by Cydney Posner
In this article from Bloomberg, institutional investors and proxy advisory firms expressed their views on the value of the SEC’s new pay-ratio disclosure (which, for most companies, will not be reported until the 2018 proxy statement). (See this PubCo post and this Cooley Alert, SEC Adopts Final Pay-Ratio Rule.) Is there any consensus view? Of course not.
According to the director of global governance at CalPERS, quoted in the article, the new rule should provide shareholders with more clarity on executive pay and reduce the need for “back-of-the-envelope” calculations: “’This new rule is a chink of light in a cloudy subject….It’s going to start a conversation about pay throughout the company. ….If we see a pay ratio that is surprising then we would engage with the company,’ she says.” She also believes that the pay-ratio data will enhance the reform agenda and strengthen shareholder rights, which, she contends, have historically been weak in the U.S.
Others were more circumspect. The executive director of the International Corporate Governance Network, whose global membership has $26 trillion in assets under management, believes that any benefit will be marginal: “’Investors, at least in the UK, are not calling for pay ratios. TSR [total shareholder return] measures… are already fairly helpful in comparing CEO pay and, without rigour, pay ratios could be easily manipulated.’” According to the article, proxy advisory firm ISS was likewise chary about the potential benefits. Special counsel for ISS expressed concern that the pay-ratio calculation will not provide “true comparability across industry sector peer groups…. The resulting inability to perform portfolio-wide analyses may hinder widespread usage of the new data.”
The article reports that there is also disagreement regarding the need for more frequent updating. In a change from the proposal, the final rule allows each company to undertake the process of identifying the median employee only once every three years, instead of every year, although the annual total compensation for the median employee and the final pay ratio will need to be calculated every year. ISS did not expect the pay ratio to change much from year to year, but the two institutions disagreed, contending that the information will not be valuable if it is not up to date.