Menendez Leads Call to SEC to End Delay in Requiring CEO Pay Ratio Disclosure

Menendez Leads Call to SEC to End Delay in Requiring CEO Pay Ratio Disclosure

CEOs out-earn their typical employees an average 335:1


WASHINGTON, D.C. – U.S. Senator Bob Menendez (D-N.J.), a senior member of the Senate Banking Committee, today led a letter to the head of the Securities and Exchange Commission (SEC) urging the Wall Street regulatory agency to cease any delay in implementing a Congressionally-mandated rule that requires publicly traded companies to disclose to investors the pay ratio between their chief executive and median employee.  Last month, SEC Acting Chair Michael Piwowar unilaterally decided to reopen the public comment period despite the fact that the SEC adopted the final rule 18 months ago.
 

The letter was cosigned by Sens. Jack Reed (D-R.I.), Elizabeth Warren (D-Mass.), Cory Booker (D-N.J.), Richard Durbin (D-Ill.), Chris Van Hollen (D-Md.), Jeff Merkley (D-Ore.), Al Franken (D-Minn.) and Bernie Sanders (I-Vt.).

“We are concerned that your unilateral decision to open a second public comment period on a rule that has already been adopted by the SEC is solely intended to discredit the rule and generate momentum to repeal the statutory requirement,” the senators wrote to SEC Acting Chair Piwowar.  “Moreover, we are alarmed that your remarks appear to solicit comments from issuers only, improperly overlooking the views of the thousands of investors that submitted comments to the SEC prior to its adoption of the final rule.” 

Sen. Menendez authored the provision requiring disclosure of the ratio, which was included as Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The Menendez provision requires publicly traded companies to disclose the ratio of what they pay their CEO to the compensation of their median worker.  The vast majority of the 287,400 letters the SEC received on the proposed rule during the initial comment period, including from a wide range of institutional investors and investment managers, strongly supported the rule. 

Sen. Menendez has led the effort in calling on the SEC to issue the rule needed to implement the pay ratio disclosure requirement since the law passed in 2010, including letters in 2011, 2012, 2013, and 2014.

“For nearly seven years, investors have been waiting for this disclosure, and now as the first reporting period has just begun, you have inexplicably halted this important investor tool,” the letter continued.  “We urge you to retract your statement opening a new public comment window on the rule and directing SEC staff to reconsider the rule, and we expect the SEC to allow the full implementation of the CEO-to-worker pay ratio disclosure rule to recommence without delay.” 

The senators argued that disclosing CEO-to-worker pay ratio increases transparency and provides critical information to investors to better understand executive compensation.  Salary disparity continues to widen, with the CEO of an S&P 500 company in 2015 making an average 335 times what their typical employee takes home. 

The full text of the letter is follows and can be downloaded here

March 21, 2017

The Honorable Michael Piwowar
Acting Chair
United States Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549

Dear Acting Chair Piwowar:

We write to oppose any delay in the full implementation of the Securities and Exchange Commission’s (SEC) CEO-to-worker pay ratio disclosure rule.  We are extremely troubled by your decision to open a new comment period on the final rule adopted by the SEC 18 months ago and to direct SEC staff to “reconsider the implementation of the rule.”   For nearly seven years, investors have been waiting for this disclosure, and now as the first reporting period has just begun, you have inexplicably halted this important investor tool.

As you know, section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act indisputably requires publicly traded companies to disclose the ratio of what they pay their CEO to the compensation of their median worker.  During the comment period, the SEC received 287,400 comment letters on the proposed rule, the vast majority of which strongly supported the rule.  Among those commenters were a wide range of institutional investors and investment managers expressing the view that the ratio of CEO-to-worker pay at publicly traded companies is important and material information for investors to help them understand and assess executive compensation and companies’ approaches to developing human capital.  

Pay ratio disclosure helps investors evaluate the relative value a CEO creates, which facilitates better checks and balances against insiders paying themselves runaway compensation.  When a company’s performance improves but only the CEO is rewarded, for example, investors should know, so that they can ask what kinds of incentives this creates for the company’s future performance.  Similarly, when a CEO asks for a raise while giving other employees a pay cut, investors should have this information to help them evaluate whether this is value creation or simply value capture by insiders.  Investors should have this information available to consider when they vote on executive compensation.

In the seven years that investors have been waiting for this disclosure, the gulf between CEO and median worker pay has only widened.  Average CEO pay at the 350 largest U.S. companies, measured by revenue, increased 997 percent from 1978 to 2014, while the compensation of non-supervisory employees rose only 10.9 percent.  In 2015, the CEO of an S&P 500 company made, on average, $335 dollars for every dollar earned by a typical employee.  In light of this trend, the CEO-to-worker pay ratio disclosure rule increases transparency and provides critical information to investors to better understand executive compensation. 

The final rule adopted by the SEC addresses cost concerns and provides appropriate flexibilities to facilitate compliance, including allowing a company to select a methodology to identify its median employee and the employee’s compensation.  The final rule goes to great lengths to accommodate the individual circumstances of each company required to report under the rule.  As such, we are concerned that your unilateral decision to open a second public comment period on a rule that has already been adopted by the SEC is solely intended to discredit the rule and generate momentum to repeal the statutory requirement.

Moreover, we are alarmed that your remarks appear to solicit comments from issuers only, improperly overlooking the views of the thousands of investors that submitted comments to the SEC prior to its adoption of the final rule.  In August 2015, as the SEC voted to adopt a rulemaking pursuant to section 953(b), you made it clear that you believe the requirement is nothing more than an attempt by “Big Labor” to shame CEOs, a misguided view with which thousands of investors disagree.  Ultimately, the clear statutory mandate for companies to disclose the ratio of their CEO to median worker pay remains unchanged.

We urge you to retract your statement opening a new public comment window on the rule and directing SEC staff to reconsider the rule, and we expect the SEC to allow the full implementation of the CEO-to-worker pay ratio disclosure rule to recommence without delay.  Please provide a response no later than April 7, 2017, and please include in your response an estimate of the cost of your actions to open a new public comment period and to devote staff resources to reconsideration of the rule.

Sincerely,

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