After much foot dragging, I have finished reading the adopting release for the new pay ratio disclosure rules. Yes, the release is long (300 pages or so), but adopting releases are always long. The real reason why it took so long is that the whole concept of pay ratio disclosure just seems silly to me (and apparently to Bob Lamm as well) so I just hoped it would go away.
I am not against finding ways to strengthen the middle class. Just like I am not against ending the sale of certain minerals in Central Africa that end up funding deadly conflict. The problem I have is that public companies should not have to bear the complete burden of fixing social ills. Less than 1% of the 27 million companies in the United States are publicly traded. And there are plenty of private companies that are larger than most publicly traded companies. Thus, while we may not agree whether the social goals are worth achieving, I think we can all agree that there are better ways to achieve them than selective enforcement (particularly since the SEC itself has said that the pay ratio will not be comparable from one company to another). The Securities Edge has been criticizing the social disclosure movement for some time, but we haven’t yet seemed to have stopped Congress from continuing to go down that path.
So, unless Congress acts to reverse its mandate for public companies to disclose their pay ratios before 2018 (the first year of required disclosure), I suppose we should all start learning how to comply. Leading practices for calculating the ratio and providing narrative disclosure will develop over the next couple of years, but I have summarized the important parts of the rules in this post:
What is the required disclosure?
Registrants must disclose:
- The median of the annual total compensation of all employees of the registrant (excluding the CEO)
- The annual total compensation of the CEO; and
- The ratio of the median to the CEO’s compensation.
The ratio needs to be expressed as X:1 or X to 1 where “X” represents the CEO’s total compensation and “1” represents the median employee’s salary. The ratio can also be expressed in narrative form such as: “The CEO’s annual total compensation is X times the median employee’s annual total compensation.” You can’t
Continue Reading Pay ratio (unfortunately) coming to public company filings soon