September 27, 2013
To whom it may concern,
This email is regarding the proposed amendment to Item 402 of Regulation S-K to implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 953(b) of the Act includes a mandate for the SEC to require each issuer to disclose the median of the annual total compensation of all employees of the issuer, the annual total compensation of the chief executive officer (CEO) of the issuer and the ratio of the two amounts as "pay ratio" disclosure.
My concerns are related to the potential impact of the proposed rule. Before I address my specific concerns I have a few additional observations that may be helpful. I find nothing particularly troubling about the flexibility included in the currently proposed rules. My understanding is that prior comments have focused some concern over the potential for significant compliance costs and difficulty of gathering accurate information worldwide. These concerns may well be valid but they are not the focus of this communication. I also do not care to comment here as to the challenges around making this disclosure comparable between issuers, other than to generally agree that different industries and business structures will certainly make this ratio of somewhat limited value. I do believe that the previous comments that investors do not seem to be particularly concerned with additional compensation disclosures do unfortunately appear somewhat true. Over the last few years there has been rather dramatic additions to the compensation disclosures and the Compensation Committee responsibilities and it is unclear at this point if any of that has actually caused much investor reaction. I do generally support the motivation for this rule but I have two concerns related to how this rule, if implemented, will almost certainly have two separate and very negative consequences.
It is clear to me that a CEO, that is faced with a "pay ratio" that may be deemed to be too high, would be highly motivated to consider making a rather easily adjustment that will be quite harmful to our economy and particularly harmful to lower paid workers. If the average worker pay is adjusted upward the ratio will become less dramatic. Increasing the pay for lower paid worker would do that but that would also impact the operating results. The calculated average pay for the workers can likewise be quickly adjusted upward (without dramatically impacting results of operations) by simply eliminating many of those lower paid workers and replacing that work with contract labor from outside service providers. These service providers can be very competitive in their pricing and work quality. Outside labor for services and contract manufacturing have already eliminated many lower and middle income positions in the United States. These separate service suppliers are often companies that do not file with the SEC (both domestic companies as well as foreign enterprises) and many do not provide their workers with compensation or benefits that are similar to the U.S. jobs that will be eliminated. Good jobs eliminated to improve a pay ratio number. This seems like it is such an obvious consequence that I do not see the point in explaining this further. Perhaps the SEC is not in a good position to clearly communicate this back to the legislature and the administration, but someone needs to carefully consider the potential costs (in terms of good U.S. jobs) for the questionable benefits that this disclosure.
My second concern is that the disclosure, in many cases, will cause some lesser compensated CEO's to show competitive ratio disclosures to their Board of Directors and Compensation Committees in an effort to increase his own compensation. Compensation in many companies has surely gotten to be higher than is reasonable or justified. In many other companies the CEO compensation has been far more reasonable. Most CEO's have very competitive personalities and many see their personal compensation as one of the measures of their success. It will be easy for a CEO to find comparable companies with much higher pay ratios but perhaps far less in terms of operating results. I therefore expect that the impact of this rule may be exactly the opposite of the reason that it was first proposed.
I do not believe that either of these concerns are wild speculation. I actually fully believe that both will certainly occur.
James R. Peters