{"id":1751,"date":"2011-10-11T15:27:57","date_gmt":"2011-10-11T19:27:57","guid":{"rendered":"http:\/\/journals.law.harvard.edu\/hblr\/?p=1751"},"modified":"2016-07-04T21:55:12","modified_gmt":"2016-07-05T01:55:12","slug":"compensation","status":"publish","type":"post","link":"https:\/\/journals.law.harvard.edu\/hblr\/compensation\/","title":{"rendered":"Dodd-Frank, Compensation Ratios, and the Expanding Role of Shareholders in the Governance Process"},"content":{"rendered":"

Download PDF<\/a><\/p>\n

J. Robert Brown, Jr.*<\/a><\/p>\n

I. Introduction<\/strong><\/p>\n

Congress, in adopting the Dodd-Frank Act,[1]<\/a> sought to correct some of the abuses believed to have contributed to the financial crisis of 2008-2009.\u00a0 Executive compensation was one of them. \u00a0Formulas used to determine compensation were thought to promote a short-term perspective that encouraged excessive risk taking.[2]<\/a>\u00a0 As a result, financial regulators were given the authority to review compensation practices for risk.[3]<\/a>\u00a0 Likewise, the Act sought to strengthen the integrity of the compensation approval process[4]<\/a> and to increase clawbacks of performance-based compensation following certain restatements.[5]<\/a><\/p>\n

Not all compensation provisions, however, were designed to address risk.\u00a0 Some were inserted in an effort to expand the role of shareholders in the governance process.\u00a0 Addressed primarily under the rubric of fairness,[6]<\/a> the Act gave shareholders an advisory vote on executive compensation.[7]<\/a> At the same time, Dodd-Frank expanded the information available to shareholders making the determination.\u00a0 Specifically, Section 953(b) required disclosure of a ratio that compared CEO and employee compensation.[8]<\/a>\u00a0 Although hardly noticed at the time of adoption, the provision eventually generated considerable controversy and engendered serious calls for repeal within Congress.<\/p>\n

This article will do several things.\u00a0 First, it will examine the role of compensation ratios in the debate over executive compensation.\u00a0 Second, the article will discuss Section 953(b), including the broad regulatory authority retained by the Securities and Exchange Commission (\u201cSEC\u201d or \u201cCommission\u201d) in implementing the provision.\u00a0 Finally, the article will analyze the current controversy surrounding the provision.<\/p>\n

II. Compensation and Ratios<\/strong><\/p>\n

Ratios have long been part of the debate over executive compensation.\u00a0 They typically rely on average CEO compensation as the numerator and average employee compensation as the denominator.\u00a0 In general, they have been used to show the relative increase of CEO compensation over time.[9]<\/a><\/p>\n

Ratios, however, have not been a particularly useful metric for shareholders.\u00a0 For one thing, they are not computed on a company-specific basis.\u00a0 For another, they are not determined in a consistent fashion.\u00a0 While average CEO compensation can, for the most part, be computed on a uniform basis,[10]<\/a> there is considerable variance with respect to employee compensation.\u00a0 Ratios may rely on the amount paid to the \u201caverage production worker\u201d[11]<\/a> or \u201cprivate sector\u201d employee.[12]<\/a> \u00a0Some look to the minimum wage.[13]<\/a>\u00a0 They can exclude particular sub-categories of employees[14]<\/a> or resort to medians rather than means.[15]<\/a><\/p>\n

The lack of consistency and the absence of firm specific data minimize the ability to use the metric to assess CEO compensation within a particular company.\u00a0 Thus, while they can demonstrate broad trends in compensation, they have not been particularly helpful in providing shareholders with a tool for assessing the reasonableness of compensation in their own company.<\/p>\n

III. Dodd Frank and Compensation Ratios<\/strong><\/p>\n

Sponsored by Senator Menendez of New Jersey and originally part of separate legislation,[16]<\/a> the requirement to disclose compensation ratios was inserted into the Senate version of Dodd-Frank during committee deliberations.\u00a0 Apparently a late addition, the provision generated no meaningful legislative history.[17]<\/a><\/p>\n

