The pay ratio mandate in section 953(b) of the Dodd-Frank Act requires companies to disclose the ratio of the median employee pay to CEO pay as disclosed in the summary compensation table. This presents considerable challenges to companies as there is no business purpose for collecting pay information for non-executive employees in this way. If implemented, companies will be required to collect and reconcile this information from disparate pay systems across dozens of countries with differing wage and benefit laws, and adjust the data for currency fluctuations. This information is not available at the touch of a button, and companies will be forced to divert a considerable amount of resources to comply. The SEC’s proxy disclosure rules are intended to educate investors and promote their understanding of a company’s executive compensation practices so that they can make better investment decisions. However, the pay ratio provision does not provide material information to investors, would be extremely costly to implement and is inconsistent with the purposes of compensation disclosure in a company’s proxy statement. Moreover, this number is potentially misleading to investors as the ratio is not comparable among companies due to different operational structures, geographic locations and business strategies.
In 2013, the SEC proposed rules implenenting the pay ratio which were finalized in 2015. Starting in 2018, companies will begin to provide pay ratio disclosures covering compensation for fiscal year 2017. Despite the efforts of the SEC to provide companies with flexibility to lower compliance costs, the final rule will still force comapnies to unneccesarily incur substantial costs which would be better spent elsewhere to create a disclosure which provides no material information. The Center believes the pay ratio requirement is an example of a mandate where the costs far outweigh the putative benefits and accordingly should be repealed.