Public companies will now have to disclose how much their CEO’s pay differs from the company’s workers under a rule passed by the Securities and Exchange Commission Wednesday.
The highly controversial rule, required under Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, mandates that public companies disclose the ratio of the annual total compensation of a public company’s CEO to the median of the annual total compensation of the company’s employees.
SEC Chairwoman Mary Jo White stated at the open meeting at SEC headquarters in Washington to vote on the rule the many “divided thoughts and heated dialogue” on the “controversial, contentious” rule, which garnered a whopping 287,400 comment letters to the agency.
The agency voted 3-2 to pass the rule, with the agency’s two Republican commissioners casting dissenting votes. Commissioner Daniel Gallagher called the pay ratio rule “the most useless of all our Dodd-Frank mandates,” adding that “shaming” companies into lowering CEO pay “is not the province of the securities laws.” He added that “reasonable investors” will not find the rule “useful.”
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As White explained, the pay ratio disclosure “will provide shareholders with additional company-specific information that they can use when considering a company’s executive compensation practices, an important area of corporate governance on which shareholders now have an advisory vote.”
The final rule would also allow companies to choose any date during the last three months of a company’s fiscal year to determine the median employee, and, to further reduce costs, would permit companies to use the same median employee for three years unless there has been a change in the employee population or employee compensation arrangements that the company reasonably believes would result in a significant change in the pay ratio disclosure, White stated.
The final rule also provides companies with “substantial discretion to use estimates and sampling as a means to determine the median employee and the employee’s compensation,” and as required by the JOBS Act, the final rule excludes emerging growth companies, smaller reporting companies, foreign private issuers, registered investment companies and registrants filing under the U.S.-Canadian Multijurisdictional Disclosure System.
The U.S. Chamber of Commerce is already threatening action against the SEC.