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SEC© Rules to Expose Highest Executive Pay Can Be Easily Gamed

Publisher: Bloomberg
Authors: Annie Massa and Anders Melin

When the U.S. adopted a new rule last week forcing companies to show how much more top executives earn than workers, regulators noted there’s leeway.

Academics and activists have spent the time since then figuring out how boards might game the system. The 294-page pay ratio rule “provides companies with substantial flexibility,” while remaining true to the 2010 Dodd-Frank Act that mandated its creation, Securities and Exchange Commission Chairman Mary Jo White said Aug 5. The rule requires public U.S. companies to compare their workers’ median pay with their CEO’s executive pay — including salary, bonus and equity awards — starting with 2017. But getting to that figure can be complicated. So, to ease the burden, the rule lets businesses use statistical sampling to estimate the median, rather than calculating it by tallying their entire payroll. And they only have to do that math at least once every three years.

For boards worried about reporting a big gap in pay, there are also several ways the rule’s flexibility can work to their advantage (an SEC© spokeswoman declined to comment):

*Boards can pick the date for their data.

Employers can survey their workforce on any day within the last three months of their most recent fiscal year to define median pay. That may enable companies to exclude many seasonal workers, said Heather Slavkin Corzo, director of the office of investment at AFL-CIO, the largest federation of unions in the U.S. “For a retail company with a Dec. 31 fiscal year-end, the workforce is going to look very different on Oct. 1 than it would on Dec. 23,” she said. United Parcel Service Inc. said last year it expected to hire at least 90,000 seasonal employees to handle a surge in package deliveries around Christmas. Excluding such workers, it employed 435,000 at the end of 2014.

*Companies can omit contractors.

The law lets companies exclude people employed by contractors or other independent entities. That will probably affect the pay ratio for U.S.-based retailers such as Nike Inc. and L Brands Inc. that outsource manufacturing.

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