Friday, July 15, 2011

Senators Oppose Repeal of Dodd-Frank Pay Ratio Provisions

Against the backdrop of House legislation that would repeal a Dodd-Frank provisions mandating the disclosure of pay ratios, four US Senators expressed their support for the provisions in Section 953(b) of Dodd-Frank in a letter to the Center on Executive Compensation. Senators Robert Menendez (D-NJ), Tom Harkin (D-Iowa), Sherrod Brown (D-OH), and Carl Levin (D-MI)emphasized the importance of pay ratio transparency to provide investors and policy makers with a better understanding of pay in America and address the pay and income disparity that has skyrocketed in recent decades.

Under Section 953(b) of the Dodd-Frank Act, the SEC must adopt rules requiring new disclosures about the relationship between executive compensation and company performance, and the ratio between the median of the annual total compensation of an issuer's employees and the annual total compensation of the issuer's chief executive officer. The House Financial Services Committee has approved legislation repealing Section 953(b) of Dodd-Frank. The Burdensome Data Collection Relief Act, HR 1062, is sponsored by Rep. Nan Hayworth (R-NY) and has bi-partisan support. The legislation also has the support of the Society of Corporate Secretaries and Governance Professionals.

In their letter, the Senators said that Section 953(b) will increase transparency with regard to the growing disparity in CEO and worker pay ratios, thereby encouraging companies to take a harder look at the rising pay discrepancies, as well as providing investors and policy makers with a better understanding of pay. This is basic information that needs to be disclosed to the investing public and the company’s shareholders.

In a response letter to the Senators, the Center said that Section 953(b) promotes unnecessary disclosure that would impose substantial and costly burdens on employers at a time when stimulating the economy and promoting job growth are top priorities. Absent legislative changes, the pay ratio requirement is slated to take effect after SEC implementing regulations are finalized. Noting that Section 953(b) was inserted into the Senate version of Dodd-Frank during a 20-minute Banking Committee markup without a full legislative review, the Center asked for Senate Banking Committee hearings focused on this provision.

In an earlier briefing paper on Section 953(b), the Center took the position that the disclosure of a pay ratio would not be useful to investors or the general public .The Center said that the pay ratio will vary considerably by company, industry, diversification of operations, geographic scope and business strategy. There is no standard for investors to determine what are good versus bad pay ratios and how the ratio would relate to the safety or desirability of an investment, opined the Center, asking, for example, if a high ratio suggests that the company is a better or less risky investment compared to lower ratios.

The Center noted that the provision requires public companies to calculate the compensation of all their employees, both full and part-time, in every country using the complex SEC proxy disclosure rules and then find the pay of the person in the middle of the pay distribution, the median. Global companies often have tens of thousands of employees and dozens of disparate payroll systems across dozens of countries. The elements of an employee’s compensation vary considerably among countries because of different cultures, benefit mandates, competitive practices and regulations. Also, the calculation must account for volatile currency exchange rates.