Trump’s First 100 Days: SEC’s Pay Ratio Rule Being Reconsidered

By: Jennifer Trinkwald

Just weeks after President Trump took office, the United States Securities and Exchange Commission announced on February 6, 2017, that the Commission might reconsider the implementation of Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the pay ratio disclosure rule.[1] First proposed in 2013,[2] Section 953(b) required:

[D]isclosure of median of the annual total compensation of all employees of an issuer (excluding the chief executive officer), the annual total compensation of that issuer’s chief executive officer and the ratio of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer.[3]

Based on comments received during the formal rulemaking process, the final rule, adopted in August 2015, included a compliance date of the “first fiscal year beginning on or after January 1, 2017,”[4] to give companies ample time to implement the rule.[5] Nevertheless, after only one month of implementation, the Commission has decided to reopen a comment period, due to “unanticipated compliance difficulties.”[6]

According to Acting Commission Chairman, Michael S. Piwowar, the purpose of the comment period is to gain a better understanding of the compliance difficulties, yet, he has also directed Commission staff to “reconsider the implementation of the rule based on any comments submitted.”[7] With the comment period underway, supporters and opponents of the rule are speaking out.[8]  A cohort of United States Senators are urging the Commission to implement the rule as planned, while groups of chief executive officers (“CEOs”) are expressing concerns over the implementation of this rule.[9]

According to nine Senators, including Bernie Sanders, this delay is troubling.[10] The Senators are “concerned that [the Acting Chairman’s] unilateral decision to open a second public comment period on a rule that has already been adopted by the SEC is solely intended to discredit the rule and generate momentum to repeal the statutory requirement.”[11] This rule was adopted after a substantial comment period that brought in 287,400 comments, with a “vast majority” of comments supporting the rule.[12] As the average pay for CEO’s in top companies drastically increased by 997 percent from 1978 to 2014, while compensation for non-supervisory employees rose only 10.9 percent during that time period, supporters believe this rule is necessary to allow for transparency in publicly traded companies.[13]

On the other hand, companies such as Business Roundtable, an association of CEOs of leading U.S. companies, and Pearl Meyer, an independent compensation consulting firm, expressed significant concerns with the rule.[14] Specifically, they are concerned that the rule is “burdensome to companies and immaterial to understanding their compensation practices” and, as a result, the rule does not achieve what it has set forth to do.[15] These companies argue further that the disclosure is not only burdensome, but it will also create discord amongst the employees of the companies subject to the rule.[16]

Whatever the argument, it is clear that the Pay Ratio Rule comes with a great deal of support and opposition, however, as the rule successfully passed the thorough rule making process, in my opinion, the Senators seem to have the stronger argument.[17] The announcement of this new comment period, just one month after implementation, raises the question of what the real reason for reconsideration is.[18] Is really a result of negative effects from the implementation or the Acting Chair Piwowar’s belief that the rule is “nothing more than an attempt by ‘Big Labor’ to shame CEOs”?[19] Whatever the true reason, only time will tell what will come of the Commission’s Pay Ratio Rule.

[1] Michael S. Piwowar, Reconsideration of Pay Ratio Rule Implementation, U.S. Sec. & Exch. Comm’n (Feb. 6, 2017), https://www.sec.gov/news/statement/reconsideration-of-pay-ratio-rule-implementation.html.

[2] Corporate Governance Issues, Including Executive Compensation Disclosure and Related SRO Rules, U.S. Sec. & Exch. Comm’n, (July 1, 2015), https://www.sec.gov/spotlight/dodd-frank/corporategovernance.shtml.

[3] Pay Ratio Disclosure, Dodd-Frank Wall Street Reform and Consumer Protection Act Release Nos. 33-9452, 34-70443 (Sept. 18, 2013).

[4] Piwowar, supra note 1; Pay Ratio Disclosure, Dodd-Frank Wall Street Reform and Consumer Protection Act Release Nos. 33-9877, 34-75610 (Oct. 19, 2015).

[5] See Piwowar supra note 1.

[6] Id.

[7] Id.

[8] See Letter from Robert Menendez, Jack Reed, Elizabeth Warren, Chris Van Hollen, Richard J. Durbin, Jeffrey A. Merkley, Al Franken, Bernard Sanders, & Cory A. Booker, Senators, U.S. Senate, to Michael Piwowar, Acting Chair, U.S. Sec. & Exch. Comm’n (Mar. 21, 2017), https://www.menendez.senate.gov/imo/media/doc/Letter-to-SEC-CEO-Pay-Ratio%202017-03-21-Signed-Final.pdf [hereinafter Letter from Senators]; Letter from John Hayes, Chair, Corporate Governance Committee Business Roundtable, to Michael Piwowar, Acting Chair, U.S. Sec. & Exch. Comm’n (Mar. 23, 2017), http://businessroundtable.org/resources/business-roundtable-comment-letter-sec-implemention-pay-ratio-rule; Letter from David N. Swinford, President & CEO, Pearl Meyer, to Michael Piwowar, Acting Chair, U.S. Sec. & Exch. Comm’n (Mar. 23, 2017), https://www.pearlmeyer.com/pearl-meyer-statement-reconsideration-pay-ratio-rule-implementation.pdf.

[9] See Letter from John Hayes, supra note 8; See Letter from David N. Swinford, supra note 8; See Letter from Senators, supra note 8.

[10] Letter from Senators, supra note 8.

[11] Id.

[12] Id.

[13] Id.

[14] Letter from John Hayes, supra note 8; Letter from David N. Swinford, supra note 8.

[15] Letter from John Hayes, supra note 8; see also Letter from David N. Swinford, supra note 8.

[16] See Letter from John Hayes, supra note 8; Letter from David N. Swinford, supra note 8.

[17] See Letter from Senators, supra note 8.

[18] See id.

[19] See id.

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