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Demand for CEO pay ratios intensifies

Demand for CEO pay ratios has increased with initiatives in the US and UK focusing on the discrepancies between director and employee pay and the need for more regulation.

US Democratic Senator Bob Menendez and eight other senators have written to Michael Piwowar, chairman of the Securities and Exchange Commission, to urge him to implement the CEO pay ratio rule which would require companies to disclose the ratio between chief executive (CEO) pay and the pay of their median worker.

Menendez, a member of the Senate banking committee, and his colleagues said they were “extremely troubled” by Piwowar’s decision to reopen consultation on the rule 18 months after the SEC formally adopted it and seven years after the Dodd-Frank Act was passed.

SEC Securities & Exchange Commission

US Securities & Exchange Commission

The Senators also said they were “alarmed” by the apparent decision to ask for comments from issuers and not include investors. In the original consultation, the letter states, the SEC received 287,400 responses with the majority supporting the disclosure rule.

Among these respondents, the Senators state, there were many institutional investors and investment managers, who said that the CEO to worker pay ratio was of material importance to investors. These investors stated that this information would help investors to assess CEO pay and to understand company approaches to human capital.

Menendez authored the provision requiring disclosure of the ratio, which was included as Section 953(b) of the Dodd-Frank Act. He then put pressure on the SEC to implement the disclosure rule to implement this section of the Act which was passed in 201o. The SEC eventually adopted the rule in August 2015 and it took effect for financial years from 1st January 2017.

The SEC launched its latest consultation in February giving 45 days for submissions from issuers after there had been reports from companies that they were encountering unexpected compliance difficulties that could have prevented them from meeting the reporting deadlines. Piwowar said he wanted to understand what challenges were being faced and if any action was needed from the SEC.

The letter to the SEC from the Senators comes as the Council of Institutional Investors (CII) launched a new web page, Fair Financial Rules, which outlines the three principles that should be followed if, as seems likely, the Trump administration and the Republican-dominated Congress, seek to revamp the existing financial regulations brought in following the 2008 financial crisis.

These principles are protecting fundamental shareholder rights, promoting the effective disclosure and reliable financial reporting and upholding the independence of the SEC. Notably the CII states that proxy advisers “play a vital and necessary role in assisting pension funds and other institutional investors in carrying out their fiduciary duty to vote proxies in the best interest of plan participants and clients.”

Meanwhile in the UK, the Equality Trust is calling for people to sign its petition calling on the government to introduce mandatory pay ratios. It has just released research which it says shows that the average chief executive of FTSE 100 companies earned £5.3m in 2015 based on the total remuneration figures disclosed by companies in their annual reports.

This, the pressure group said, is more than 100 times the average UK salary or 386 times that of a worker earning the National Living Wage, based on figures from the Office of National Statistics Annual Survey of Hours and Earnings, 2016.

The Equality Trust said their analysis revealed that FTSE 100 CEOs on average were paid 165 times more than a nurse; 140 times more than a teacher; 132 times more than a police officer and 312 times more than a care worker. The research also found that over two thirds (67%) of FTSE 100 CEOs were paid more than 100 times the average UK salary while 90% were paid at least 100 times more than the National Living Wage.

Dr. Wanda Wyporska, Executive Director of The Equality Trust

Dr. Wanda Wyporska, Executive Director of The Equality Trust

Dr. Wanda Wyporska, Executive Director of The Equality Trust, said: “Pay inequality drives wider inequality, and we know this is bad for businesses, bad for our economy and bad for our health, our education and our wider society.

“We need far greater transparency on company pay practices to challenge poverty pay and executive excess at the same time. That’s why we’re calling on government to introduce mandatory reporting for large and medium businesses on the pay gap between their highest and average paid employee. Only then can we create a sense of trust and common purpose essential to build an economy and society that works for all.”

What do you think?