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What you need to know for 01/17/2017

CEO pay ratio proposal just a shame game?

CEO pay ratio proposal just a shame game?

Tell me how this makes sense: Public companies soon could be required to compute a CEO-to-worker pay

Tell me how this makes sense: Public companies soon could be required to compute a CEO-to-worker pay ratio for filings made with the U.S. Securities and Exchange Commission.

The proposal isn’t final yet — the agency still is accepting comment on it — but an analysis by the SEC’s own staff estimates that running the numbers to produce the ratios will cost affected companies a combined 546,000 hours of additional in-house personnel time and $72.8 million in fees for outside consultants.

All to show how a company like General Electric pays CEO Jeffrey Immelt in comparison to the typical GE worker.

The roots of the proposal are in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which sought to curb corporate activities blamed for the country’s financial meltdown in 2008. CEO pay was one target, and the SEC was put in charge of crafting regulations to meet Congress’ mandates.

Under the pay ratio proposal, some 3,800 publicly traded companies will have to compare total CEO compensation to the median of the total annual compensation paid all company employees. Companies already must calculate total compensation — salary plus bonuses, perks and benefits — for their five highest-paid executives and disclose it in annual filings.

But calculating the median pay of all employees would be new — and potentially costly. So the SEC would give companies some leeway in making their calculations, as long as a sound methodology was used. The ratios could begin showing up in filings by late 2015.

Not even the SEC, though, is sure why Dodd-Frank required the ratios. A discussion of the proposed rule, posted on the agency’s website, notes little guidance from Congress on the measure. “In particular,” it says, “the lack of a specific market failure identified as motivating the enactment of this provision poses significant challenges in quantifying potential economic benefits, if any, from the pay ratio disclosure.”

One SEC commissioner who opposed the proposal saw no purpose in it other than “to name and, presumably in the view of its proponents, shame” companies and their executives.

Indeed, Bloomberg News earlier this year devised its own CEO-to-worker pay comparison at some of the country’s biggest companies and found the eye-popping ratio of 1,795-to-1 at J.C. Penney Co. when Ron Johnson led the faltering retailer in 2012.

Other studies have found less startling, but rising, ratios: 20-to-1 in the 1960s; 29-to-1 in the 1970s; 120-to-1 in the 1990s; and almost 400-to-1 in 2000.

Donald Siegel, dean of the School of Business at the University at Albany, isn’t a fan of Dodd-Frank, which he says may have had a goal of increasing public company transparency but which really was “haphazard” and “politically motivated.”

The legislation came in response to perceived corporate greed and “boards [of directors] not doing a good job of policing CEO pay,” says Siegel, a co-author of “The Oxford Handbook of Corporate Governance,” an 800-page academic tome published in March.

If Siegel were to argue in favor of the pay ratio proposal — which he says he wouldn’t do — he’d say it gave prospective investors more information about a company. “I don’t buy that,” he says, calling Dodd-Frank “onerous and unnecessary.”

But the legislation required the SEC to develop fitting regulations, which led to the pay ratio proposal.

“This was included in the legislation,” Siegel says, even if Dodd-Frank “wasn’t clear how to implement it.”

Marlene Kennedy is a freelance columnist. Opinions expressed in her column are her own and not necessarily the newspaper’s. Reach her at marlenejkennedy@gmail.com.

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