The recent decision by the SEC to adopt a CEO-to-median pay ratio disclosure rule in the US was a near run thing. The SEC commissioners were split on the issue. The vehement opposition to ratio disclosure expressed in the 5 year gap between Dodd Frank legislation and SEC rule adoption has found a new channel. After lobbying from The Chamber of Commerce’s corporate governance lobby arm, the Centre for Capital Markets  attempts are now being made by members of the House Financial Services Committee to repeal the recently introduced final rule using a device called the Burdensome Data Collection Relief Act (BDCRA).

Despite the post-implementation intervention, the SEC is moving forward with support on executive pay disclosures. In a speech to the National Institute on Executive Compensation recently Keith Higgins the Director of the SEC’s Corporation Finance division outlines that the next phase of work will focus on the effectiveness of executive pay and corporate governance reporting in proxy statements. Executive Compensation: Looking Beyond the Dodd-Frank Horizon Higgins makes clear how effectiveness should be measured when he asks “Are investors getting the information they need to make an informed voting decision…”

Higgins focuses in particular on Item 10 of Schedule 14A. which requires a proxy statement to describe material features of a plan. Unlike UK disclosure requirements Item 10 requires disclosure of the number of persons of each class eligible to participate in the plan. This “human capital” information is exactly the kind of complementary data which gives context to the ratio disclosure which must now appear elsewhere in a company’s reporting. (Companies are not being asked to define their employees social status. Class in this context relates to grade within an organisation.)

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Share-based pay is a strong contributory factor in explaining the divergence of executive pay from average pay at listed companies over the last 20 years, so knowing how many staff are allowed to participate is certainly relevant to understanding a firm’s income distribution. In terms of Human Capital Stewardship, knowing a company’s income distribution is essential to predicting regulatory risk (National Living Wage in the UK for example) but also the company’s capacity to deliver productivity improvements. As the Resolution Foundation has recently reported there appears to be a positive correlation between productivity levels and minimum wages across OECD countries.

Tax treatment can amplify the divergence of top to average pay. Although Higgins poses the question of whether the tax effect of equity compensation arrangements is important information for investors ahead of a vote he does not go as far as suggesting disclosure of the change in the CEO’s personal effective tax rate resulting from a company’s remuneration proposals.

Despite posing questions about what would be new disclosures for companies, Higgins is alive to the real concern over the sheer volume of detail now being provided on executive pay. There are no real solutions posed here, but Higgins does make a good case for rethinking the CD&A disclosure by pointing out that executive summary of the CD&A may now be doing the job that the CD&A itself was originally intended to do.

In discussing over–reporting, Higgins cites the results of a survey which found that 55% of investors believe a typical proxy statement is too long. There is a paradox here. All this information has at some point been asked for by investors; however, in seeking such disclosure there is no requirement for investors to quantify the costs of using it. The potential value of what might be learned from a rigorous analysis and distillation of disclosure can only be tapped if investors are prepared to bear the cost of tapping it. This cost is almost exclusively outsourced to proxy agencies. A crude measure of the cost can be taken from the wage rates for agency staff who are offered €1,000 per month to find the value amongst the millions of pages of disclosure that must now be processed.

Having completed the introduction of all the Dodd Frank pay provisions, the SEC is clearly thinking where it should turn to next. In doing so it should not forget that the burden of more disclosure falls on investors and their service providers – notably the shareholder voting research providers – or the dreaded “Proxy Advisors” that the Centre for Capital Markets has spent the past five years fighting.

Unlike companies, investors and analysts do not have access to a device like the BDCRA which protects them from this burden.

Last Updated: 22 November 2015