A closer look at the implications of the SEC’s latest disclosure ruling
Last week, the SEC approved a widely discussed new rule that requires listed companies to disclose the ratio of pay of their CEO to that of their median employee.
Supporters include activist investors, who cite increased transparency and a move towards true pay fairness at US companies. Two Republican commissioners voted to oppose the rule change, however.
The UK has had a similar requirement in place for a few years, where companies must disclose the annual percentage change in both CEO remuneration and employees’ pay from the previous year though it’s widely thought to be too flexible a benchmark to be useful for real comparisons.
‘The UK legislation ultimately is about creating a framework, giving greater transparency, and the ability to compare similar companies, and looks to investors and companies to reach a position with which they would both be comfortable,’ says Mirit Ehrenstein, a professional support Lawyer at Linklaters. ‘So far we have not seen institutional investors focusing on the percentage change ratio - they are more concerned about linking pay to performance and appropriate returns to shareholders.’
There’s a danger, she continues, that too much flexibility means there’s a risk that the SEC’s enforced disclosures could become as meaningless as the UK’s has arguably become.
Victor Li, vice president for Kingdsale Shareholder Service’s governance advisory and proxy analytics arm, says however that the SEC ruling differs from the UK’s laws on a fundamental level. ‘The median pay depends on the distribution of employees in a company but makes the disclosure a bit more straightforward and probably more accurate,’ he explains.
‘Investors and the public like ratios because they’re a simple representation, as we’ve seen with other pay ratios in the US and Canada, such as the comparison between the CEO’s total pay and that of the next highest named officer which provides some very direct indications.’
Li adds that the latest ruling in the US will provide a data point that has ‘been missing for a long time’, in that it addresses the fairness of a company’s overall remuneration structure and is comparable over sectors or between competitors.
Will investors and analysts take note though? Not necessarily, says Graham Rowlands-Hempel, a consultant at Linklaters, but there are still pre-emptive actions issuers can take. ’One thing they can do, if they have to comply with the US regulation, is to think about whether they can get this information together,’ he explains. ‘I think it’ll be quite onerous, even with the built-in flexibility. For companies with large numbers of employees worldwide or very different employees, it will take some work to make the disclosure meaningful. ‘
Li agrees. ‘It will be an additional burden for issuers and although it looks like an easy disclosure, in reality it won’t be an easy thing to calculate,’ he adds. ‘For large companies with different operations, contractors, part-time workers, high employee turnover, it’ll be hard to find the median employee.’
That being said, Ehrenstein points out that changes to UK rules have promoted ‘much greater engagement’ between issuers and their investors. ‘Companies have to say in their remuneration reports how shareholders have voted on the pay resolutions in the previous AGM and whether there was a significant vote against, any known reasons [for this] and company action in response,’ she summarizes.
Engaging your constituents on the topic might be as simple, extends Rowlands-Hempel, as speaking to investors, analysts and other groups and asking what do you want out of this? ‘It’s interesting – we’ve never seen [IR’s role] as something that’s being discussed,’ he says. ‘I think what companies are doing is just complying with the regulation.’