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US set to tighten scrutiny of CEO pay versus staff salary

Published on Friday, 19 Jul 2013
Photo: iStockphoto

Public companies would be required to disclose how much more their chief executives are paid than rank-and-file workers under a rule to be proposed next month by US securities regulators, according to two people familiar with the matter.

The US Securities and Exchange Commission (SEC) proposal, part of the 2010 Dodd-Frank overhaul of financial markets, would require companies to calculate and disclose their CEO's compensation as a multiple of average worker pay, sources said.

Groups representing corporations oppose the law's pay-ratio mandate, saying the information will be difficult to compile and isn't material to investors. Backers say the data would help investors monitor CEO pay and staff morale.

The SEC could vote to introduce the regulation as soon as 21 August, said one of the sources. If approved, the vote would open a lengthy public-comment period before the SEC would vote on a final version.

Mary Jo White, who took office as SEC chairman in April, has vowed to cut the backlog of rules her agency was required to write under Dodd-Frank.

Proponents of the rule, including unions and activist investors, say mandatory disclosure would help inform shareholders on advisory "say on pay" votes at annual meetings.

Across the Standard & Poor's 500 Index of companies, the average multiple of CEO compensation to that of rank-and-file workers is 204, up 20 per cent since 2009, according to data compiled by Bloomberg. The numbers are based on industry-specific estimates for worker compensation.

The Dodd-Frank mandate has divided Democrats and Republicans in Congress. Democrats have prodded White to move forward with the proposal, while the Republican-controlled House financial services committee voted on 19 June to repeal the provision.

Business groups such as the US Chamber of Commerce have questioned the costs imposed by a rule, information that must be considered by the SEC in any rulemaking.

Thomas Quaadman, vice-president of the chamber's Center for Capital Markets Competitiveness, said business groups asked the SEC last year to hold consultations before proposing a rule.

Some large public companies say the data required to produce the ratio will be difficult to compile and could lead to misleading comparisons about executive pay between companies.

"If they take a straitjacket approach, you are not only going to have a bad rule, but it could harm investors," Quaadman said. "It's the type of rulemaking that has not passed legal scrutiny before."

The AFL-CIO (American Federation of Labour and Congress of Industrialised Organisations) labour union has told the SEC it could reduce the costs of compliance by allowing companies to calculate median pay using statistical sampling. The union also insists foreign and part-time workers should be included in any calculation, said Brandon Rees, acting director of the AFL-CIO's office of investment.

"We believe sampling addresses implementation concerns that have been raised by companies in a way that is consistent with the intent of the act and provides meaningful information to investors," Rees said.

The SEC is also weighing a vote to be taken earlier in August to adopt a proposed rule to strengthen audits of broker-dealers, sources said.

The two-year-old proposal - a response to Bernard Madoff's Ponzi scheme - mandates an audit of a broker's compliance with SEC rules for maintaining custody of a customer's securities and cash. The proposal also calls for a registered public accounting firm to review the broker's controls for assuring compliance with those rules.

Once adopted, the broker-dealer rule would facilitate the Public Company Accounting Oversight Board's authority under Dodd-Frank to set the standards for and oversee the audits of broker-dealers. Bloomberg

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