	Introduction

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act; P.L. Section 953(b) of the act, the so-called pay ratio provision, requires the Securities and Exchange Commission (SEC) to craft rules necessary to implement a requirement that public company quarterly mandatory disclosures to the agency include the ratio between the total compensation of their chief executive officer (CEO) and all other employees. To address concerns over the challenges of calculating worker median pay, the SEC has proposed giving firms the flexibility to "select a [calculation] methodology," which could include the use of a statistical sample of the total worker population. Other factors that may help to reinforce a "cozy" CEO/board dynamic are when CEOs also serve as the board chair and when many directors are themselves active or retired CEOs. Since 1938, as part of its mission to ensure that public companies provide investors with material information to make informed investment and corporate governance voting decisions, the SEC has adopted an array of additional executive pay-related mandatory corporate disclosure regulations, including
disclosure of information concerning the amount and the kinds of compensation paid to its chief executive officer, chief financial officer, and the three other most highly compensated executive officers; disclosure of the criteria used in reaching executive compensation decisions and the degree of the relationship between the company's executive compensation practices and corporate performance; disclosure on how a company's executive pay policies might encourage excessive risk-taking; the objectives of the company's compensation program; what kinds of performance the compensation program is designed to reward; the elements of the compensation program; why the company has selected each element in the compensation program; how the amount of each compensation element is determined; and how each compensation element fits into the issuer's overall compensation objectives. The SEC's Proposal to Implement the Pay Ratio Provision

On September 18, 2013, the SEC voted 3-2 to propose a new rule that would require public companies to disclose the ratio of the total compensation of its CEO to the median total compensation of the rest of its employees as required by Section 953(b) of the Dodd-Frank Act. 1135 (Huizenga) was ordered to be reported by the House Financial Services Committee on June 19, 2013, and is similar to legislation in the 112 th Congress, H.R. H.R. She argued that the pay ratio provision "has the potential to provide useful information to shareholders about the ratio of CEO pay to median worker pay." Still, there appears to be a general consensus among critics that the provision is not likely to result in meaningful information to investors because the resulting data are not likely to pass the materiality test. Some investor groups have lent conceptual support to the operational importance of firms paying attention to CEO-worker pay ratios. An example is a scenario in which a high CEO-worker pay ratio could publicly embarrass a corporate board. This is because global firms could have overseas workers who reside in different countries with different average wage rates, different costs of living, different tax regimes, and different levels of government-provided benefits. Proponents of the pay ratio provision counter that such shortcomings can be reasonably addressed. Expressing doubts about the benefits some ascribe to the pay ratio provision, SEC staff commentary in the SEC's pay provision proposal noted that company-specific information about median employee pay would be new investor information that resulted from the pay ratio provision. Various proponents of the pay provision, such as Senator Robert Menendez (its original sponsor), say that the provision was in part a response to perceived excessive CEO pay levels. A concern is that the cost of computing the ratio may impose what some describe as "immense" costs, especially for large multinational or multi-segment companies. It has also been reported that many large and sophisticated global companies have human resource, payroll, and benefits systems that are not centralized, which could mean that they would have to reconcile data calculations across all countries in which they have a presence and then ensure that the data are accurate to comply with the pay ratio provision. Based on the survey, the center said that for many companies, implementation costs for the pay provisions are likely to be in the millions of dollars.
Section 953(b) of the Dodd-Frank Consumer Protection and Wall Street Reform Act (Dodd-Frank Act; P.L. 111-203), known as the "pay ratio provision," requires the Securities and Exchange Commission (SEC) to write rules to implement a requirement that public companies disclose the ratio between the total compensation of a company's chief executive officer (CEO) and the median compensation of all other employees. On September 18, 2013, the agency released proposals to implement the pay ratio provision. A firm will be able to choose its own methodology to calculate worker median pay, including statistical sampling.
Supporters of the provision, including its sponsor Senator Robert Menendez, argue that the public company data on CEO-worker pay disparity that will result from the provision will pressure corporate boards to be more restrained in pay packages to CEOs. The strategy can be seen as a measure to address what some describe as a board/CEO dynamic that can result in perceived excessive compensation for CEOs: board members may feel beholden to the CEO, who may also serve as board chair. Research consistent with this notion of insufficiently independent boards exists. Other research, however, appears to be consistent with the view that public company CEOs operate in a generally competitive marketplace in which the value that they give to shareholders is fairly compensated.
Other supporters of the pay ratio provision, including consumer groups, labor groups, and pension funds, also claim that disclosures that will result from the provision will help to inform investor decision making, including on whether a CEO's compensation is reasonable given a firm's overall worker compensation picture. If a corporate disclosure adds value to the investing process, it is said to provide material information. Materiality is central to the SEC's adoption of disclosure regulations, including the compensation disclosure rules that it has issued over the years. The SEC has observed that the usefulness to investors of the company-specific pay ratio data in the pay ratio provision cannot be quantified.
Critics of the pay ratio provision, including the U.S. Chamber of Commerce, human resources groups, and other business-related groups, counter that the value of corporate disclosure data is linked to the ability of investors to use it to compare various firms. A principal concern is that this comparative value of the ratios will be undermined. An additional concern is that the provision will mislead investors who try to compare the CEO-worker pay ratios from domestic firms in industries with differing levels of worker pay and from domestic firms without a global workforce relative to domestic firms with global workers who are paid at varying wage levels in different currencies.
There is also some concern that the pay ratio provision is likely to result in substantial compliance challenges and costs, especially for large multinational or multi-segmented firms with decentralized payroll systems. Some estimates are that implementation costs for some companies could be in the millions of dollars. The SEC acknowledged that such firms would be likely to face greater compliance challenges and costs. In the aggregate, the proposal estimated that firms would spend about $72 million over a three-year period to comply with the pay ratio provision with large, multinational firms likely facing the greatest costs.
H.R. 1135 (Huizenga) would repeal the pay ratio provision, Section 953(b) of the Dodd-Frank Act. H.R. 1135 was ordered to be reported by the House Financial Services Committee on June 19, 2013. This report will be updated as events warrant.