US companies question pay ratio rule

Oct 16, 2013
<p>Only 10 percent believe disclosure will provide important information; majority concerned about cost</p>

Most companies listed on US stock exchanges question the relevance of impending rules that will govern CEO pay ratios, with only one in 10 believing the required disclosure will provide important information, according to a Towers Watson poll.

More than half the companies that responded – 56 percent – say they would be concerned about complying with the new transparency requirements set out by the SEC last month. The regulator voted in favor of a new rule that will require listed companies to reveal the ratio their CEO’s pay to the average compensation received by all other employees. The change comes as part of a set of reforms required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Most of those concerned about the new rules suggest that gathering pay data would be a time-consuming and expensive process, while others express worries about how to determine a data sample and to identify a ‘mean employee’ for comparison.

Only 31 percent say they are most concerned about how their firm’s CEO-to-worker ratio will compare with that of their peers, their industry or even the entire marketplace. Fewer still – 21 percent – cite any difficulty in explaining the ratio to shareholders as a chief concern.

‘Determining the best approach to identifying the median employee and calculating a pay ratio will be no easy task, especially for large global companies. There’s a lot of uncertainty about what this will cost,’ says Todd Lippincott, Towers Watson’s North American leader of executive compensation.

Lippincott also notes that only two in 10 respondents say they fully understand the costs, effort and data needed to comply with the new rules. The poll finds that just over a third of those polled think they will be ‘comfortable’ they have the necessary tools to deal with the new disclosure requirement, expected to be implemented in 2015.

‘Companies will need to spend time to figure out what the costs will be so they can provide meaningful estimates in their comments to the SEC,’ suggests Lippincott. ‘The companies we have been meeting with are beginning to get their arms around the proposed rule and the work that will be required to comply, even though most don’t believe it will provide important information for investors.

‘While the flexibility the SEC provided in calculating a pay ratio is helpful, companies will need to decide on an approach that’s valid and defensible, because they know many stakeholders will be taking a close look at these disclosures.’

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