The U.S. Securities and Exchange Commission on Wednesday voted 3-2 in approving final rules that require public corporations to disclose the ratio of CEO pay to the median worker.
"The vote by the commission itself illustrates the politically charged nature of this issue," Brad Bondi, a partner at Cahill Gordon & Reindel, said. "It's an open question whether this rule will provide useful information to investors, rather than only to groups that might be advocating for higher pay of entry-level employees or lower pay of CEOs," Bondi, a former counsel to two SEC commissioners, added.
Wednesday's vote, the outcome of which was expected and went along partisan lines, came nearly two years after the regulatory agency voted to propose the disclosure rule and nearly five years after Congress passed legislation that included a mandate that the SEC require companies to disclose the information.
Those years involved intense lobbying by business and labor groups, with legislation introduced in Congress to repeal the rule ahead of the SEC's final decision, and groups including the U.S. Chamber of Commerce viewed as likely to wage a court challenge.
"Clearly it's controversial. The real questions now are what is going to happen on the legislative and judicial front," said Andrew Liazos, partner and head of the Executive Compensation practice at McDermott Will & Emery. "The question for a lot of these companies is do you try to wait and see what happens, or really get into this, as in, can you afford to wait?"
The SEC received more 287,400 comment letters, including over 1,500 unique ones. Some asserted the importance of the rule to shareholders as they consider CEO compensation and investment decisions, while others claimed the rule has no benefits and will needlessly force companies to incur costs, SEC Chair Mary Jo White said.
The issue of executive compensation came under scrutiny during the 2008 financial crisis, and the rule approved is a result of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
"To say that the views on the pay ratio disclosure requirement are divided is an obvious understatement. Since it was mandated by Congress, the pay ratio rule has been controversial, spurring a contentious and, at times, heated dialogue," White, who voted in favor of the rule, told the meeting.
The heated rhetoric continued as commissioners expressed their views at Wednesday's gathering, with the most vehement opinions voiced by the minority Republican members, Daniel Gallagher and Michael Piwowar.
"This rulemaking may well be the most useless of all of our Dodd-Frank mandates, and that says something. With this vote I will have cast 16 'no' votes, which I think is a commission record," Gallagher said.
Piwowar called the rule "another blatant attempt to limit executive compensation by 'Big Labor' and their political allies." He said he was "voting no on name and blame."
However, SEC commissioner Luis Aguilar, who voted in favor of the rule, said: "These decisions were designed to facilitate compliance with the rule in a manner that is reasonable and workable for issuers, while still providing for increased transparency and greater accountability in executive compensation matters."
Industry and labor groups also reacted along similarly partisan lines.
The disclosure was mandated by Congress "as a favor to union lobbyists who misguidedly think it will help their organizing efforts," David Hirschmann, president and CEO of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, said in a statement. The chamber "will continue to review the rule and explore our options," added Hirschmann, likely alluding to legal challenges and legislation to repeal the ruling.
"This new ratio information will make it easier to ensure that our tax dollars do not enrich corporations that are widening our economic divide," Institute for Policy Studies compensation analyst Sam Pizzigati said in a statement.
"Out-of-control compensation played a conspicuous part in the cycle of reckless lending, opaque securitizing and systematic offloading of responsibility that led to the financial and economic meltdown," Americans for Financial Reform said in a statement. "Runaway pay, repeated studies have shown, inhibits teamwork, reduces employee morale and productivity, and encourages executives to make dangerous short-term bets."
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