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SEC to Decide on Executive Pay Disclosure
By Michael Schweibinz

Do chief executives work 273 times harder than the average worker? Not likely. Why then do they earn, on average, 273 time more than the people who work for them?

“The median pay package for the country’s top 200 executives was $15.1 million last year,” according to Equilar, up 16% from 2011. Many investors are closely analyzing whether such rich compensation packages are justifiable and essential to the organization’s financial health and success.

The gap in compensation between executives and rank-and-file employees has grown steadily over the past five years—since the financial crisis. In response to outcry from the American public, the Securities and Exchange Commission (SEC) has decided to address this issue.

Last month, the SEC proposed a rule that would mandate publicly traded companies to “disclose the difference between pay of chief executives and their employees.” Three of the five SEC Commissioners voted in favor of the proposition. We are now in the middle of a 60-day window for comments on this new (proposed) rule.

To date, the SEC has received well over 20,000 public letters expressing a full range of opinions and ideas. Some critics believe that the mandate will be too time-consuming and costly for the companies to implement—mainly because the current proposal requires businesses to provide two key data points:

  • The median of the total compensation for all employees omitting the chief executive.
  • The ratio between that number and the chief executive’s annual total compensation.

First Affirmative believes this proposal is a step in the right direction. Implementing this new rule will offer additional transparency and provide investors with more insight into the inner workings of many public companies. In addition, some boards may find themselves under additional pressure to curtail increases in executive pay—not a half-bad thing.

CEO’s may not like the SEC proposal very much, but investors—especially those who think long-term and integrate ESG (environmental, social, governance) factors into valuation analysis—are loving it.

To voice your opinions to the SEC click here.

Mention of specific companies or securities should not be considered a recommendation to buy or sell that security. Past performance is no guarantee of future results.

Posted: October 2, 2013