The requirement addressed many of the concerns that limited the value of compensation ratios to shareholders.\u00a0 Section 953(b) of Dodd-Frank imposed a mandatory formula for calculating the statistic.[18]<\/a>\u00a0 Moreover, it provided for the determination of ratios on a company-specific basis and mandated the use of medians rather than averages.[19]<\/a>\u00a0 Implementation was, however, accomplished in a highly complicated fashion.\u00a0 Rather than simply require disclosure of the ratios, the provision in three instances cross-referenced or incorporated portions of existing regulations.\u00a0 The result was substantial discretion on the part of the SEC in implementing the requirement.<\/p>\n

Specifically, Section 953(b) provided that ratio disclosure must appear in Item 402 of Regulation S-K (or its successor),[20]<\/a> the SEC provision defining executive compensation.[21]<\/a>\u00a0 In effect, Congress opted to write a portion of Item 402, transforming a regulation into a statute.[22]<\/a>\u00a0 As a consequence, the Commission could amend or rewrite Item 402 with respect to most compensation matters but, once implemented, could not eliminate ratio disclosure.<\/p>\n

Congress also referred to SEC regulations in defining the breadth of the disclosure requirement.\u00a0 Section 953(b) provided that ratio disclosure was to appear \u201cin any filing of the issuer described in section 229.10(a).\u201d[23]<\/a> \u00a0Because Item 10(a) referred to periodic reports, the reference suggested that the ratios were to be disclosed on a quarterly if not more frequent basis.[24]<\/a>\u00a0 Congress, however, left the Commission with the discretion to reduce the frequency through amendments to Item 10.[25]<\/a>\u00a0 Deletion of the words \u201cor other\u201d after \u201cannual report\u201d in Item 10 would eliminate the ratios from all periodic reports except the Form 10-K, effectively requiring only annual disclosure of the information.[26]<\/a><\/p>\n

Finally, Section 953(b) prescribed the method for calculating employee compensation by referencing Item 402(c)(2)(x), the subsection that defined the CEO\u2019s total compensation.[27]<\/a> \u00a0Congress specifically limited the SEC\u2019s authority to change the formula by requiring application of the standard \u201cin effect on the day before the date of enactment of this Act.\u201d[28]<\/a> \u00a0The SEC nonetheless retained considerable discretion over the formula.\u00a0 The reference to Item 402 specified the categories of compensation that were to be considered[29]<\/a> but did not prescribe the method of calculating the categories.\u00a0 That was left to the administrative discretion of the SEC.[30]<\/a><\/p>\n

The provision, therefore, provided a broad role for the SEC in developing and applying ratio disclosure.\u00a0 The SEC retained the authority to determine the frequency of ratio disclosure and the method used to calculate employee compensation.<\/p>\n

IV. The Ongoing Debate<\/strong><\/p>\n

The imposition of ratio disclosure caused little controversy during the debate over Dodd-Frank.\u00a0 As implementation approached, however, vigorous opposition developed over the merits of the provision.[31]<\/a>\u00a0 Critics asserted that calculation of median compensation for employees would be costly[32]<\/a> and logistically difficult. [33]<\/a> In addition, they challenged the value of the information, asserting in part that the ratios did not provide a meaningful basis for comparison.[34]<\/a><\/p>\n

The concerns attracted attention in Congress.\u00a0 The Burdensome Data Collection Relief Act called for the repeal of Section 953(b) in its entirety.[35]<\/a>\u00a0 On June 22, 2011, the House Financial Services Committee approved the legislation by a vote of 33-21.\u00a0 The accompanying report reiterated the concerns about the immateriality of the information and the burdensome nature of the calculation.[36]<\/a> Attempts in the committee to rewrite Section 953(b) to simplify the formula and limit the frequency of disclosure were defeated.\u00a0 While the matter has not yet passed the House, opposition in the Senate has surfaced.[37]<\/a><\/p>\n

V. Compensation Ratios Going Forward<\/strong><\/p>\n

Most of the concerns expressed over ratio disclosure can be fixed in the rulemaking process,[38]<\/a> something that the SEC has indicated will occur before the end of 2011.[39]<\/a>\u00a0 As discussed, the SEC has considerable flexibility to limit the frequency of disclosure.[40]<\/a>\u00a0 Likewise, while Congress prescribed the categories used in determining employee compensation, the SEC retains broad discretion to determine how these categories are calculated.[41]<\/a>\u00a0 As for the treatment of part-time and overseas workers, there may be little administrative discretion over the issue.[42]<\/a><\/p>\n

