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Huizenga: Dodd-Frank Pay Ratio Provision Not Worth The Cost, Needs To Be Repealed

Washington, March 21, 2013
Pay Ratio Provision Not Worth Cost, Repeal Bill Sponsor Huizenga Says
Bloomberg BNA - Mary Hughes | March 20, 2013 08:32PM ET

(BNA) -- The pay ratio disclosure requirement of Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act is a “perfect example of an unnecessary and complex regulatory requirement that is not worth the cost and should be repealed,” Rep. Bill Huizenga (R–Mich.) told BNA March 20.

Huizenga introduced the Burdensome Data Collection Relief Act (H.R. 1135) March 13. Huizenga said that the proposed legislation “offers us the opportunity to provide bipartisan regulatory relief to all publicly traded companies.”

The bill would repeal Dodd-Frank Section 953(b), which requires public companies to disclose the median annual total compensation of all employees, the total annual compensation of the chief executive officer, and the ratio of the median employee pay to the CEO's pay . A similar repeal bill was introduced in the 112th Congress

Huizenga told BNA that “Section 953(b) of Dodd-Frank creates an enormous burden for publicly traded companies while offering no corresponding benefit. By forcing publicly traded companies to report median total compensation, the federal government is requiring companies to provide data that is potentially misleading to investors due to the differing geographic locations of the business. A salary in Detroit is going to be different than a salary in San Francisco, which is going to be different than a salary in London.”

Section Serves a Purpose

Republican and industry backers' attempts to repeal portions of the Dodd-Frank Act are intended to intimidate the regulatory agencies and try to keep them from taking action, Sarah Anderson of the Institute for Policy Studies, told BNA March 20. Anderson, the global economy project director for the Washington-based progressive think tank, said rulemaking on Section 953(b) is long overdue.

The pay ratio data that Section 953(b) requires is information that should be in a company's files, she said. “Companies should be keeping good records on how much they are paying their employees. If they don't know what they are paying their workers, that should send up a red flag to investors,” she said. The information is already available and disclosed for CEOs, she added.

Regarding criticism that the section is unduly burdensome for multinational employers, Anderson said that the pay ratios of companies with a substantial part of their workforce outside of the United States—for example, in third-world countries, “will [have ratios that] look very wide compared to companies that only have a workforce in the U.S.”

However, she added that “there is nothing to prevent companies from offering additional information” that would explain the differences. They could, for example, break down the U.S. ratio versus the global employee ratio, she said.

Anderson said that the pay ratio disclosure requirement serves investors in other ways, including highlighting the level of fairness in a company's pay policy. The information will give investors a better picture of the gap between executive- and employee-level pay, she said. From a business perspective, when a company has a narrower gap, it increases company effectiveness, encourages employee cooperation, produces higher productivity and lower turnover, she said.

Section Serves No Purpose

Greta E. Cowart, a partner with Haynes & Boone in Dallas, supports repeal. She said in a March 19 letter to Huizenga that Dodd-Frank Section 953(b) is “unworkable under existing laws.”

“I was encouraged to see Rep. Huizenga's introduction of [H.R. 1135], . . . which would eliminate a provision requiring a disclosure in a filed SEC document for which multinational corporations face both legal and extraordinary practical challenges,” Cowart told BNA March 19.

“Even if the [pay ratio] numbers required by [Section 953(b)] can be calculated without violating other jurisdictions' laws regarding data privacy, the number cannot be verified because compensation of many employees varies by when it is measured, and thus the number is only momentarily accurate at best,” Cowart said.

Section 953(b) disclosure “may have seemed like a good idea when Congress first considered it,” Cowart said, “but the legal and practical impediments to complying with this are large for multinational corporations and the data may not provide any useful information for investors due to the large number of variables in the calculation.”
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