Pay-Ratio Battle Wages On

Employers say compliance with anticipated rules from the SEC requiring organizations to provide information on the ratio of employee pay to CEO compensation will be difficult -- and possibly, extremely expensive to obtain. They also question the usefulness of such information.

Wednesday, November 30, 2011
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Before the end of the year, the Securities and Exchange Commission hopes to issue proposed rules that would require publicly traded employers to calculate the ratio of median employee pay to CEO compensation.

But if most employers had their way, the pay-ratio mandate of the Dodd-Frank Act wouldn't happen at all.

To that end, Rep. Nan Hayworth, R-N.Y., earlier this year introduced the Burdensome Data Collection Relief Act, aimed at repealing the pay-ratio requirement of Dodd-Frank. But while Hayworth's bill has bipartisan support in the House, many believe its prospects in the Senate aren't promising.

During a Practising Law Institute event on Nov. 9, Meredith Cross, director of the SEC's division of corporate finance, confirmed that the agency was still shooting to craft proposed rules by year's end that weren't "unduly burdensome." Some experts, however, believe the date may not be realistic considering everything else that's on the SEC agenda.

Among the options reportedly being weighed by the SEC is the use of random statistical sampling, an approach put forth by the AFL-CIO during the summer.

On Nov. 11, the Center on Executive Compensation in Washington specifically took aim at the sampling approach in a letter to the SEC.

Sampling, writes the Center's Senior Vice President and General Counsel Timothy Bartl, "would not address the underlying issues that make the collection and analysis of global compensation so difficult and costly."

That approach, he writes, would create added complexity and be time-consuming, because most companies "do not maintain a centralized list of employees that is linked to their compensation data."

He suggested the SEC consider other methods. If "the SEC is willing to use an estimate to approximate median employee compensation through statistical sampling," he writes, "why require companies to divert valuable time and resources to collecting an estimate of median employee pay when similar estimates are currently available [elsewhere]?"

Along with Bartl's letter, the Center sent the findings of a just-completed study of 95 mostly Fortune 500 companies that showed the vast majority would have difficulty calculating the pay ratio.

More than four of five (84 percent) of those polled indicated it would not be easy to obtain the information necessary to make such a calculation, with more than three-quarters (76 percent) reporting they would have to manually calculate some, if not all, of the information to determine a ratio.

Half of the respondents said it would take at least three months or more to arrive at a calculation.

Bartl says the findings raise a lot of questions as to whether statistical sampling is the right approach.

"We've encouraged the SEC to strongly consider other approaches in a thoughtful way," he says.

The calculation would be particularly problematic for companies with operations abroad, where other benefits are frequently substituted for cash, according to the Center.

"I may have an employee who's the median in cash, but doesn't participate in in-kind compensation that's common in some countries," says Charlie Tharp, CEO of the Center. "So an employee who may look like the median employee ... may not be ... ."

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That provision was inserted into Dodd-Frank "without an understanding of how difficult it is to collect, analyze and assemble this information," he says.

Tharp also questions how useful the data will be to investors.

The AFL-CIO believes, however, that the provision will provide "greater transparency to investors about their companies' compensation practices for rank-and-file employees," according to a white paper it issued on the subject.

But the ratio could be deceptive, Tharp says. "If a company has very low ratio, you might think it's a good investment, but is that because they overpay below the CEO level or they outsource or have vendors that provide a lot of services at low-wage positions?"

Some experts predict calculating the pay ratio could end up costing publicly traded companies millions.

"I've met with publicly traded companies that say, 'We operate in 76 different countries, we have a mix of full- and part-time employees and we have payroll systems not only in each country, but sometimes in each state," says Katie Vlietstra, a Washington-based public policy analyst for WorldatWork in Scottsdale, Ariz. "So HR leaders are truly concerned about the difficulty and cost of doing this."

Most companies simply don't have the internal infrastructure to handle compliance with such a requirement, she says.

Vlietstra says she's particularly troubled by the fact that it could end up diverting funds that otherwise could be used to open more businesses, create jobs and train workers.

"If you were to walk the streets of New York and ask people what they think, they probably would say it is a great idea," she says. "But at what cost?"



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