With respect to the materiality of the information, ratios have particular importance in the era of \u201csay on pay.\u201d\u00a0 An advisory vote on compensation gives shareholders an opportunity to comment on the reasonableness of CEO pay.\u00a0 Reasonableness, however, requires context.\u00a0 Metrics that allow for a comparison of pay practices among public companies can assist in providing the requisite context.[43]<\/a>\u00a0 Moreover, the ratios provide a mechanism for the first time for assessing the reasonableness of the compensation within each particular company.[44]<\/a><\/p>\n

Variations in the ratio that arise from differences in business models or geographic reach can be addressed through accompanying \u00a0disclosure.\u00a0 Companies can explain the relevant differences through the use of narrative and additional ratios.\u00a0 Moreover, such information will likely have the benefit of providing shareholders with additional insight into the calculation of CEO compensation and the company\u2019s employment practices.[45]<\/a><\/p>\n

The most significant impact of the ratio may, however, be on the board of directors.\u00a0 The disclosure requirement effectively increases the information available to boards when setting executive pay.\u00a0 Some boards already take ratios into account when determining compensation.[46]<\/a>\u00a0 Because a bad ratio may be embarrassing,[47]<\/a> the board has an incentive to alter compensation in order to avoid adverse disclosure.[48]<\/a>\u00a0 Disclosure of the ratio may, therefore, impact the amount of compensation paid to employees and the CEO.[49]<\/a><\/p>\n

VI. Conclusion<\/strong><\/p>\n

Ratio disclosure raises some legitimate logistical concerns over the method of computation and the frequency of disclosure.\u00a0 Most can be addressed and resolved by the SEC during the authority process.\u00a0 The addition of ratio disclosure, when coupled with say on pay, provides shareholders with a more meaningful ability to participate in the compensation process.<\/p>\n

