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May 3rd, 2011
Dear Member of Congress,
On behalf of Americans for Financial Reform, we are writing to urge you to oppose H.R. 1062 that will repeal Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 953(b) requires public companies to disclose the pay disparity ratio between the company CEO and the median employee of the company.
By enacting Section 953(b), Congress sought to empower investors to take into account pay equity when making their investment decisions. Large pay disparities are an issue of equity and fairness, and they can also affect company productivity by lowering employee morale and driving up turnover rates. It is clear that many investors wish to see this information. 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.
Section 953(b) is also designed to address the concern that current SEC disclosure requirements fuel a spiral of ever-increasing 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 average and entitled to higher pay than peers. Disclosure of CEO-to-worker pay ratios will encourage Boards of Directors to also consider vertical pay equity within their firm. SEC disclosure rules should not unfairly privilege horizontal comparisons to other CEOs over considerations of pay equity between CEOs and their own employees.
Some critics of the proposal claim that the reporting requirement is not practical because it is too difficult to calculate median employee pay. However, all firms already collect employee pay data for tax purposes. 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.
At a time of rapidly increasing inequality in income, the disclosure and openness created by the 953(b) disclosures will provide critical information to company investors and workers regarding wage-setting practices. We urge you to maintain this important element of the Dodd-Frank Act and to reject HR 1062.
Americans for Financial Reform