November 12, 2013
Dear SEC Commissioners,
I am writing to comment on the SEC’s proposed rulemaking implementing Dodd-Frank’s requirement that all issuers disclose the ratio of principle executive officer (“PEO”) compensation to median employee compensation. This is a very useful rule that will hopefully help to limit the growing disparity between executive and average employee compensation. However, because this is an important goal and the regulation at issue sufficiently easy to comply with, I encourage the SEC to have “emerging growth companies” comply with the rule as well. There are three reasons to do so, each of which I will discuss in turn.
First, emerging growth companies are both potential attractive investments and potentially risky ones as well. Thus, it is especially relevant information to an investor considering one of these companies whether it spends wisely for employee talent (i.e. has a low ration of PEO to employee pay) or funnels the bulk of the firm’s compensation to the top (i.e. has a high ratio). Even if there is little correlation between the success of a company and its pay ratio, extending the rule to new companies would incentivize lower ratios to attract investors, who presumably would not want to invest in a company that is little more than a vehicle for executive pay. Thus, extending the rule in this context would help achieve Congress’s aims in passing Dodd-Frank.
Second, companies that have grown substantially from their “emerging growth” period often retain much of the culture from that earlier time in the company’s history. The SEC should mandate pay ratio disclosure for young companies, therefore, in order to get the company to consider issues of fair compensation at its very inception. Similarly, subjecting companies to this regulation earlier in their existence will make it harder for PEO’s to pay themselves too much in the future, since equitable compensation schedules are probably easier to maintain than create in the first instance.
Finally, the fact that the SEC has made this regulation easy to comply with also argues in favor of extending it to cover “emerging growth companies.” In response to concerns about the complex calculations needed to determine “median employee pay,” the agency allows companies significant freedom to choose a feasible calculation method. First, to the extent that requiring companies to actually calculate median executive pay raises compliance costs, this is less true for “emerging growth companies,” which are unlikely to have the complex payroll and benefits systems that make calculations difficult. Second, the flexibility proposed in the current rule would, of course, lower the regulatory burden for these nascent companies just as much as it would for established blue chip firms.
Because this is such an important issue in our times of income inequality, I urge the SEC, for the reasons stated above, to extend this rule to cover “emerging growth companies.”
Sincerely,
Andrew Kushner