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Preferred citation: J. Robert Brown, Jr., Dodd-Frank, Compensation Ratios, and the Expanding Role of Shareholders in the Governance Process<\/em>, 2 Harv. Bus. L. Rev. Online 91<\/span> (2011), https:\/\/journals.law.harvard.edu\/hblr\/\/?p=1751.<\/div>\n
*<\/a> J. Robert Brown, Jr. is a Professor of Law and Director of the Corporate-Commercial Law Program at the University of Denver Sturm College of Law.<\/div>\n
[1]<\/a> Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (\u201cDodd-Frank\u201d or \u201cthe Act\u201d).<\/div>\n
[2]<\/a> S. Rep. No. 111-176 (2010), available at<\/em> <\/strong>http:\/\/thomas.loc.gov\/cgi-bin\/cpquery\/?&item=&&sid=cp111FTCKo&&refer=&&r_n=sr176.111&&dbname=cp111&&sid=cp111FTCKo&&sel=TOC_446491&&sid=cp111FTCKo&r_n=sr176.111&dbname=cp111& <\/em>(noting that legislation addresses \u201c<\/em>executive compensation practices that promoted excessive risk-taking\u201d).<\/em><\/div>\n
[3]<\/a> See<\/em> Dodd-Frank Act \u00a7 956. \u00a0Even before the adoption of Dodd-Frank, the SEC required disclosure by public companies of relationship between compensation policies and risk.\u00a0 See<\/em> Regulation S-K, 17 C.F.R. \u00a7 229.402(s) (2011). The provision was adopted in 2009.\u00a0 See<\/em> Proxy Disclosure Enhancements, Exchange Act Release No. 61175 (Dec. 16, 2009).<\/div>\n
[4]<\/a> Dodd-Frank Act \u00a7 952.\u00a0 The SEC has proposed implementing rules with respect to these requirements.\u00a0 See<\/em> Listing Standards for Compensation Committees, Exchange Act Release No. 64149 (March 30, 2011).<\/div>\n
[5]<\/a> Dodd-Frank Act \u00a7 954.<\/div>\n
[6]<\/a> S. Rep. No. 111-176, supra<\/em> note 3 (<\/strong>\u201c<\/em>Congress is empowering shareholders in a public company to have a greater voice on executive compensation and to have more fairness in compensation affairs.\u201d).<\/div>\n
[7]<\/a> Dodd-Frank Act \u00a7 951.<\/div>\n
[8]<\/a> Dodd-Frank Act \u00a7 953.<\/div>\n
[9]<\/a> Indeed, for the most part, ratios have shown a substantial growth in CEO compensation compared to employees.\u00a0 See<\/em> Joel Seligman, Rethinking Private Securities Litigation<\/em>, 73 U. Cin. L. Rev. 95, 114 (2004) (\u201cThese decisions coincided with a dramatic increase in the ratio of the compensation of the corporate CEO to that of the average corporate blue collar employee. \u00a0In 1980, this ratio was 42 to 1; by 1990, it had grown to at least 120 to 1; by 2000, it was estimated to be at least 475 to 1.\u201d). \u00a0See also<\/em> Jeffrey N. Gordon, Essay: \u201cSay on Pay\u201d: Cautionary Notes on the UK Experience and the Case for Shareholder Opt-In<\/em>, 46 Harv. J. on Legis. 323 (2009)\u00a0(\u201cBy the mid-2000s the changing ratio in the compensation level of CEO versus line-worker–from 20-1 in the 1950s to a purported approximate of 350-1 today–created controversy in the political realm as well as the boardroom.\u201d).\u00a0 For an example of ratios used to show increasing CEO compensation outside the United States, see The High Pay Commission, Interim Report: More for Less: What Has Happened to Pay at the Top and Does It Matter? (2011), available at<\/em> http:\/\/highpaycommission.co.uk\/wp-content\/uploads\/sites\/87\/2011\/09\/HPC-IR.pdf.<\/div>\n
[10]<\/a> Companies must disclose total compensation for the CEO using a common formula.\u00a0 See <\/em>Regulation S-K, 17 C.F.R. \u00a7 229.402 (2011).\u00a0 Nonetheless, variations exist.\u00a0 Ratios used an average of CEO compensation, something that could vary depending upon the group selected.\u00a0 See<\/em> Sarah Anderson, Eric Benjamin, John Cavanagh, & Chuck Collins, Institute for Policy Studies, Executive Excess 2006: Defense and Oil Executives Cash in on Conflict, available at<\/em> http:\/\/www.faireconomy.org\/files\/ExecutiveExcess2006.pdf (average CEO compensation for 350 companies with revenues above $1 billion).\u00a0 Likewise, administrative changes to the formula used for calculating CEO compensation could alter ratios over time.\u00a0 See<\/em> Executing Compensation and Related Person Disclosure, Exchange Act Release No. 54302A (August 26, 2006).<\/div>\n
[11]<\/a> See<\/em> Economic Policy Institute, More Compensation Heading to the Very Top, http:\/\/www.stateofworkingamerica.org\/files\/images\/orig\/8-Wages_ceo_pay.png (last visited Oct. 6, 2011).<\/div>\n
