Change Part-Time Employee Rules to Address Misleading Pay Ratios, MIT Lecturer Urges SEC
March 24, 2018
With first-time pay ratios being watched by companies and the press alike, former MFS Investments Chairman Robert Pozen, currently an MIT Lecturer, wrote in the Wall Street Journal this week arguing that the SEC should fix its pay ratio rules promote misleading disclosures in the way they treat part-time employees. Pozen focuses on the lack of comparability among ratios between retail employees and other industries. He criticizes the requirement that companies include part-time employees in the median employee calculation without any adjustment reconciling the hours they work. Pozen notes that “that 31% of retail employees work part-time, compared with 17% for the rest of American employees.” Thus, he understandably calls the comparison of a full-time CEO with part-time employees “hardly a fair measure of the company’s compensation structure” (the same argument applies to the ratio mandate generally). Presumably, this is because the ratio does not demonstrate whether such part-time employees are paid relative to the market. Thus, he argues that the SEC should allow companies to annualize part-time employees’ pay and to convert such employees into full-time equivalents, thus creating an “apples-to-apples” comparison with full-time CEOs. He notes that the SEC could accomplish the former with an administrative interpretation but that the latter would require notice and comment rulemaking, a longer endeavor.
Using an example of a midsize retail company with 1,200 primarily U.S. stores and 25,000 employees, Pozen and an assistant calculated a pay ratio under the current rules of 408. When the part-time employees pay was annualized, the ratio dropped to 355, and by converting part-time employees to FTEs, the ratio dropped to 263.
Pozen’s calculations demonstrate why this aspect of the pay ratio should be changed quickly. However, with so many other nuances of the pay ratio calculation also rendering company comparisons difficult, if not impossible without substantial detailed context, it is one slice of an argument of why the ratio should be eliminated altogether.