Mandated by the 2010 Dodd-Frank law, the requirement to disclose CEO pay ratio went into effect in January and the ratio is expected to be disclosed in many companies’ 2018 proxy statements.
Of course, U.S. CEOs, among the most paid in the world, did not welcome the rule and most of them definitely refused any comparison with the pay level of their own employees. Their powerful lobby group, Business Roundtable, the association of chief executive officers of leading U.S. companies, chaired by Jamie Dimon, the chairman and CEO of JP Morgan Chase, has actively lobbied against such disclosure with some success since the new SEC chairman Piwowar said in February the SEC was seeking comments about whether to delay the rule.
Proxinvest believes that CEO pay ratio disclosure aims to help investors better gauge the reasonableness of CEO pay. Therefore Proxinvest decided to join an investor group with $3Trln in assets to urge SEC not to delay CEO pay ratio disclosure.
“The SEC’s pay ratio disclosure rule is thoughtful, balanced, and carefully crafted to provide companies considerable flexibility and makes accommodations to them in complying with the rule, while giving shareholders valuable new information” the groups wrote in the letter.
The new Shareholder Right Directive,voted by the European parliament this month, will oblige companies listed in the European Union to disclose in their remuneration report “the annual change of remuneration, of the performance of the company, and of average remuneration on a full-time equivalent basis of employees of the company other than directors over at least the five most recent financial years, presented together in a manner which permits comparison“. This EU new disclosure is close to the current UK practice.
As clearly explained by the UK Executive Remuneration Working Group established by the UK Investment Association, “There is growing public disapproval of the absolute levels of remuneration paid to business leaders, as well as growing divergence between remuneration paid to those business leaders and remuneration paid to other employees in the company. The issue of quantum is often the underlying issue behind shareholder and public disapproval of executive remuneration. […] The internal reference point should preferably be the ratio between the remuneration of the CEO and median employee pay, which should then be publically disclosed. Boards must take account of CEO pay relative to market levels, but they must also make sure that their decisions are not dictated by benchmarking alone, as this has significantly contributed to the “remuneration creep”.”
UK, Europe and the US have to move together to restore shareholder, employee and public trust in reasonable executive remuneration practices.