US companies to disclose CEO/employee pay ratio – the UK experience

After protests and consultations lasting several years, the US Securities and Exchange Commission (SEC) has finally adopted a rule requiring US public companies to disclose the ratio of chief executive officers’ (CEO) pay to the median pay of employees.

The rule was originally mandated by the Dodd-Frank Act 2010 as part of the US’s post financial crisis measures, and will apply to financial years from 1 January 2017 onwards. So 2018 filings will include this figure for the first time.

The intention is to enable comparison across similar companies by shareholders who may call for curbs of CEO pay where judged necessary. But inevitably there have been concerns that the disclosure will primarily result in an outcry at the increasing disparity between CEO and employee pay. Companies have also complained of the potential cost and complexity of having to produce the median employee figure.

The SEC has said that the disclosure will be sufficiently flexible to counter this: companies can choose how to identify the median employee, for example using a statistical sampling of employees (rather than an annual survey of the entire workforce), on a date chosen by the company within three months of the end of its financial year (thus being able to exclude low paid seasonal workers), non-US employees of up to 5% of the workforce may be excluded (to counter concerns that their lower pay may skew the figures) and the figure need only be produced every three years.

The UK has had a similar requirement for a couple of years, introduced by Vince Cable, for companies to disclose annually the percentage change in CEO pay from the previous year and the percentage change in group employees’ pay – but it has not worked that well. The disclosure should be presented in a manner which permits comparisons, but companies have faced some problems in identifying employee pay costs which are often recorded in different ways in different countries and business units.  As with the US the UK rules were watered down allowing companies to use a different comparator group of employees if this is considered more appropriate. There has inevitably been some criticism that companies are choosing comparator groups in such a way as to make the disclosure meaningless thus making comparison across companies impossible.  This led to a complaint to the Government by the High Pay Centre - http://highpaycentre.org/blog/high-pay-centre-and-partner-organisations-write-to-financial-reporting-coun

Graham Rowlands-Hempel, Linklaters employment & incentives consultant, said:

“The UK has had a similar requirement for a couple of years, introduced by Vince Cable, for companies to disclose annually the percentage change in CEO pay from the previous year and the percentage change in group employees’ pay – but it has not worked that well and has been criticised by the High Pay Centre.”

It will be interesting to see whether or not the US rules will lead to any meaningful disclosure which will be useful for investors and companies alike. The flexibility built into the SEC rule, whilst aiming to assist companies in producing the required median employee figure, may ultimately result in the somewhat flawed disclosure we have seen in the UK.