The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Last night, Joann Lublin & Andrew Ackerman ran this WSJ article:

Securities regulators are poised to complete rules requiring companies to disclose the pay gap between chief executives and employees, putting in place a measure without broad exclusions sought by companies, people familiar with the deliberations said Monday. In a setback to corporations and their trade groups, the Securities and Exchange Commission is expected to allow companies to exclude 5% of their overseas workers from the pay-ratio calculation, these people said. Companies had pressed to exclude a much larger percentage of foreign workers, which likely would have narrowed the pay gap some businesses report.

Under the rule, which the SEC could vote on as early as the first week of August, companies would have to disclose median worker pay—the point on the income scale at which half their employees earn more and half earn less—and compare it with CEO compensation. A mandate of the 2010 Dodd-Frank financial law, the pay-ratio rule could put added pressure on corporate boards to slow pay increases for chief executives at companies with significant or growing gaps, proponents have said. SEC Chairman Mary Jo White is under pressure from Sen. Elizabeth Warren (D., Mass.) and other Democratic lawmakers to complete the measure as well as other unfinished portions of the Dodd-Frank law.

Yet the pay-ratio rule has come under fire from corporations, Republican lawmakers and some regulators who warn it will be costly to compile across multiple jurisdictions and won’t provide investors with meaningful information about a company’s financial health. As with a 2013 proposal, the rule is expected to draw dissents from the SEC’s two Republicans, who say the commission has more urgent rules to tackle and the pay-ratio rule is designed to shame chief executives.

Economists at the SEC believe allowing companies to exclude 5% of their workforce will only have a small effect of the pay ratio, according to an analysis the commission released in June. The analysis found a 5% carve out changed a company’s pay ratio up or down by about 3.5%. An SEC spokeswoman declined to comment. Ms. White has repeatedly said she hopes to complete the measure by fall. People familiar with the matter said the vote date and the contours of the rule could still change.

Letting companies exclude up to 5% of their workforce if they are overseas will benefit some businesses with a minor presence abroad, said Mark Borges, a principal at Compensia Inc., an executive-pay boutique. “For a lot of companies, I don’t think that (exclusion) goes far enough.’’ The SEC should exclude all foreign employees from companies’ pay-ratio calculations, suggested Timothy J. Bartl, president of the Center on Executive Compensation, a Washington advocacy group for corporate human-resources chiefs. “That’s the most effective way to remove the most burdens.”

An AFL-CIO study of CEO pay across a broad sample of S&P 500 firms showed the average CEO earned 373 times more than the typical U.S. worker in 2014. In 1980, that multiple was 42. The 5% carve out is also likely to encounter opposition from supporters of the rule, including the big labor federation, who have pressed the SEC against carve outs. Brandon Rees, deputy director of the AFL-CIO’s Office of Investment, said Congress intended for companies to count all employees, not some of them. “The SEC doesn’t have statutory authority to exclude workers from the ratio,’’ Mr. Rees said.