September 19, 2013
After having reviewed the recent rules release, I am amazed by the amount of thought and effort that went into to producing the release. Had the members of Congress taken the time to consider the difficulties in determining median employee salary, Section 953(b) of Dodd-Frank may not have been included in the bill at all. Obviously there are a number of issues that make a seemingly simple calculation a Herculean task in reality. Furthermore, I, like the SEC staff, have a hard time comprehending the tangible benefit that this new disclosure requirement provides to investors.
My comment is one of practicality and is framed from the stand point of "devil's advocate." That is, at the end of the day, there is going to be a single numerical ratio included in one or more of a publc company's filings. In addition, there will likely be a summary of the methodoogy employed to determine that ratio. But realistically, who will ever know whether or how close the company followed their stated methodology or whether the purported CEO pay ratio is even accurate based on that methodology or otherwise?
With all the difficulties commentators have identified in calculating the compensation of the median employee, how is any outside thrid party going to be able to verify that the number is accurate? Moreover, even if they were able to identify and prove that a company's CEO pay ratio was not accurate, what would come of it? As Commissioner Gallagher stated in his dissenting remarks, the SEC Staff was unable to affirmatively identify a single benefit to disclosure of the CEO pay ratio. This being the case, it would seem to be a monumental task for anyone to prove that a misstatement of the CEO pay ratio was in any way, shape or form, material. Thus, what's stopping any issuer from merely making an educated or best guess and reporting that number as the median? Yes, there are potential civil and even criminal penalties that could result from intentionaly making a potentially false or misleading statement in an SEC filing, but is the SEC or DOJ really going to expend resources to pursue any type of action should such a case arise? I imagine the answer is no there are more important fish to fry.
We can go back and forth and argue all of the details, potential complexities and intricacies of this new rule, but perhaps we should all just be practical about it and not waste our time on something which, in my opinion, is really not that important. Federal law says the SEC must adopt this rule so let's adopt something and move on with more important matters. If a public company wants to undertake an in-depth analysis to precisely determine median employee pay so as to permit them to accurately and precisely report their CEO pay ratio to the penny, then more power to them. If, on the other hand, companies realize that there is likely little or no risk in making an "educated estimate" as to their median employee salary, who would really be the wiser?
Even if we were talking about a registration statement withpotential Section 11 or 12(a)(2) liability, one would still need to show a misstatement of material fact under either of those sections. As referenced above, I'm not sure how anyone proves an inaccurate CEO pay ratio is material when, as Commissioner Gallagher mentioned, the SEC Staff was unable to affirmatively identify a single benefit of these disclosures to investors.
I am sure you will get many sophisticated comment letters from the ABA, Society of Corporate Secretaries, NACD and the like. I have no doubt that these comments will be much more insightful, informative and well thought out than mine as I am writing this completely off the cuff. However, I hope that one or more of these letters touch on the risks of non-compliance along the lines of what I have discussed above (i.e., with the calculation methodology requirements)as I would be interested to know if there is something that, at first glance, I have overlooked which would significantly increase the risks to an issuer who make a best guess at median salary in lieu undertaking an expensive and complex statistical analysis to make such determination. Perhaps the more likely scenario will be that companies do undertake the in-depth analysis initially and then estimate a reasonable annual adjustments thereafter.
Thank you and go Red Sox