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Business Roundtable Comments on Proposed SEC Pay Ratio Rule

Delivered December 02, 2013

Dear Secretary Murphy:

Re: File Number S7-07-13
Proposed Rules for Implementing the Pay Ratio Disclosure Provision of Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act

This letter is submitted on behalf of Business Roundtable, an association of the chief executive officers of leading U.S. companies.  Our member companies produce $7.4 trillion in annual revenues and employ more than 16 million employees worldwide.  Roundtable companies comprise more than a third of the total value of the U.S. stock market, and annually pay more than $200 billion in dividends to shareholders, generate more than $540 billion in sales for small and medium-sized businesses, and invest     $158 billion in research and development.  Our members also give more than $9 billion a year in combined charitable contributions, representing more than 60 percent of total corporate giving.

We appreciate the opportunity to comment on the rules proposed by the U.S. Securities and Exchange Commission (SEC or Commission) to implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), as set forth in the Commission’s accompanying proposing release.  Due to our significant concerns about the unnecessary costs and burdens imposed by these proposed rules, we provide general comments below and submit more detailed comments in an attachment to this letter. 

As an initial matter, we do not believe that the proposed pay ratio rules will provide investors with useful or accurate information.  The federal securities laws are intended to provide disclosure to investors to enable them to make 
informed investment and voting decisions, and the usefulness of all disclosure is jeopardized when any required disclosure wanders from this purpose.  The disclosures required by the proposed pay ratio rules will depend on issues having nothing to do with a company’s performance, as the Commission acknowledges in the proposing release.  Moreover, the proposed disclosure will exacerbate the growing length of required disclosures that make it difficult for investors to identify the material information that is relevant to their investment and voting decisions.  While this problem is most acute for retail investors, institutional investors also face the problem of digesting increasingly lengthy and detailed proxy statements.   

Section 953(b) of the Dodd-Frank Act directs the SEC to amend Item 402 of Regulation S-K to require issuers to disclose the annual total compensation of their median employee and chief executive officer and the ratio of the two amounts.  The rules proposed by the Commission on September 18, 2013 would require each registrant subject to the rules to identify its median employee on a global basis among those employed by the registrant or any of its subsidiaries, and then calculate that median employee’s total annual compensation in accordance with   Item 402(c)(2)(x) of Regulation S-K.  While we appreciate the Commission’s efforts to attempt to make it feasible for companies to comply with Section 953(b), we believe that revisions in the proposal are necessary to make compliance possible on a cost-effective basis.  Our recommendations are designed to achieve this goal while satisfying Section 953(b) of the Dodd-Frank Act. 

First and most significantly, if compliance is to be achieved on a cost-effective basis, the employees included in the identification of the median should be limited to U.S. employees.  Our member companies have employees in over 75 countries and some have over 100 payroll systems.  In order to identify a global median employee, companies will have to incur significant expense, including employee time and external advisor fees, as they seek to aggregate compensation data from incompatible systems and comply with foreign data privacy laws.  Moreover, many foreign countries use unique methods of compensating their employees, such as profit-sharing arrangements and allowances for housing, transportation or family care.  The proposed rules require non-U.S. employees to be included in the identification of the median employee, but prohibit adjustments to reflect non-U.S. approaches to compensation in the calculation of the median employee’s total annual compensation.  For example, under the proposed rules, government-provided benefits are not permitted to be included, while in many countries outside the U.S., this is the prevalent practice.  We are concerned that this and other important subtleties will be lost as companies struggle to force non-U.S. pay into the framework of Item 402.

Second, in order to avoid unnecessary costs and burdens, only those employed by the registrant and its consolidated subsidiaries, rather than all subsidiaries, should be included for purposes of identifying the median employee.  Companies are substantially less likely to be able to gather the necessary information from their unconsolidated subsidiaries.  Moreover, limiting the rules to cover employees of the registrant and its consolidated subsidiaries is consistent with the guidance provided by the SEC staff under the conflict minerals rule, another rule mandated by the Dodd-Frank Act. 
Third, in order to provide investors with information that better represents registrants’ internal compensation practices, we recommend that the final rules permit registrants to annualize and or otherwise appropriately adjust the compensation of part-time, seasonal and temporary employees.  We believe that the approach of the proposed rules, which would prohibit registrants from annualizing or adjusting the compensation of these employees, will skew the ratios of registrants that depend on large populations of these employees at the end of the year.

Fourth, additional time is necessary each year in order for companies to be able to gather the information needed to comply with the pay ratio rules.  Accordingly, we recommend that companies be permitted to use pay data from the fiscal year prior to the most recent fiscal year both to identify the median employee and calculate his or her compensation as well as the compensation of the Chief Executive Officer.  The burden on company personnel during the first three months of each fiscal year is already significant due to year-end closing financial statements.  In addition, companies frequently do not have final compensation data for employees until after the end of the applicable fiscal year.  Similarly, a transition is necessary in the case of acquisitions as the Commission provides for in several of its other rules. 

Fifth, companies will need additional time following the effective date of the final rules in order to implement the rules for the first time.  Among other things, they will have to develop processes and systems to implement the rules (which are unlikely to have other uses), train personnel, and retain advisors and experts.  We suggest that registrants have at least two full years to implement the rules after the final rules become effective. 

Finally, but importantly, the proposed rules should not require that the pay ratio information be “filed” with the Commission; instead it should be “furnished.”  This is both necessary and supported by SEC precedent.  Given the amount of data necessary to be considered and the significant number of estimates, assumptions and judgment calls necessary to produce the ratio, we believe it will be impossible for chief executive officers and chief financial officers to verify the information sufficiently in order to be able to make the certification the proposed rules would require.  This is especially the case if the Commission determines to include non-U.S. employees in the final rules.  We note that, with respect to certain other disclosures, the SEC has provided for “furnished” status where “filing” the disclosures in question would have imposed undue liability.

In conclusion, while we appreciate the Commission’s attempt to make it possible for companies to comply with Section 953(b) in a cost-effective manner, changes are necessary in order to prevent the disclosures required by the proposed rules from being prohibitively costly and burdensome to prepare. 

Thank you for considering our comments.  We would be happy to discuss our concerns or any other matters that you believe would be helpful.  Please contact Michael J. Ryan, Jr. of Business Roundtable at (202) 496-3275.

Click here to read more detailed comments on the proposed rule.

Sincerely,

Alexander M. Cutler
Chairman and Chief Executive Officer
Eaton
Chair, Corporate Governance Committee
Business Roundtable

SC/mr

C:  The Honorable Mary Jo White, Chairman
The Honorable Luis A. Aguilar, Commissioner
The Honorable Daniel M. Gallagher, Commissioner
The Honorable Michael S. Piwowar, Commissioner
The Honorable Kara M. Stein, Commissioner
Mr. Keith F. Higgins, Director, Division of Corporate Finance
Ms. Anne K. Small, General Counsel and Senior Policy Director

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