AFR Supports 953(b) – Calls for Disclosure of Executive Compensation

Read the pdf of our letter here.


March 23rd, 2011

Ms. Elizabeth M. Murphy

Secretary Securities and Exchange Commission

100 F Street, N.E.

Washington, DC 20549-1090

Re: Dodd-Frank Section 953(b)

Dear Ms. Murphy:

On behalf of Americans for Financial Reform, thank you for the opportunity to comment on the implementation of Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Americans for Financial Reform (AFR) is an unprecedented coalition of over 250 national, state and local groups who have come together to reform the financial industry. Members of our coalition include consumer, civil rights, investor, retiree, community, labor, religious and business groups as well as leading economists.

AFR strongly supports the Section 953(b) requirement that companies disclose to investors the ratio of CEO pay to the median employee’s compensation at the company.  By enacting Section 953(b), Congress sought to address investor concerns with existing SEC disclosure requirements for CEO pay.  Existing requirements mandate disclosure of top executive compensation only, encouraging companies to focus unduly on peer to peer comparisons when setting CEO pay.  These comparisons  help lead to ever increasing levels of CEO pay by virtue of a “Lake Wobegon” effect, where nearly all CEOs claim to be above the average CEO quality level.

Disclosure of CEO-to-worker pay ratios will encourage Boards of Directors to also consider vertical pay equity within firms. Such vertical pay equity is also vital to proper human resources practices.[1] SEC disclosure rules should not unfairly privilege horizontal comparisons to other CEOs over considerations of vertical pay equity.

Pay disparity information is clearly material to investors. According to the Social Investment Forum, the major association of socially responsible investment funds, more than 80 percent of member funds consider labor relations issues in making their investment choices, and half of member funds consider executive pay in making their investment decisions.[2] Socially responsible funds are a significant and rapidly growing segment of the investment market.[3]


Academic research also indicates that ratio of CEO pay to that of other employees within the firm can affect firm performance. As one team of academics put it, “extreme wage differentials between workers and management discourage trust and prevent employees from seeing themselves as stakeholders.”[4] And this information clearly bears directly on the important public policy issues of pay equity and income inequality.

It is important to ensure that reported within-firm CEO pay ratios include all corporate employees, including foreign and part-time workers. Excluding these workers would make the ratio less informative to the investing public and may create incentives to move jobs offshore or convert full-time jobs into part-time jobs. Excluding the foreign workforce would create a significantly misleading picture of a multinational company’s true pay structure. To take just a few examples, PepsiCo employs 68 percent of its 203,000 employees outside the U.S., Ingersoll-Rand Co. employs 54 percent of its 57,000 employees outside of the U.S., and Intel employs 45 percent of its 79,800 employees outside the U.S. The statutory intent of Section 953(b) is clearly to report the pay of all workers, including overseas or part-time employees. The legislation refers to “all” employees of the issuer, and the legislators responsible for the provision have made their intention clear.[5]

To make statistics more comparable and compliance easier, ratios can be reported separately for full-time U.S. workers and global workforces. Pay for part-time workers can also be translated into full-time-equivalent (FTE) compensation based on a simple formula using hours worked. Companies should also be encouraged to provide a narrative discussion of their CEO-to-worker pay ratios.

Some critics of the proposal object that CEO-to-worker pay ratios will not be meaningful to investors because hiring practices and worker skills differ significantly across industries. It is true that employment and employee compensation patterns differ significantly across industries. However, this same “apples to oranges” criticism can be made of all financial ratios.  Requiring that this information be disclosed will help investors compare companies’ employee compensation practices to their industry peers.  The reporting firm can provide additional disclosure along these lines to give investors more context to interpret this information.

Other critics claim that the reporting requirement is not practical because it is too difficult to calculate median employee pay. However, all firms collect employee pay data for tax purposes. It should be straightforward to identify median employee cash compensation using information already collected for IRS W-2s and the corresponding tax filings for foreign jurisdictions, and then calculate this median employee’s total compensation as required by Section 953(b). We believe that this approach would be consistent with the intent of Congress. We also note that worker pay is a central data item for management purposes and it is hardly credible that firms do not have access to extensive information about how much they pay their employees.

In sum, Section 953(b) of the Dodd-Frank Act requires the reporting of significant data that is material to investors and relatively straightforward for firms to report. AFR strongly supports the 953(b) reporting requirement and urges the SEC to move quickly to implement this section of the Act.


Americans for Financial Reform

[1] Hinchcliffe, Brian, “The Juggling Act: Internal Equity and Market Pricing,” Workspan, Scottsdale, Az. World at Work, Feb. 2003, pp.46-8.


[2] Performance of Social Investment Forum Member Mutual Funds, Social Investment Forum, December 31, 2009.


[3] Social Investment Forum, Report on Social Investment Trends In The United States, 2010, Social Investment Forum Foundation, 2010.


[4] Eileen Applebaum, Thomas Bailey, Peter Berg, and Arne L. Kalleberg, Manufacturing Advantage: Why high-performance work systems pay off. Ithaca, New York: Cornell University Press, 2000, 44.


[5] See January, 19 2011 comment by Senator Robert Menendez, the author of the provision.