US now requires disclosure of the CEO to median worker pay ratio

On August 5, 2015, the US Securities and Exchange Commission released its final pay-ratio rule under the Dodd–Frank Act.

This was a long time coming, given that the Act was passed in 2010. Given the long and tortuous debate about the unintended consequences of such a rule, and then how it should be implemented, the delay is not surprising. In fact, the UK also considered this as part of its most recent reforms ending with the binding vote on executive pay. In the end, the UK rejected the idea.

So far Australia has not considered such a disclosure requirement. This may be because the ratio of executive pay to median worker pay is relatively low. This is, in part, related to from having one of the world’s highest minimum wages and relatively modest executive pay stemming from governance regulation that had it beginnings late last millennium. It also helps that the country has relatively high socio economic mobility contributing to the low inequality ranking in the OECD’s Gini Index (especially compared to the US and UK – see HERE).

US companies will be required to disclose the ratio of the median pay of all employees, excluding the CEO, to the total pay of the CEO as disclosed in that year’s summary compensation table. The calculation for median employee pay can be made for any time during the last three months of the year.

The final rule defines employees as “any U.S. and non-U.S. full-time, part-time, seasonal, or temporary worker (including officers other than the CEO) employed as of the last day of the last completed fiscal year” (p. 216 of the 294 page explanation from the SEC – for those interested, and insomniacs, see HERE).

 The new rule will apply to all U.S. public companies but exempts smaller reporting companies (defined as having a public float of less than $75 million) and emerging growth companies (defined as a having total annual gross revenues of less than $1 billion during their most recently completed fiscal year). It also exempts foreign companies (including Australian companies listing ADRs in the United States).

The rule also contains an exemption for U.S.-based global companies that cannot access the median pay data due to foreign data-privacy laws. New public companies would not need to comply with the new rule until their first annual report and proxy statement after they register with the SEC.

The final rule does not exclude part-time workers or foreign workers. In combination, these factors in the final rule may cause the ratio of CEO pay to median employee to appear relatively high in industries that employ part-time or non-U.S. workers (for example see HERE).

In the near term the primary beneficiaries of the new rule are likely to be compensation consultants, as occurred in Australia with the 2-strikes law. Assistance will be required with peer analyses, and reviewing compensation philosophy and then articulating this for investor disclosure.

Longer term it is likely that the rule will affect most company’s human capital strategy and even business strategy. However, exactly how is unknown, as the rule will no doubt have unintended consequences. Companies off-shoring labour may bring them back on-shore. New technologies and the high paid technologists to run them, may be employed to displace the rapidly unemployable semi skilled workers in manufacturing, to college educated middle management in financial and other services based industries.

For a more detailed perspective on the rule by our GECN partner US firm, Farient Advisors, see HERE.

© Guerdon Associates 2021
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