[12]<\/a> See<\/em> Anderson, et al., supra<\/em> note 11 (average pay for private sector workers in 2005 as determined by U.S. Department of Labor, with average including part-time employees).\u00a0 Others have referred to the compensation paid to the \u201caverage\u201d worker.\u00a0 See<\/em> Lawrence Mishel, CEO-to-Worker Pay Imbalance Grows<\/em>, Economic Policy Institute (June 21, 2006), available at<\/em> http:\/\/www.epi.org\/economic_snapshots\/entry\/webfeatures_snapshots_20060621\/.<\/div>\n
[13]<\/a> See<\/em> Heritage Institute, Spotlight on CEO Compensation, available at<\/em> http:\/\/www.heritageinstitute.com\/governance\/compensation.htm#The_Ratio_of_Average_CEO_and_Worker (last visited Oct. 6, 2011).<\/div>\n
[14]<\/a> Larry Bumgardner, High CEO Pay Could Draw Renewed Attention in Election Year<\/em>, 11 Graziadio Bus. Rev. (2008), available at<\/em> http:\/\/gbr.pepperdine.edu\/2010\/08\/high-ceo-pay-could-draw-renewed-attention-in-election-year (\u201cOne could plausibly argue that the ratio is likely overstated somewhat by including only 350 large companies for CEO pay, and by considering part-time employees in the average worker calculation.\u201d).<\/div>\n
[15]<\/a> Frederic W. Cook, The Business Roundtable, Research on CEO Compensation for Business Roundtable (2006), available at<\/em> http:\/\/www.shrm.org\/hrdisciplines\/compensation\/Documents\/20060705002ExecutiveCompensationResearch_FWC_62906.pdf (noting that with respect to an average, \u201coutliers pull the averages up above the median\u201d and that \u201c[m]edian statistics are more representative of the practices of a large group\u201d).\u00a0 While most compensation ratios used averages, at least one study relied upon the median and produced a substantially lower ratio.\u00a0 See<\/em> Bumgardner, supra<\/em> note 15 (\u201cBy contrast, a separate study released in 2006 by a CEO group, the Business Roundtable, concluded that the ratio was starkly lower-179 to 1.\u201d).<\/div>\n
[16]<\/a> The legislation was the Committee on Banking, Housing, and Urban Affairs.<\/div>\n
[17]<\/a> The only mention of the provision in the Senate Report accompanying the legislation was a brief reference by the minority.\u00a0 See<\/em> S. Rep. No. 111-176, supra<\/em> note 3 (\u201cAlthough provisions like this appeal to popular notions that chief executive officer salaries are too high, they do not provide material information to investors who are trying to make a reasoned assessment of how executive compensation levels are set. Existing SEC disclosures already do this.\u201d).\u00a0 See also<\/em> 156 Cong. Rec. S4075 (daily ed. May 20, 2010)\u00a0 (statement of Sen. Shelby) (\u201cThe grab bag includes puzzling items, like a . . . provision that requires disclosure of the ratio of the median employee’s compensation to the chief executive officer’s compensation.\u00a0 It looks to me like the way is being paved to achieve so-called \u2018social justice\u2019 in income distribution. \u00a0This is another disturbing example of the government getting its nose under the private sector’s tent.\u201d).<\/div>\n
[18]<\/a> Dodd-Frank Act \u00a7 953(b).<\/div>\n
[19]<\/a> Id.<\/em> (\u201c[T]he median of the annual total compensation of all employees of the issuer, except the chief executive officer (or any equivalent position) of the issuer\u201d).\u00a0 Interestingly, calculation of the median cannot include CEO compensation.\u00a0 The elimination of a single person from the determination of the median is not likely to have any meaningful effect on the calculation. \u00a0The same would not be true had employee compensation been computed based upon averages.<\/div>\n
[20]<\/a> See<\/em> id. (\u201cThe Commission shall amend section 229.402 of title 17, Code of Federal Regulations, to require each issuer to disclose in any filing of the issuer described in section 229.10(a) of title 17, Code of Federal Regulations (or any successor thereto)\u201d).<\/div>\n
[21]<\/a> 17 C.F.R. \u00a7 229.402.<\/div>\n
[22]<\/a> Regulations affirmed in legislation are elevated to the status of law.\u00a0 Smith v. Whitney, 116 U.S. 167, 181 (1885) (\u201cThis legislative recognition of the Navy Regulations of 1870 \u2018must,\u2019 as was said by Chief Justice Marshall of a similar recognition of the Army Regulations in the act of April 24, 1816, ch. 69, \u00a7 9, 3 Stat. 298, \u2018be understood as giving to these regulations the sanction of the law.\u2019”).<\/div>\n
