulations
Of course, in investing, as in life, nothing is simple. The SEC proposed regulations that run to over 160 pages. Contentious questions feature:
❖What does total employee compensation include? vacation pay? health benefits?
❖How should companies handle international employees, including converting currencies and tracking disparate payroll data?
❖What does total CEO comp include? how to measure equity and bonuses?
A few things are clear, though - companies will need to include all employees in determining the median pay, including part-time staff.
Unenthusiastic approach
It seems that the SEC isn’t especially eager to implement this new law. SEC leadership doesn’t appreciate Congress using investor disclosure as a means of promoting social goals such as pay equality.
And, the draft regulations afford companies considerable flexibility in computing CEO and median employee pay. They can even estimate median pay with a small sample of all employees, rather than canvassing their various payroll systems and computing a comprehensive median figure.
Investors should feel the same way the SEC does. We can’t think of an investment decision that will change based on knowing how much more a portfolio company CEO makes than the median employee.
While this actual disclosure will matter little, how the SEC defines CEO comp in this regulation may reflect back on other exec comp rulings that will come along. So, we’ll follow this one like the rest, and hope the SEC and Congress move along to more important subjects soon.
Tuesday, November 5, 2013