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Setting the benchmark in corporate integrity

Pay ratio disclosure leaves directors unconvinced

The SEC’s recent pay ratio proposal has given rise to criticism and suggestions that it is an ineffective way of curbing excessive executive pay

Even as the window for public comments looms large on the horizon, the SEC’s pay-ratio disclosure proposal continues to ignite criticism, the most recent of which stems from company directors.

On September 18, the SEC proposed plans to amend Item 402 of Regulation S-K, which would require companies to disclose the ratio of CEO pay to the median annual total compensation of all employees. The proposal has come amid fierce debate with regards to excessive executive compensation and, once put in place, is expected to narrow the pay gap somewhat.

The proposal however does not enforce a specific methodology for calculating pay ratio and the determination of median pay is left to the discretion of the company. “This proposal would provide companies significant flexibility in complying with the disclosure requirement while still fulfilling the statutory mandate,” said SEC Chair Mary Jo White in an SEC press release.

The proposal has since given rise to numerous criticisms, and whilst proponents argue that it would curb excessive executive pay, opponents are labeling the rules entirely unnecessary; highlighting that the proposal amounts to mere disclosure and does not require that any specific action be taken. Others argue that the administrative costs could well offset any potential gains and that the lack of a uniform formula for calculating median pay will give rise to incomparable and corruptible results.

A recent survey conducted by NYSE Governance Services, Corporate Board Member and Pay Governance states that the vast majority of directors believe CEO/media employee pay disclosure to be an ineffective reform measure. More specifically, a mere 18 percent of respondents agree that the SEC’s proposals will see improvements to corporate governance, whereas 82 percent consider existing executive pay programmes to be working well.

The report goes on to consider the effectiveness of say on pay, with under half of the respondents stating that it has had a positive effect on corporate governance and as little as a third believing that pay programmes have improved as a result. However TK Kerstetter, chairman of the NYSE Governance Services and Corporate Board Member said in a recent Pay Governance press release, “Even though I have traditionally opposed rules and legislation that let shareholders sit on the shoulders of directors and second guess their decisions without having access to all the facts, you can’t help but admit that say on pay has helped compensation committees improve their governance with respect to the pay for performance structure of plans, severance plans, and improved disclosure of the committee’s thought process.”

The pay ratio disclosure proposal has come in a time wherein discussions of excessive executive pay have gained ground and regulators are scrambling to 6find an effective method of settling the disparity. The results of a report undertaken by the Institute for Policy Studies in September shows that the pay gap has widened in recent years, from 195-1 in 1993 to 354-1-1 in 2012.

The 60-day public window for comments on the pay ratio proposal closes on December 2 and the new rules are expected to take effect by 2016 proxy season.

 

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