[23]<\/a> 17 C.F.R. \u00a7 229.10(a).<\/div>\n
[24]<\/a> Disclosure in multiple filings does not necessarily require multiple calculations.\u00a0 The SEC could require a single calculation but mandate that the same calculation appear in an assortment of filings (perhaps through incorporation by reference).<\/div>\n
[25]<\/a> Where Congress did not intend for the SEC to have the authority to amend the applicable language, it said so.\u00a0 See<\/em> infra<\/em> note 31.<\/div>\n
[26]<\/a> See<\/em> 17 C.F.R. \u00a7 229.10(a)(2) (applying Regulation S-K to \u201cannual or other reports under sections 13 and 15(d)\u201d).\u00a0 The savings clause contained in Item 10(a) would prevent the amendment from having any effect on the applicability of Regulation S-K to quarterly and current reports.\u00a0 See<\/em> 17 C.F.R. \u00a7 229.10(a) (providing that Regulation S-K applied to \u201cany other document required to be filed under the Exchange Act, to the extent provided in the forms and rules under that Act.\u201d).\u00a0 So long as the forms for quarterly and current reports provide for the applicability of Regulation S-K, it would apply even if unmentioned in Item 10(a).<\/div>\n
[27]<\/a> The statute specifically requires application of Item 402(c)(2)(x) of Regulation S-K.\u00a0 17 C.F.R. \u00a7 229.402(c)(2)(x).<\/div>\n
[28]<\/a> Dodd-Frank Act \u00a7 953(b) (\u201cFor purposes of this subsection, the total compensation of an employee of an issuer shall be determined in accordance with section 229.402(c)(2)(x) of title 17, Code of Federal Regulations, as in effect on the day before the date of enactment of this Act.\u201d).\u00a0 The Commission could, therefore, amend the provision and change the method used to calculate total compensation for top executive officers.\u00a0 The amendment would not, however, apply to the calculation of the median compensation paid to employees.<\/div>\n
[29]<\/a> See<\/em> 17 C.F.R. \u00a7 229.402(c)(2)(x).\u00a0 The seven categories are salary, bonus, stock awards, stock options (with both stock awards and stock options measured by their value on the award date), other incentive pay, changes in pension value and other deferred compensation, and all other compensation.<\/div>\n
[30]<\/a> Thus, for example, 17 C.F.R. \u00a7 229.402(c)(2)(ix) provides that perquisites are included in CEO compensation only if they exceed $10,000.\u00a0 The SEC could impose similar thresholds throughout the other categories, effectively limiting employee compensation to the amounts paid in cash.<\/div>\n
[31]<\/a> Although not proposing rules to implement ratio disclosure, the SEC did invite comments.\u00a0 See<\/em> http:\/\/www.sec.gov\/comments\/df-title-ix\/executive-compensation\/executive-compensation.shtml.<\/div>\n
[32]<\/a> See <\/em>Center on Executive Compensation, The Dodd-Frank Pay Ratio Is Unduly Burdensome and Contrary to Sound Disclosure Policy<\/em>, Hearing on Legislative Proposals to Promote Job Creation, Capital Formation, and Market Certainty Subcommittee on Capital Markets and Government Sponsored Enterprises House Committee on Financial Services (March 16, 2011), available at<\/em> http:\/\/www.hrpolicy.org\/downloads\/2011\/c11-34%20House%20Fin%20Svcs%20Cmt%20Testimony%20March%2016%202011%20FINAL.pdf.<\/div>\n
[33]<\/a> See<\/em> Letter from Retail Industry Leaders Association (Oct. 27, 2010), available at<\/em> http:\/\/www.sec.gov\/comments\/df-title-ix\/executive-compensation\/executivecompensation-43.pdf; Letter from Center on Executive Compensation (Sept. 1, 2010), available at <\/em>http:\/\/www.sec.gov\/comments\/df-title-ix\/executive-compensation\/executivecompensation-10.pdf.\u00a0 One solution might be the use of sampling.\u00a0 See<\/em> Letter from Center on Executive Compensation (Aug. 11, 2011), available at<\/em> http:\/\/aflcio.org\/corporatewatch\/capital\/upload\/AFL-CIO-Comment-Letter-on-Dodd-Frank-Section-953-b.pdf<\/div>\n
