Disputed rule intended to shame CEOs

Business groups and unions are sparring over a little-known provision in the Dodd-Frank reform law that supporters concede is an effort to shame the nation’s highest-paid CEOs.

The rule, which predates the Occupy Wall Street movement but channels it in spirit, requires companies to disclose the difference in pay between their chief executives and average employees.

{mosads}An industry-spanning roster of business groups, including the U.S. Chamber of Commerce, the Financial Services Roundtable, the Securities Industry and Financial Markets Association and the National Association of Manufacturers, argue the salary data are difficult to collect and of no interest to investors. 

“It’s really a political talking point that’s managed its way into legislation,” said Tom Quaadman, vice president of the capital markets center for the U.S. Chamber of Commerce.

Critics of the provision are at work trying to repeal it. The House Financial Services Committee approved legislation sponsored by Rep. Nan Hayworth (R-N.Y.) that would do away with the disclosure requirement. 

But the repeal movement is unlikely to make headway in the Senate, where Democrats are lining up behind President Obama’s election-year message of working to “level the playing field” for workers and reduce income inequality.

With repeal unlikely for now, industry groups are encouraging regulators to take their time implementing the provision, and to solicit plenty of business input along the way. 

Labor groups and other critics of Wall Street, meanwhile, are urging the Securities and Exchange Commission to move swiftly to put the requirement in place, and dismiss arguments that it’s more trouble than it’s worth.

“It’s quite astounding that a relatively simple disclosure requirement would trigger so much hand-wringing,” said Brandon Rees of the AFL-CIO, which pushed for the provision’s inclusion in Dodd-Frank. 

“They will be embarrassed, and that’s the whole point,” Rees said.

Sen. Robert Menendez (D-N.J.) inserted the largely overlooked provision into the Wall Street reform bill while he was serving as chairman of the Democratic Senatorial Campaign Committee. He said supporters of repeal are fighting a losing battle.

“Those who would seek to roll back this provision are shilling for corporations and CEOs,” Menendez told The Hill. “It will never see the light of day in the Senate.”

The salary rule requires publicly traded companies to disclose in their annual financial statements exactly how much the CEO makes, how much the median employee makes, and the ratio between the two.

Businesses say figuring out how much each employees makes is no easy task and question what value the information could have for investors — the whole reason corporate disclosures are required.

“We think that the legislation is not helpful and that the disclosure is not helpful, and we’re working to obviously try to repeal the provision,” said Tim Bartl, senior vice president and general counsel for the Center on Executive Compensation, an association that represents human resource officials for some of the nation’s largest companies. “The more we look into it, the more we realize the complexities.”

In a letter to the SEC earlier this month, 23 business groups argued that the requirement would prove particularly problematic for multinational companies that would have to grapple with vastly different pay structures when making the calculations. 

Furthermore, they argued, investors who rely on corporate disclosures are not interested in how much a CEO makes when compared to the median employee.

“It doesn’t convey any information about the health of a company,” Quaadman said. “It is difficult to see where the costs actually outweigh the benefits.”

Backers of the provision are not persuaded.

“It’s our belief that companies that have effective internal controls over their compensation processes will have no problem disclosing that,” Rees said. 

The business community is focusing its attention on the SEC as it battles the rule. Unlike many provisions in Dodd-Frank, the salary provision does not have a statutory deadline for regulators to implement it, opening the door to a drawn-out process. The SEC originally said it wanted to complete work on that provision by the end of 2011, and now says on its website that it hopes to get it done by the close of 2012.

Businesses are insisting that the SEC needs to take its time and “resist rushing” a regulation that could pose substantial compliance costs. Menendez said he is urging the SEC to finish it as soon as possible.

“This is about trying to hide the information,” Rees said. “It’s just delay, delay, delay.”