Feb. 13, 2018

CEO-Worker Pay Ratio Data Being Revealed for First Time

More Than Seven Years in the Making, a Dodd-Frank Regulation Requiring Corporations to Report Their Internal Pay Gaps Is Finally Producing Results

Experts available for interviews

Public Citizen: Lisa Gilbert, lgilbert@citizen.org; Bartlett Naylor, bnaylor@citizen.org
AFL-CIO: Brandon Rees, brees@aflcio.org
AFSCME: John Keenan, jkeenan@afscme.org
As You Sow: Rosanna Landis Weaver, rlweaver@asyousow.org
Institute for Policy Studies: Sarah Anderson, sarah@ips-dc.org
New York City Comptroller's Office: Michael Garland, mgarlan@comptroller.nyc.gov
Segal Marco Advisors: Maureen O'Brien, mobrien@segalmarco.com

Contents:

Background
Timeline: the pay ratio regulation’s long and bumpy road
Finding and analyzing the data
Select SEC comment letters
First Companies to Report

Background

For the first time in history, U.S. publicly traded companies are beginning to report the ratio between their CEO and their median worker pay to the U.S. Securities and Exchange Commission (SEC). It took seven and a half years for this disclosure regulation to go into force after becoming law in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Section 953b). While publicly held firms have had to report executive compensation information for many years, they have not until now been required to disclose employee pay data.

This regulation has survived fierce attacks from multiple fronts: Republicans in Congress and on the SEC, Trump administration Treasury officials and all the major corporate lobby groups (see detailed timeline below). Opponents argued the pay ratio data was not of material interest to investors and would be extremely burdensome to calculate. However, this has been proven to be untrue.

Supporters of the rule included a large number of institutional investors and responsible investment groups, labor unions, Public Citizen, the Institute for Policy Studies and Americans for Financial Reform. They dismissed the corporate complaints about implementation difficulties and emphasized that pay equity is an important indicator of enterprise health and economic fairness. Many of them cited the writings of management guru Peter Drucker and J.P. Morgan, both of whom argued that ratios higher than 20-1 are bad for business.

In 1965, average pay ratios were around the 20-1 range. But since 1995 they’ve grown from 122-1 to 347-1 in 2016, according to the AFL-CIO’s Executive PayWatch. In other words, in 2016, the average big company CEO was compensated in about one day what the average U.S. worker earned in a year.

The release of the new pay ratio data will boost efforts at the municipal and state government levels to apply tax penalties on firms with high ratios. Portland, Ore. already has adopted such a tax, while proposals are under consideration in San Francisco, Illinois, Minnesota, Massachusetts and Rhode Island. At the international level, the U.K. will begin requiring British firms to report their pay ratios in June 2018, and India began disclosure in 2013.

Timeline: the pay ratio regulation’s long and bumpy road

July 20, 2010: Pay ratio included in Dodd-Frank Wall Street Reform and Consumer Protection Act (Section 953b). Chief architect: U.S. Sen. Robert Menendez (D-N.J.).

September 18, 2013: The SEC issues a proposed pay ratio rule and opens public comment, ultimately receiving more than 304,000 letters, the vast majority of which are strongly in favor. Supporters include four state officials responsible for their state pension funds and more than two dozen institutional investors and investment managers.

June 2015: Sen. Elizabeth Warren (D-Mass.) sends a scathing, 13-page letter to SEC Chair Mary Jo White documenting specific broken promises made to senators regarding commitments to finalize the pay ratio rule and other regulations. The letter adds to the pressure applied on the SEC by Rep. Keith Ellison (D-Minn.), Menendez and many other policymakers.

July 9, 2015: AFL-CIO files a FOIA request for records pertaining to the SEC’s decision to delay a final rule on pay ratio disclosure. Americans for Financial Reform organizes a petition signed by 165,000 people demanding SEC action.

August 5, 2015: The SEC votes to finalize pay ratio disclosure regulation in a 3-2 vote, with Republican Commissioners Daniel Gallagher and Michael Piwowar voting against. Effective date, with direction: “Registrants must comply with the final rule for the first fiscal year beginning on or after January 1, 2017.”

February 6, 2017: Acting SEC Chair Piwowar maneuvers to delay the regulations by instructing staff to reconsider implementation and reopening public comment, specifically encouraging input from firms having difficulty with implementation. Instead, the SEC receives more than 14,000 letters, only 30 or so of which expressed opposition to the regulation, according to the legal news site JD Supra.

February 22, 2017: The Business Roundtable sends a letter to the Trump White House, identifying repeal of the pay ratio regulation as one of the corporate lobby group’s top priorities.

June 8, 2017: The U.S. House of Representatives passes a broad deregulatory bill, the Financial CHOICE Act, which would repeal the pay ratio rule. The U.S. Senate does not take similar action.

October 6, 2017: U.S. Treasury recommends repealing the pay ratio disclosure regulation.

January 2018: First pay ratio data begins to appear in SEC filings.

Finding and analyzing the data

Companies are required to report the pay ratio for their first fiscal year beginning on or after Jan. 1, 2017. Some data is starting to trickle out, while most corporations will report their ratios in proxy statements to be filed in late February through April. These statements are available on the SEC website. Enter a company’s ticker symbol or name here and then view the company’s form Def 14a.

High ratios: This indicates that the firm has low worker pay, or high CEO pay, or a combination. Firms are required to calculate median worker pay based on their global workforce, not just their U.S. workers. Thus, firms with large numbers of employees in low-wage countries are likely to have higher ratios.

Low ratios: This indicates CEO pay is relatively low, or workers are better paid, or a combination. Analysts also will be scrutinizing low ratios where CEO pay is high to determine whether the company may have manipulated worker compensation data to narrow their reported gap. The SEC allows significant flexibility in determining median worker pay, including the use of statistical sampling.

Ratios that differ significantly from peer firms: This will be one source of information for investors to measure firms against their competitors by identifying extreme pay disparities that can reduce financial performance by undermining employee morale and productivity.

Select SEC comment letters

As noted above, public comments to the SEC have been overwhelmingly in favor of the pay ratio disclosure rule.

2013/2015 submissions: In response to the initial public comment period, the SEC received more than 304,000 letters, including:
AFL-CIO, and here
AFSCME
Americans for Financial Reform
Demos
Economic Policy Institute
Institute for Policy Studies
Members of the U.S. House
Members of the U.S. Senate
Sen. Robert Menendez
NYC Comptroller
Public Citizen (including discussion of analytics)
Teamsters
UAW

Select 2017 submissions:
State Treasurers Press SEC Nominee, Congress on CEO Pay Disclosure Rule
100 investors representing $3 trillion in assets
AFL-CIO
AFSCME
CALSTRS
Institute for Policy Studies
Lynne Dallas, Professor of Law, University of San Diego
Network for Sustainable Financial Markets
Religious Society of Friends
Rep. Keith Ellison, et al., members of Congress
Sen. Robert Menendez and eight other senators
Sen. Tammy Baldwin
SharePower Responsible Investing, Inc.
Sue Ravenscroft, Accounting Professor, Iowa State University
Teamsters
Trillium Asset Management
US Social Investment Forum
Walden Asset Management

First Companies to report

Invivo has reported. This is a small company with 15 employees. Its ratio: 16-1. Others expected early are Hewlett Packard and Schlumberger.

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