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 U.S. securities regulators, according to two people familiar with the matter.
The Securities and Exchange Commission 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, said the people, who spoke on condition of anonymity because the commission’s agenda has not been made public.
Groups representing corporations oppose the law’s pay-ratio mandate, saying the information will be difficult to compile and isn’t material to investors. Supporters say the data would help investors monitor CEO pay and employee morale.
The SEC could vote to introduce the regulation as soon as Aug. 21, said one of the people. If the proposal is approved, the vote would open a lengthy public-comment period before the commission would vote on a final version.
SEC Chairman Mary Jo White, who took office in April, has vowed to reduce the backlog of rules her agency was required to write under Dodd-Frank. SEC spokesman Judith Burns declined to comment.
Proponents of the rule, including unions and activist investors, say mandatory disclosure would help inform shareholders on advisory “say-on-pay” votes at companies’ 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 percent 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 a proposal, while the Republican-controlled House Financial Services Committee voted June 19 to repeal the provision.
Business groups such as the U.S. Chamber of Commerce have questioned the costs imposed by a rule, information that must be considered by the SEC in any rulemaking.
Thomas P. Quaadman, vice president of the Chamber’s Center for Capital Markets Competitiveness, said business groups asked the SEC last year to hold a roundtable to solicit views 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 straight-jacket approach, you are not only going to have a bad rule, but it could harm investors,” Quaadman said in a phone interview yesterday. “It’s the type of rulemaking that has not passed legal scrutiny before.”
The AFL-CIO 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 in a phone interview.
The SEC also is weighing a vote earlier in August to adopt a proposed rule that would strengthen audits of broker-dealers, the people said. The proposal, which wasn’t required by Dodd- Frank, grew out of the SEC’s response to Bernard Madoff’s Ponzi scheme. The five-member commission could vote on the matter as soon as Aug. 7, one of the people said.
The two-year-old proposal 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.
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