CEO to Worker Pay Ratio Disclosure Open for Comments

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On September 18, 2013, the SEC voted 3 to 2 to propose a rule which would require public companies to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees. The new rule is required under Section 953(b) of the Dodd-Frank “Wall Street Reform and Consumer Protection Act” of 2010. The proposed rule was published in the Federal Register of October 1, 2013. Interested parties have until December 2, 2013 to file letters of comment with the SEC.

Prior to the vote to propose, the SEC received over 22,000 comment letters and a petition with over 84,000 subscribers related to the new rule. This would indicate a significant degree of interest in the new rule and its consequences. As a service to our constituents, we point out several features of the proposed rule, and encourage you to comment.

In calculating the median compensation figure, “all employees of the registrant” is defined to include all full-time, part-time, temporary and seasonal employees of the company and any of its subsidiaries in the United States and abroad as of the end of the last fiscal year. Independent contractors are not included. Full-time equivalent adjustments for part-time workers would not be permitted. The term “compensation” for all employees is defined as equivalent to the compensation of the CEO as determined for disclosure purposes, and thus includes all salaries, commissions, incentives, pension and other benefits.

For companies with large numbers of employees, “statistical sampling” is allowed; however, the proposed rule does not offer any guidance as to preferred techniques to be used, maximum permissible confidence interval, etc. It is also likely that some companies do not have such information for all full-time and part-time employees in all locations worldwide in a readily accessible repository.

Although we support complete and accurate disclosure of all financial information as essential to the process of informed investment decision making, we are at a loss as to the potential benefits for the investment community to be derived from compliance with the new rule. The overall costs of compensation are disclosed in the audited financial statements of every public company. The compensation of CEO’s and other “named executives” is individually disclosed as well under current regulation. Any competent analyst should find these data sufficient for his needs. Since some companies may encounter significant cost in complying with the proposed new rule, we see it as redundant and unnecessary.

Your opinion may differ. We encourage all concerned to file their comments. The full text of the proposed rule, as well as instructions for filing comments, may be found at the SEC website

About the Author:

Greg is a Derivative Valuation Consultant with Montgomery Investment Technology, Inc. He holds a BS from Carnegie-Mellon University and a PhD in Chemical Engineering with a concentration in Applied Mathematics from Princeton University. His experience spans management at both public and privately held companies, as well as teaching finance at the university level. Greg is a Chartered Alternative Investment Analyst (CAIA) and a Financial Risk Manager (FRM)