It seemed a simple enough task. The Dodd-Frank Act required companies to regularly report how much their CEOs make compared to the pay of their median workers.
Nearly two years after the act was enacted, however, implementation remains far off. Consumer and labor groups complain that the Securities and Exchange Commission, which must implement the provision, is buckling under pressure from business and Republican complaints that it imposes unjustified costs on business. The GOP-led House Financial Services Committee has voted to repeal the provision.
For her part, SEC Chairwoman Mary Schapiro in April told the House Financial Services Committee that the delay isn't due to ideology but because of the sheer complexity of the rulemaking.
"It is a very, very difficult rulemaking," she said at the time. "If it was a matter of adding up all the W-2s involving employees and comparing that to the CEO, we could have done it quickly. But it's quite a prescriptive provision in the law, and there are very extensive record-keeping requirements."
Previously companies were required to provide total compensation for only five named executive officers, which can be done manually. There are now so many employees covered that the reporting must be automated, she said. "That can't be done manually when you have 60 or 70 or 80,000 employees around the world. There are a lot of questions about how do we treat part-time employees in this calculation. What about joint venture employees? Employees overseas? The definition of total comp is quite complex and includes calculating pension benefits."
The requirement wasn't meant to be complicated. When Sen. Robert Menendez, D-N.J., added the mandate to the Dodd-Frank Act, he wanted a simple ratio to underscore the high level of CEO compensation. "I wrote this provision so that investors and the general public know whether public companies' pay practices are fair to their average employees, especially compared to their highly compensated CEOs," he said in a January 2011 letter asking Schapiro to act quickly and without watering down the requirement. "At a time when companies are laying off workers, employees deserve to know whether their executives are sharing proportionately in any sacrifices."
Bartlett Naylor, a financial policy advocate for Public Citizen, argues there's no reason compliance should be difficult. He and his counterparts at other consumer groups and labor unions have repeatedly met with SEC officials to get them moving.
"It is mandated by Dodd-Frank. It is simple. It is useful in exposing where CEO pay is out of line," he says. He suggests the SEC "has compromised its independence to political pressure." The groups have barraged the SEC with 21,000 nearly identical comments demanding action.
But the delay comes after a federal court struck down a rule that made it easier for shareholders to gain access to company proxies. The court said the SEC had not conducted sufficient cost-benefit analysis. Business groups have argued that the benefits of providing the information don't offset the high costs of compiling it.
Diann Howland, vice president, legislative affairs, at the American Benefits Council, one of the business groups urging the SEC to look closely at the issue, says the provision is very complex. "It has to be something workable," she says. "There are so many unanswered questions about compensation. What do you do about overseas employees? Different retirement plans? Stock plans? There may be other things of value employees get. There are so many data points to calculate."
In February the American Benefits Council joined a number of other business groups in urging the SEC to consider the cost of the provision and the utility of the information before moving forward.
The House Financial Services Committee in March 2011 approved legislation sponsored by Rep. Nan Hayworth, R-N.Y., that would remove the requirement. She called the provision "a logistical nightmare."
Hayworth said: "Requiring that these numbers be reported in every disclosure ... adds substantially to the cost of compliance with the new law."
Ira Teinowitz covers financial regulation for The Deal magazine.