[34]<\/a> Letter from Center on Executive Compensation, supra <\/em>note 34.\u00a0 See also<\/em> Brett Harsen, Matt Ward, & Ted Buyniski, Dodd-Frank Act: The Importance of Putting CEO Pay Multiples into Context<\/em> 1 (Radford), available at <\/em>http:\/\/www.globalequity.org\/geo\/sites\/default\/files\/Radford_Whitepaper_DoddFrank_CEO_Pay_Multiples.pdf (\u201cA company involved only in semiconductor chip design will have a much lower CEO pay multiple than a similar entity that designs and fabricates the chips because the latter has a large workforce of lower-paid manufacturing workers. A company that has moved a segment of its workforce to lower cost countries will have a higher CEO pay multiple than one whose workforce is based solely in the United States.\u201d).\u00a0 Some have described the ratio as \u201coverly simplistic.\u201d Id<\/em>.<\/em><\/div>\n
[35]<\/a> Burdensome Data Collection Relief Act, H.R. 1062, 112th Cong. (2011).<\/div>\n
[36]<\/a> See<\/em> H.R. Rep. No. 112-142 (2011), available at<\/em> http:\/\/financialservices.house.gov\/UploadedFiles\/HR1062hreport.pdf.\u00a0 An amendment designed to fix the major concerns over the calculation of the ratio was defeated by a 27-25 vote.\u00a0 Id<\/em>. at 4.<\/div>\n
[37]<\/a> U.S. Senators Robert Menendez (D-NJ), Tom Harkin (D-IA), Sherrod Brown (D-OH), and Carl Levin (D-MI) sent a letter to Charles G. Tharp, CEO of Center on Executive Compensation, urging the organization to reconsider its position and to \u201cstop shielding your member companies from revealing this basic information.\u201d\u00a0 Letter to Charles G. Tharp (Jul. 6, 2011), available at <\/em>http:\/\/menendez.senate.gov\/download\/?id=c374a0b8-8413-4bab-a4a7-dd54ce712aff.<\/div>\n
[38]<\/a> At least one company has already disclosed a compensation ratio.\u00a0 See<\/em> MBIA Inc., Proxy Statement (Form DEF 14A) (filed March 18, 2011) (\u201cThe average and median salary for all employees other than the NEOs (385 employees) were $151,700 and $130,000, respectively. The average and median salary and bonus for all employees were $223,000 and $165,000, respectively. These compare to Mr. Brown’s salary of $500,000 (3.3 times average and 3.9 times median) and salary and bonus of $2,300,000 (10.3 times average and 14.0 times median) for 2010.\u201d), available at<\/em>\u00a0 http:\/\/www.sec.gov\/Archives\/edgar\/data\/814585\/000119312511070813\/ddef14a.htm.<\/div>\n
[39]<\/a> See<\/em> Implementing Dodd-Frank Wall Street Reform and Consumer Protection Act \u2014 Upcoming Activity<\/em>, www.sec.gov, http:\/\/www.sec.gov\/spotlight\/dodd-frank\/dfactivity-upcoming.shtml (last visited Oct. 11, 2011).<\/div>\n
[40]<\/a> See<\/em> supra<\/em> text accompanying notes 24-27.<\/div>\n
[41]<\/a> See supra <\/em>text accompanying notes 29-33.\u00a0 Others have suggested the use of sampling techniques.\u00a0 See<\/em> Letter from Meridian Compensation Partners (Oct. 19, 2010), available at<\/em> http:\/\/www.sec.gov\/comments\/df-title-ix\/executive-compensation\/executivecompensation-49.pdf . See also<\/em> Letter from Davis Polk (Nov. 16, 2010), available at<\/em> http:\/\/www.sec.gov\/comments\/df-title-ix\/executive-compensation\/executivecompensation-51.pdf.<\/div>\n
[42]<\/a> See<\/em> Letter from Senator Menendez (Jan. 19, 2011), available at<\/em> http:\/\/www.sec.gov\/comments\/df-title-ix\/executive-compensation\/executivecompensation-59.pdf (\u201cSpecifically, I want to clarify that when I wrote \u2018all\u2019 employees of the issuer, I really did mean all employees of the issuer. \u00a0I intended that to mean both full-time and part-time employees, not just full-time employees. \u00a0I also intended that to mean all foreign employees of the company, not just U.S. employees.\u201d).\u00a0 The inclusion of part time workers and foreign workers in low wage countries will likely lower the median compensation paid to employees and increase the ratio.\u00a0 See supra<\/em> note 15.<\/div>\n
[43]<\/a> Shareholders can make comparisons based upon the total compensation paid to the CEO.\u00a0 The utility of this statistic, however, is limited at least in part by the \u201cLake Wobegon\u201d effect.\u00a0 See<\/em> Letter from Americans for Financial Reform to Elizabeth M. Murphy (Mar. 23, 2011), available at <\/em>http:\/\/ourfinancialsecurity.org\/blogs\/wp-content\/ourfinancialsecurity.org\/uploads\/sites\/18\/2011\/03\/AFR-SEC-953b-3-23-11.pdf (\u201cExisting requirements mandate disclosure of top executive compensation only, encouraging companies to focus unduly on peer to peer comparisons when setting CEO pay. These comparisons help lead to ever increasing levels of CEO pay by virtue of a \u2018Lake Wobegon\u2019 effect, where nearly all CEOs claim to be above the average CEO quality level.\u201d).<\/div>\n
