Lou Rohman, vice president of XBRL Services, Merrill Corporation | November 06, 2017
New regulatory direction
The SEC’s future direction under new Chair Jay Clayton is still unfolding as I discussed earlier this year and a few months ago. New leadership in Washington is focused on streamlining regulation. In Congressional testimony and speeches, Clayton made it clear he wants to improve the opportunities for companies to raise capital while still protecting investors. SEC Commissioners have wide latitude in how they interpret and apply the SEC’s mission to balance the needs of issuers and investors. During a speech in July 2017 before the Economic Club of New York Clayton made his underlying focus clear, stating “Our analysis starts and ends with the long-term interests of the Main Street investor; or as I call them, “Mr. and Ms. 401(k).”
Clayton is not starting with a clean rule slate to implement his goals. After the financial crisis in 2008, Congress passed the Dodd-Frank Act designed to prevent many issues from recurring. Under Mary Jo White, the SEC implemented many Dodd-Frank mandates but several remain outstanding including Pay Ratio disclosures. Excessive executive compensation drew strong public and political scrutiny when so many investors lost money during the crisis. To address this, Dodd-Frank required public companies to disclose the ratio of their CEO's compensation compared to employees. Other countries already require pay ratio information. Despite public frustration, shareholders rarely impact how much executives receive in salary and bonuses. In 2015, the SEC finally passed a rule that would require the mandated pay ratio information in proxy statements and other filings starting with the 2017 fiscal year end (initial filings in spring 2018).
Pay Ratio debate
Before Clayton was confirmed, Acting Chair Piwowar requested public comment regarding the upcoming Pay Ratio mandate to see if is too much of a burden. He stated, in part " I am seeking public input on any unexpected challenges that issuers have experienced as they prepare for compliance with the rule and whether relief is needed.” Overall, public comment strongly supported implementing the rule with no delays. Some companies and professional organizations indicated that calculating the employee compensation would be time-consuming and costly and questioned the benefit to investors. Conversely, many investor advocates feel that Pay Ratio is a stark metric revealing critical information to the public about a company's overall direction and compensation practices. A recent study by the Economic Policy Institute surveyed 350 of the largest companies in the United States. It revealed that in 2016 the average CEO received 271 times more than the typical employee. Chief executives of these companies made an average of $15.6 million in 2016, or 271 times more than what their typical worker made last year.
Given the public support and market focus, I believe the rule will be implemented.
Companies should be prepared to meet the mandate and report pay ratio information in their upcoming proxy statement.
Steps to disclose Pay Ratio discussed in a previous blog post:
- Determine median, annual employee compensation
- The SEC provides many methods, so companies need to determine the best method for them, based on their employees and compensation practices.
- Determine annual CEO compensation (already a required disclosure)
- Calculate the ratio of the CEO compared to employee compensation
- Disclose the ratio and method(s) used to determine in the next annual proxy statement
Note: Smaller Reporting Companies, Emerging Growth Companies and Foreign Private Issuers are exempt from this requirement.
In September 2017, the SEC issued guidance to assist filers with their Pay Ratio calculations. This signaled that the rule will likely move forward with no changes or delays. It will be interesting to see the actual ratios as they are reported.
After the Pay Ratios are reported, much thought will go into how to improve disclosures around executive compensation, especially since the SEC has touched on more executive compensation topics than just Pay Ratio.In 2015, the SEC proposed a rule to require every public company to disclose and tag their clawback policy in XBRL. Additionally, the Pay vs. Performance proposal would require companies to tag and report in XBRL executive compensation values. The SEC's activities on these topics has made it clear that this is a focus area and that the SEC is planning to require much more transparency for executive compensation disclosures.