Don’t Stop Readying Your Pay Ratio Just Yet

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By Rob Tricchinelli and Andrea Vittorio

Nov. 16 — Companies collecting data and crunching numbers on the pay gap between their workers and their chief executive officer shouldn’t stop just yet.

Republicans in Congress have tried for years to undo a requirement from the 2010 Dodd-Frank Act for public companies to disclose the ratio of CEO-to-worker pay, through legislative packages, standalone bills and riders to government spending measures. With control of both chambers and the White House next year, their legislation will have an easier time getting through.

House Financial Services Committee Chairman Jeb Hensarling’s bill (H.R. 5983) to scrap Dodd-Frank would repeal the pay ratio requirements. The bill may serve as a blueprint in the next Congress as to how Republicans would remove the requirements.

A repeal of the ratio reporting rule would probably be a relief to many companies. The rule requires companies, starting in 2018, to disclose in Securities and Exchange Commission filings their 2017 compensation ratios.

But for now, “I would not count on it being repealed or changed,” Michael Melbinger, a Chicago-based partner in Winston & Strawn LLP’s employee benefits and executive compensation practice, told Bloomberg BNA.

At this point, the only thing “we know for sure is that the CEO pay ratio rule has been specifically attacked,” Andrew Liazos, the Boston-based head of the executive compensation practice at McDermott Will & Emery LLP, told Bloomberg BNA.

Bigger companies and those with employees outside the U.S. have probably already started the process of calculating the ratio. Melbinger, whose clients include companies such as Boeing Co. and Wal-Mart Stores Inc., said that work may slow down a bit, but it shouldn’t stop. It would be a big risk for companies to abandon their preliminary compliance efforts on the assumption that the CEO pay ratio rule will disappear before it takes effect, Liazos said.

Communicating CEO Pay

The ratio has been criticized for being tricky to calculate and for shaming executives without providing meaningful information to shareholders. “The ratio is so embarrassing, it’s hard to defend it with a straight face,” Alan Johnson, a managing director at compensation consultant Johnson Associates Inc., told Bloomberg BNA.

In 2015, the average pay gap between CEOs of companies on the S&P 500 Index and the typical worker was 335-to-1, according to the latest data from the AFL-CIO. Labor unions and other supporters of the disclosure say it could help rein in excessive CEO pay.

President-elect Donald Trump has called executive compensation “a total and complete joke” in the past. So targeting executive compensation regulations could expose a rift between the next Congress’s priorities and Trump’s messaging.

“Dealing with CEO pay is something that is more populist,” Lisa Gilbert, director of Public Citizen’s Congress Watch, which supported the CEO pay rules, told Bloomberg BNA. Erasing executive compensation rules would be a questionable early move for the new administration to the extent they care at all about charges that they are not sincere about their rhetoric, she said.

Companies could also have an internal communications issue on their hands as employees find out the difference in pay between the CEO and the median employee. More than half of employees surveyed by compensation data and software provider Payscale Inc. didn’t know how much their CEO is paid.

If workers learn how their pay stacks up against that of the CEO and, perhaps more importantly, the median worker, human resource departments could find themselves caught in the middle. “So if there is any chance of that coming out, they have to be prepared,” said Dan Marcec, director of content at Equilar Inc., which provides executive compensation benchmarking and tracking tools.

To contact the reporters on this story: Rob Tricchinelli in Washington at rtricchinelli@bna.com; Andrea Vittorio in Washington at avittorio@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

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