Proposed Rule on CEO-Worker Pay Ratio is Good for Long-Term Shareholder Value
The SEC has proposed a draft rule mandated by the Dodd-Frank Act requiring disclosure of the ratio of CEO compensation to the compensation of their median employee. The pay ratio would provide shareholders with comparable information regarding the management of human capital and another line of sight on to CEO pay, both critical to long-term value creation.
The SEC is seeking investor comments:
- Comments were due by December 2, 2013, but the Agency still appears to be accepting comments.
- Submit comments at: http://1.usa.gov/16g3WfQ or email them to: email@example.com
- File number: S7-07-13
- The full text of the proposed rule: https://www.federalregister.gov/articles/2013/10/01/2013-23073/pay-ratio-disclosure
- View CtW Investment Group’s comment letter here.
The new disclosure would aid investor evaluation of human capital management
- Long-term shareholder returns are widely acknowledged to be the result of effective management of human capital resources. Recent academic research finds companies with highly-satisfied employees enjoy larger returns, higher valuations, and superior operating performance.
The rule adds to investors’ toolkit for analyzing CEO pay
- Recent academic research shows the vast bulk of annual executive pay at large corporations cannot be explained as a competitive return to a factor of production. Public company executives have seen their incomes increase much faster over the past two decades than those of highly paid professionals in other occupations.
- With existing benchmarks, particularly peer company comparisons, proving easy to manipulate, shareholders need additional benchmarks against which to measure CEO pay in order to avoid paying more than strictly necessary to recruit competent managers.
The proposal balances cost concerns with disclosure benefits
- Responding to concerns the ratio could be a complex, time-consuming and costly process, the SEC proposal gives companies the flexibility to choose their own method to determine the median pay.
- According to Nell Minow, co-founder of Governance Metrics International and Institutional Investors Services, the agency has done a “terrific job of balancing the need to have better information with the difficulty of producing that information.”
CtW Investment Group’s comment letter contains analysis showing higher CEO pay ratio leads to lower investor returns. View it here.