Public companies in the US recently began publishing the ratios between the pay of their CEO and that of their median employee in compliance with a regulation adopted by the Securities and Exchange Commission in 2015 that went into effect in the 2017 fiscal year. The regulation, prescribed by the 2010 Dodd-Frank financial reform legislation, had been a potential target for revision, or reversal by the Trump administration, but major institutional investors, particularly activist funds, pressured the SEC not to delay or discard the rule.
As the due date for disclosure approached, executives expressed anxiety about how to communicate these figures to their employees, as well as how the media and shareholders would react. With regard to employees, the concern was not so much that they would learn their CEO was earning an outrageously large salary, but more that half of them were about to learn that they earned less than the median employee and would want to know why.
So far, over 500 companies have published their disclosures, and according to an analysis last month by ISS Analytics, “the numbers have landed all over the map,” from 1.87 for Berkshire Hathaway CEO Warren Buffett, to 2,526 for Aptiv PLC’s Kevin Clark (the median ratio for S&P 500 companies was 166:1). The SEC rule requires companies to compare salary alone, so the ratios don’t account for what CEOs earn from capital gains and dividends.
Because of this limitation, David McCann recently commented at CFO, the rule isn’t as helpful to investors as it’s supposed to be, as it allows some companies to massively undercount how much money their CEOs really make. McCann points to the examples of the private equity firms Apollo Global Management, which reported that its CEO Leon Black was paid $250,888 last year, and Carlyle Group, whose founding co-CEOs David Rubenstein, William Conway, and Daniel D’Aniello each earned $281,315. These numbers are only slightly higher than the pay of the hedge funds’ median employees, but, McCann argues, they are also meaningless:
In 2015, the Obama administration’s Securities and Exchange Commission (SEC) adopted a rule stipulating that public companies would need to disclose the ratio between their employees’ median pay and that of their CEO, starting in the 2017 fiscal year. The rule, mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, was intended to increase transparency and reduce income inequality within the country’s largest, most profitable corporations.
Once Donald Trump was elected president, however, most believed the rule would be changed or repealed, especially after Trump signed an executive order calling for a review of Dodd-Frank regulations.
Chairman of the SEC Michael Piwowar, who publicly expressed criticism of the regulation after it was passed, announced an open comment period earlier this year for companies affected by the rule to provide feedback and directed his staff to make adjustments based on the feedback. It seemed all but certain that companies would never have to release this information, which would be a potential lightning rod for controversy.
At this point, however, it seems the rule is here to stay, at least for the time being. While the House of Representatives did pass a repeal of the rule in June, experts believe the possibility of that bill making it through the Senate has diminished greatly, given the administration’s more pressing priorities. That means for at least this year, public companies will need to start—or continue—planning for how to calculate and communicate their median employee’s income, as well as how to handle the backlash that will likely ensue from reporting it.
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US President Donald Trump signed two executive orders on Friday: one ordering a review of regulations imposed on the financial sector under the Dodd-Frank Act of 2010, and the other ordering a review of the “fiduciary rule,” which requires financial advisors to act in their clients’ best interests when advising them about retirement, NPR reports:
These executive actions are the start of a Trump administration effort to reverse or revise financial regulations put in place by the Obama administration and seen by Trump and his advisers as onerous and ineffective. …
Echoing arguments of the financial services industry, the Trump administration official said the [fiduciary] rule would have unintended consequences if allowed to go forward. The industry says the rule will make it harder for advisers to serve lower-income clients. Backers of the rule say it will prevent advisers from gouging customers by selling them inappropriate, high-fee products. Once the review is complete, the official said, it’s possible the Labor Department could determine the rule is completely unnecessary.
The Trump team has had their sights on the fiduciary rule, drawn up by the Labor Department last April, for a while, and the business community had lobbied the president to rescind it. Friday’s order does not immediately cancel the rule, but gives the department the discretion to revise or discard it and prevents the rule from taking effect as scheduled on April 10.
A senior Trump administration official tells the Wall Street Journal that Friday’s orders are just the start of the administration’s deregulation agenda: