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Public Statement


Dissenting Statement at Open Meeting on Pay Ratio Disclosure

Commissioner Michael S. Piwowar

Aug. 5, 2015

When the pay ratio disclosure rule was originally proposed, I objected to its consideration on the grounds that the Commission and its staff should not spend our limited resources on any rulemaking that unambiguously harms investors, negatively affects competition, promotes inefficiencies, and restricts capital formation — especially when there is no statutory deadline for completion.[1] Pursuing a pay ratio rulemaking was wrong then and remains wrong now.

Today’s rulemaking implements a provision of the highly partisan Dodd-Frank Act[2] that pandered to politically-connected special interest groups and, independent of the Act, could not stand on its own merits.[3] I am incredibly disappointed the Commission is stepping into that fray.

Section 953(b) of Dodd-Frank simply has nothing to do with protecting investors, ensuring fair, orderly, and efficient markets, or facilitating capital formation. The proposing release is candid about the fact that “neither the statute nor the related legislative history directly states the objectives or intended benefits of the provision or of a specific market failure, if any, that is intended to be remedied.”[4]

Indeed, the proposal itself never specifically identified any objective, goal, or benefit that the Commission believes the rulemaking is intended to accomplish. The proposing release only referenced a variety of conjectured benefits described by pre-proposal commenters, such as (i) considering vertical pay equity within companies; (ii) improving employee morale and productivity; (iii) evaluating the relative worth of a chief executive officer (“CEO”); (iv) increasing board accountability; (v) facilitating identification of a board’s strengths and weaknesses; and (vi) providing insight into a board’s relationship with its CEO.[5] In other words, any benefits to be had are merely in the eye of the beholder.

Having been deprived of any clear description of what the statute or our proposal was intended to accomplish,[6] commenters submitted their own views — and we heard from a lot of them, more than 287,000 in total. What did these commenters think? Over 70,000 form letters claimed that the pay ratio disclosure was needed because “the public has the right to know which corporations are fueling the yawning gap between rich and poor.”[7] Interestingly, this form letter was generated by an organization that receives funding from billionaire George Soros.[8] Close to 13,000 other form letters asserted that the pay ratio disclosure will show which corporations are “siphon[ing] money away from investors, and into the pockets of CEOs.”[9]

Another commenter was very explicit about the “name and shame” motive of the pay ratio disclosure: “The SEC’s proposed disclosure mandate is valuable and necessary in that its implementation evidences government’s recognition of the dangers of disparity in gross pay strata. . . . If used effectively, compensation committees will use CEO pay ratio data to better moderate pay packages and reduce this hazard.”[10] In other words, the pay ratio disclosure is a blatant attempt to limit executive compensation.

The push for pay ratio disclosure should come as no surprise to anyone familiar with the use of Saul Alinskyan tactics by Big Labor and their political allies.[11] Nearly fifteen years ago, Big Labor supporters published a book called Working Capital: The Power of Labor’s Pensions[12] that contained a strategy to re-make the capital markets with a so-called “worker-owner” viewpoint.[13] The worker-owner approach would aim to “inject workers’ welfare, broadly understood, into investment priorities” and depart “from conventional investment wisdom by expanding the options, methods, and principles that guide capital allocation.”[14] As one editor of Working Capital later said, “[t]hese decisions need not be driven by a solitary logic of return-seeking. . . . Other goals, values, and methods can, and should, come into play.”[15] To put it another way, union-backed pension funds could use their investments to advance a social agenda to the detriment of risk-adjusted investment returns.[16] Where possible, Big Labor would use legal and regulatory tools to further increase the influence of their shareholder power.[17]

Working Capital observes that many “accomplishments of labor-shareholder activism are political rather than economic, and that they carry union credibility in the face of declining union membership and bargaining power.”[18] Big Labor’s playbook identified three ways in which unions had used their power as shareholders to make gains for workers: (i) convincing management to recognize union organizing activity; (ii) assisting workers in strike settlement interventions; and (iii) ensuring that anti-union managers do not become entrenched.[19]

This pay ratio rulemaking is literally a page from that Big Labor playbook. In a section entitled “Chief Executive Officer Compensation: Taming an Out-of-Control Expense,” the book contains a table labeled as “CEO Pay Packages and Consequences” that lists the compensation for the then-top twenty highest paid CEOs and the number of workers at each of their corporations.[20] It then characterizes the ratio of these two numbers as the “CEO tax” paid by each worker, or “the amount that annual wages could have been increased if the CEO’s pay had been instead divided up equally among the companies’ workers.”[21]

More recently, the concept of using a CEO pay ratio for substantive purposes has spread to other contexts. In California, a bill was introduced that would tie state corporate tax rates for publicly held corporations to its CEO pay ratio.[22] In Rhode Island, the state senate has introduced a bill that would give preference in government contracting to firms whose highest paid executive does not receive more than 25 times the compensation paid to its median, non-executive employee.[23] The federal government too could use the pay ratio as a basis for other purposes. For example, with respect to federal government contracts, if the President, by executive order, can mandate an increase to the minimum wage paid to workers of federal contractors, what is to stop the President from issuing a similar executive order that limits compensation of a CEO based on a pay ratio?[24]

Today’s rulemaking also unfairly targets publicly-traded companies that employ a large number of individuals in states with relatively lower costs of living. The labor market for hiring chief executive officers is markedly different than the market for hiring a non-executive employee of a company.[25] CEO compensation is often set based on the supply and demand for CEOs, while cost of living and local labor market conditions often play bigger factors in setting compensation for other employees. Indeed, the adopting release recognizes and addresses this issue with respect to workers located in foreign countries, but it ignores potentially similar regional effects within the United States. States with a lower cost-of-living, such as Mississippi, Idaho, and Oklahoma, are potentially disadvantaged when compared to high cost-of-living states, such as California, New York, and Connecticut.[26]

Let’s return to the problem of there being no evident benefits of this rulemaking. The best we can do in the adopting release is say that the Commission finds “the informational benefit of facilitating shareholder engagement in executive compensation decisions as potentially a significant new benefit to shareholders when they exercise their say-on-pay voting rights.”[27] However, the adopting release inserts several major caveats to this supposed benefit, including (i) the pay ratio is but one data point among many that may be relevant for say-on-pay votes; (ii) since the say-on-pay vote is advisory and non-binding, it is difficult to link the pay ratio to potential changes in CEO compensation; (iii) it is even more speculative to link the pay ratio disclosure to an economic outcome at a company; and (iv) no commenter provided us with any data that would allow us to quantify potential benefits.[28] Having identified only a speculative, unsupported benefit, the adopting release defensively retreats to the rationalization that Congress directed us to promulgate the rule and, therefore, must have believed there was some benefit to a pay ratio disclosure; thus the Commission should refrain from second-guessing that judgment. The adopting release simply brushes aside the estimated $1.3 billion in initial compliance costs.[29]

If the Commission was serious about understanding how investors might react to the pay ratio disclosure, it would have engaged in investor testing. Section 912 of the Dodd-Frank Act made it much easier for the Commission to engage in such testing. That is one of the few provisions of Dodd-Frank that I wholeheartedly support and I have long called for such testing as part of disclosure-based rulemakings.[30] Yet, despite the passage of more than five years since the enactment of Dodd-Frank and nearly two years since the proposing release, no such testing effort was undertaken.

Instead, the majority of the Commission looks to the opinions of commenters regarding the materiality of the pay ratio disclosure, particularly those commenters that asserted they incorporate social issues like pay equity into their decision-making. As support for this position, the adopting release cites a comment letter, for example, from one group whose executive committee contains representatives from Big Labor.[31]

So to recap, there is no specific or convincing justification for this rulemaking. Nor is there an even arguably compelling reason for considering it today. The timing of this vote is quite peculiar given the recent moves by Congress to repeal the pay-ratio provision. Last week, six more co-sponsors signed on to a bill introduced in the House by Representative Bill Huizenga of Michigan to repeal Section 953(b), bringing the total number of co-sponsors to 23 members.[32] Less than a month ago, Senator Mike Rounds of South Dakota introduced a pay-ratio repeal bill in the Senate, which added a co-sponsor two days ago.[33] It does not seem coincidental that our open meeting was scheduled for the week after the House of Representatives adjourned for August recess and one day before the Senate is expected to do the same.[34]

Notwithstanding the misguided actions that we are taking today, I want to acknowledge the efforts of our hardworking staff, who faithfully carried out the instructions that were issued.

I have a lot more to say on today’s adoption of the pay ratio disclosure, but in the interest of time, I will make one final point and my additional remarks will be available on the SEC website. Today’s action is nothing more than a sad example of surrendering the Commission’s agenda to politically-connected special interests and acquiescing to the bullying tactics of their political allies. Remember what we learned in school. Acquiescing to bullies only gives them more ammunition and makes it worse. And, yet, Commission leadership seems content to invite further blows. What will come next? Perhaps it will be political spending disclosure. Perhaps it will be share buyback prohibitions. To be sure, today’s action ensures that the Commission’s bullies will be back for more. It is undoubtedly too late to convince a majority of my fellow commissioners to end this losing strategy of appeasement by joining Commissioner Gallagher and me in standing up to the Commission’s bullies by voting “no” on “name and shame.” But I remain hopeful that Commission leadership will have the courage to stand up to the bullies and wrest back control of our agenda. The American people deserve nothing less.

[1] Michael S. Piwowar, Statement at Open Meeting Regarding Municipal Advisors and Pay Ratio Disclosure (Sept. 18, 2013), available at

[2] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203 (July 21, 2010) (“Dodd-Frank”).

[3] A provision identical to Section 953(b) was first included in S. 3049, introduced on February 26, 2010 by Senator Robert Menendez of New Jersey. The bill neither had any cosponsors nor was a related bill introduced in the U.S. House of Representatives. See; see also Securities Act Release No. 9452 (Sept. 18, 2013) [78 F.R. 60560, 60562 n.23 (Oct. 1, 2013)] (“Proposing Release”).

[4] Proposing Release, at 60582.

[5] Id. at 60562, n.24.

[6] The Commission’s failure to identify such objective(s) makes it difficult, if not impossible, to apply economic analysis principles as we are expected to do in each rulemaking. See Current Guidance on Economic Analysis in SEC Rulemakings (Mar. 16, 2012), available at (requiring discussion of the need for regulatory action and how the proposed rule will meet that need). Although the Commission’s guidance, citing Circular A-4 from the Office of Management and Budget, notes that a Congressional directive to adopt a rule may constitute an independent justification, in this case the Commission is making significant discretionary choices while questioning whether the rulemaking has any benefits at all. The absence of a Commission-identified need precludes the ability to analyze, and seek public comment on, the relative merits of each regulatory alternative in meeting that need. If the sole justification for the rulemaking is to implement the Congressional directive (despite a lack of articulable benefits), then the Commission would be obligated to fulfill that mandate in the least costly way possible under the Administrative Procedure Act, Section 2(b) of the Securities Act of 1933, and Sections 3(f) and 23(a)(2) of the Securities Exchange Act of 1934. The Commission has not done so here.

[7] Comment letter type H.

[8] The form letter is available at According to their website, “ is a 501(c)(4) non-profit incorporated in Washington, D.C., with a 501(c)(3) fiscal sponsorship arrangement through the Tides Foundation.” The Tides Foundation has received funding from George Soros. See Kelly Riddell, George Soros Funds Ferguson Protests, Hopes to Spur Civil Action, The Washington Times (Jan. 14, 2015), available at

[9] Comment letter type B.

[10] Comment letter from Miles Rapoport, Demos (Nov. 22, 2013).

[11] See Saul D. Alinsky, Rules for Radicals: A Pragmatic Primer for Realistic Radicals (New York, NY: Random House, 1971).

[12] I thank Professor J.W. Verret for suggesting that I read this book.

[13] Working Capital: The Power of Labor’s Pensions, edited by Archon Fung, et al. (Ithaca, NY: Cornell University Press, 2001) (“Working Capital”). In calling for more shareholder activism, one contributor observed “[w]hereas the successes of trade unions are a matter of historical record, the potential of pension funds remains largely untapped.” Id. at 2.

[14] Id. at 3.

[15] Mallory Stark, Six Questions for Archon Fung (May 20, 2002), HBS Working Knowledge, available at

[16] Working Capital at 3.

[17] Id. at 219 (“Worker-owners’ ability to change company behavior depends greatly on what legal and regulatory limits are placed on managerial power.”).

[18] Id. at 6.

[19] Id. at 71-72.

[20] Id. at 38-42.

[21] Id. at 39.

[22] S.B. 1372, 2013-2014 Session (Calif.). The applicable tax rate would range from 7% for a compensation ratio between 0 and 25 to 13% for a compensation ratio in excess of 400. The actual pay ratio would be determined under state law, but the total compensation of the CEO would be determined pursuant to the disclosure reported to the Commission under Item 402 of Regulation S-K. Although the bill received a majority of votes in the state senate, it failed to achieve the two-thirds vote required for passage. See

[23] S. 0257, 2015 Session (R.I.), available at A similar bill based on a pay ratio of 32 times the compensation of the lowest paid full-time worker was approved by the state senate last year, but no further action was taken by the state house of representatives. See S. 2796, 2014 Session (R.I.), available at

[24] Executive Order 13,658, Establishing a Minimum Wage for Contractors (Feb. 12, 2014) [79 F.R. 9851 (Feb. 20, 2014)].

[25] See, e.g., comment letter from Professor Korok Ray, The George Washington University (Dec. 2, 2013).

[26] State cost-of-living is based on data for the first quarter of 2015 collected by the Missouri Economic Research and Information Center, which is available at (last accessed Aug. 4, 2015).

[27] Securities Act Release No. 9877 (Aug. 5, 2015) (“Adopting Release”), at 175.

[28] Id. at 176.

[29] Id. at 202.

[30] Michael S. Piwowar, Remarks to the Los Angeles County Bar Association Securities Regulation Seminar (Nov. 22, 2013), available at

[31] Adopting Release, at 180 n. 483.

[32] H.R. 414, 114th Cong. (2015).

[33] S. 1722, 114th Cong. (2015).

[34] The timing of today’s meeting is concerning for additional reasons. This pay ratio rule is being considered at the earliest possible date after closure of the comment period regarding a staff analysis of pay ratio disclosure. See Press Release No. 2015-109, SEC Staff Provides Additional Analysis Related to Proposed Pay Ratio Disclosure Rules (June 4, 2015), available at (setting a deadline of July 6, 2015). By rushing to accommodate a vote today, it would seem all such comments could not reasonably have been accounted for. More specifically, the draft adopting release for pay ratio disclosure was distributed to the Commissioners on the evening of July 6, in order to comply with an internal policy of circulating drafts at least 30 days in advance of an open meeting. Unsurprisingly, the July 6 draft did not contain any references to, or analysis of, any of the comment letters submitted around the July 6 comment deadline. Indeed, due to the extensive activity that is required to prepare for an open meeting, our staff has not even been able to provide an updated comment summary to the Commissioners. The comment summary was last updated as of June 5, 2015 and references only a single comment letter that was submitted in all of 2015. In light of the July 6 submission deadline, it would have been prudent to schedule a vote on the pay ratio disclosure, if at all, a month or so from now so all comments could be considered by both staff and Commissioners. Doing so would have been entirely consistent with what we understand to be the timing discussed with members of Congress. See Letter from Senator Elizabeth Warren to Chair Mary Jo White (June 2, 2015), available at

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Modified: Aug. 5, 2015