“When you’re doing it for five people, it’s a pain but it’s feasible. Applying that standard to thousands is ridiculous,” Poerio said. He noted that lobbying “has certainly slowed down” the writing of the pay ratio rule.
Agency officials dispute criticism that they have “slow-walked” the rule and have repeatedly said their goal is to write a rule that works. They say their emphasis is not speed but effectiveness.
Now, with unions and other pay ratio advocates mounting their own lobbying effort to get the SEC to move, the agency’s new chairman, Mary Jo White, is vowing to redouble its efforts to complete the rule and other long-delayed regulations. Testifying before Congress in March, she said there is “no higher priority.” But, she added, the task “truly is daunting.’’
18 lines in 2,300 pages
The pay ratio provision was inserted into the Dodd-Frank legislation when public anger was running high over executive pay. The excesses were symbolized by the hundreds of millions of dollars in bonuses and retention pay that American International Group had paid its employees, not long after the government committed more than $180 billion to rescue the failing insurance giant during the financial crisis.
Sen. Robert Menendez, a New Jersey Democrat with strong union ties, proposed and pushed the pay ratio measure in 2010. It was 18 lines in a 2,300-page bill.
While the bill’s sponsors privately expressed doubts about the practicality of the proposal, Sen. Christopher J. Dodd (D-Conn.) agreed to accept it to satisfy Menendez, a key member of the Senate banking committee whose vote he needed, according to several people familiar with the bill’s drafting. Dodd said, “ ‘Let’s give it to the SEC and let them figure out how to do it,’ ” one of the people said. “It didn’t get much attention.” (Dodd, who did not seek reelection in 2010, is now head of the Motion Picture Association of America.)
Within six months of the law’s passage in July 2010, SEC staff members circulated what is known as a “term sheet” — an early plan for how to proceed on the pay ratio rule, according to a person familiar with the deliberations. It was “one of those things they wanted to move along,” said the person, who like others interviewed for this article spoke on the condition of anonymity to discuss sensitive deliberations.
When the document reached the SEC, it triggered questions among the commissioners about how best to carry out the ratio requirement — and whether it was even practical. Then came the lobbying buzz saw.
“There were a huge number of meetings,” said another person familiar with the SEC’s thinking. And nearly all the lobbying over pay ratio in late 2010 and 2011 was on the corporate side, according to lobbying records, disclosures on the SEC Web site and interviews.
Business officials pushed for ways to ease the requirement, such as including only U.S.-based employees in calculating a firm’s pay ratio. These lobbyists strongly opposed an approach, suggested by the AFL-CIO and considered by the SEC, to calculate the ratio using “statistical sampling,” a method that could reduce the burden on companies by requiring them to determine compensation for only a small fraction of their employees.
Baker, Donelson, Bearman, Caldwell & Berkowitz, a Memphis-based corporate law firm, flew in lawyers from three cities to meet with the SEC in October 2010. “I think they began to appreciate the complexities of this once we raised it with them,” Sam Chafetz, one of the lawyers, said in an interview.
Lawyers from many of the country’s premier corporate law firms later wrote to the SEC objecting to the pay ratio requirement and seeking to ease the requirements for businesses.
Corporate officials said calculating the ratio, which would affect all 9,000 public U.S. companies, is tremendously complicated and of little value to investors. These officials noted that most large firms operate in multiple countries, which have different systems for calculating compensation and benefits, and that currency fluctuations make comparisons harder. Smaller firms have high employee turnover and lack the staff to make the calculation, they said.
But advocates for the rule point out that other organizations have calculated a ratio. Last week, for example, the Economic Policy Institute released a report saying that, by one measure, the average chief executive made 273 times what a typical worker made last year.
Advocates contest the notion that calculating the ratio is impractical. “That’s absurd. It’s not that complicated,’’ said Lisa Donner, executive director of Americans for Financial Reform, an umbrella group of organizations pushing for the pay ratio. She accused the SEC of “bowing” to industry lobbyists and ”slow-walking” the issue.