The pay ratio mandate in section 953(b) of the Dodd-Frank Act requires companies to disclose the median compensation amount of the company’s workforce and compare that number to the company’s CEO compensation amount in the form of a ratio. In 2013, the SEC proposed rules implementing the pay ratio which were finalized in 2015. The first pay ratio disclosures will be provided in the 2018 proxy season covering compensation for fiscal year 2017
All global employees including full-time, part-time, temporary, and seasonal must be included in the pay ratio calculation. This creates compliance challenges as there is no business purpose for collecting pay information for employees in this way. Consequently, companies have been forced to divert a considerable amount of resources to comply. The SEC’s proxy disclosure rules are intended to educate investors and promote their understanding of a company’s executive compensation practices so that they can make better investment decisions. However, the pay ratio provision does not provide material information to investors, is extremely costly to implement and is inconsistent with the purposes of compensation disclosure in a company’s proxy statement. Moreover, this number is potentially misleading to investors as the ratio is not comparable among companies due to different operational structures, geographic locations and business strategies.
The Center believes the pay ratio requirement is an example of a mandate where the costs far outweigh the putative benefits and accordingly should be repealed.