Monday, August 07, 2017

Business Roundtable asks SEC to exclude non-U.S. and non-full time employees from pay ratio rule

By Jacquelyn Lumb

The Business Roundtable has written to SEC Chair Jay Clayton to recommend specific changes to the pay ratio rule, pending what it hopes will be a full repeal of the rule. The Roundtable submitted a response in March when then Acting Chair Michael Piwowar first sought views on implementing the CEO pay ratio rule. Following Clayton’s remarks at the Economic Club of New York on July 12, the Roundtable wrote that it wanted to emphasize specific changes that should be made to the rule, including the exclusion of employees outside of the U.S. and non-full time employees.

Delay in compliance. The SEC adopted the pay ratio disclosure rule in August 2015 to implement Section 953(b) of the Dodd-Frank Act. The rule requires the disclosure of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer. The SEC delayed compliance with the rule until companies’ first fiscal year beginning on or after January 1, 2017, but Piwowar issued a public statement on February 6 advising that companies were encountering difficulties with the rule’s implementation. He asked for comments on the challenges that issuers were encountering and directed the staff to reconsider the implementation of the rule based on those comments.

Non-U.S. employees. The Roundtable said the rule should exclude workers located outside of the U.S. in determining the median employee in order to create a more consistent common denominator. Some of its members have said that the inclusion of employees outside the U.S. makes compliance with the rule difficult due to the size and complexity of their workforces, the variety of business models, staffing strategies, and compensation and benefit arrangements that make up an employee’s total compensation package.

The rule contains a data privacy exception and a de minimis exception to the requirement that companies include their total employee population, but the Roundtable noted that the international data privacy regime is complex and constantly changing, so a company’s analysis could change every year. This could lead to fluctuations in inputs based on factors that are not relevant to a company’s compensation practices and are outside the company’s control. If non-U.S. employees are excluded, it would result in a more consistent common denominator over time, the Roundtable explained.

Non-full time employees. The exclusion of non-full time employees would also help prevent distortion, in the Roundtable’s view. The inclusion of part-time, seasonal, and temporary workers would have a disproportionate impact on the CEO pay ratios of companies that employ large numbers of those types of workers, such as retail and certain service industries. Companies may reduce those types of workers out of fear of a negative reaction to the CEO pay ratio, according to the Roundtable, which could have a negative impact on students, retirees, working parents, and second earners for whom these non-traditional employment opportunities are important.

If non-U.S. and non-full time employees were excluded from the data collection requirement, the Roundtable said it would significantly reduce the compliance costs. The Roundtable cited a study by the Center on Executive Compensation which found that permitting companies to exclude non-U.S. employees would reduce compliance costs by 47 percent. If the SEC changes the rule to exclude these categories of employees, the compliance cost savings could be used for more productive purposes, the Roundtable advised.