[44]<\/a> By making shareholders better informed at the time they vote on compensation, they are in a position to give the board better \u201cadvice.\u201d\u00a0 See<\/em> Shareholder Approval of Executive Compensation and Golden Parachute Compensation, Exchange Act Release No. 63768 n. 175 (Apr. 4, 2011) (\u201cEven though each of the shareholder advisory votes required by Section 14A is non-binding pursuant to the rule of construction in Section 14A(c), . . . we believe these votes could play a role in an issuer’s executive compensation decisions.\u201d).\u00a0 Calls for the use of similar ratios have arisen overseas.\u00a0 See<\/em> Will Hutton, Hutton Review of\u00a0 Fair Pay in the Public Sector: Final Report 8 (March 2011) (\u201cThe Government should not cap pay across public services, but should require that from 2011-12 all public service organisations publish their top to median pay multiples each year to allow the public to hold them to account.\u201d), available at<\/em> http:\/\/cdn.hm-treasury.gov.uk\/hutton_fairpay_review.pdf.<\/div>\n
[45]<\/a> See<\/em> Letter from Calvert Investment Management (May 27, 2011) (\u201cInvestors could use data on median pay to understand U.S. and global compensation trends, and to better understand issuer decisions to move certain operations and jobs overseas.\u201d), available at<\/em> http:\/\/www.sec.gov\/comments\/df-title-ix\/executive-compensation\/executivecompensation-75.pdf.<\/div>\n
[46]<\/a> See<\/em> Whole Foods Market, Annual Report 7 (Form 10-K) (2011) (\u201cWe also have a salary cap that limits the total cash compensation paid to any team member in a calendar year to 19 times the average annual wage of all team members. In addition, our co-founder and co-chief executive officer, John Mackey, has voluntarily set his annual salary at $1 and receives no cash bonuses or stock option awards.\u201d), available at<\/em> http:\/\/www.sec.gov\/Archives\/edgar\/data\/865436\/000110465910059917\/a10-19737_110k.htm;\u00a0 El Paso Corporation, Proxy Statement (Form DEF 14A) (2011) (\u201cWe also believe that our executive compensation program must be internally consistent in order to motivate our employees as a whole to create stockholder value. We are committed to internal pay equity and our Compensation Committee monitors, on an annual basis, the relationship between the compensation of our named executive officers and the compensation of our non-managerial employees.\u201d), available at<\/em>\u00a0 http:\/\/www.sec.gov\/Archives\/edgar\/data\/1066107\/000095012311030217\/h80859ddef14a.htm. \u00a0See also<\/em> James A. Cotton, Toward Fairness in Compensation of Management and Labor: Compensation Ratios, A Proposal for Disclosure<\/em>, 18 N. Ill. U. L. Rev. 157, 183\u00a0(1997) (\u201cAt Ben & Jerry’s Homemade, Inc., in Waterbury, Vt., for example, top people get no more than seven times what the lowest-paid full-time person earns.\u201d).<\/div>\n
[47]<\/a> Cotton, supra<\/em> note 46, at 182 (ratio disclosure \u201c[t]o a large extent . . . will embarrass [directors] into trying to do the right thing rather than face questions at the stockholders meeting or at a meeting of financial analysts. Embarrassment is a rather large factor among a group that considers itself to be as special as this one does.\u201d).<\/div>\n
[48]<\/a> Menendez, supra <\/em>note 38 (noting that disclosure will encourage \u201cfirms to take a harder look at the rising pay discrepancies between CEOs and their workers\u201d).\u00a0 The rules of the SEC are often designed to affect substantive behavior inside the boardroom.\u00a0 See<\/em> J. Robert Brown, Jr., Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure<\/em>, 57 Cath. U. L. Rev. 45 (2008).<\/div>\n
[49]<\/a> The ratio can be reduced either by raising the median compensation paid to employees or lowering the total compensation paid to the CEO.<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

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