US pay law branded ‘logistical nightmare’

By Jean Eaglesham and Francesco Guerrera in New York

Published: August 30 2010 22:01 | Last updated: August 30 2010 22:01

US companies face a “logistical nightmare” from a new rule forcing them to disclose the ratio between their chief executive’s pay package and that of the typical employee, lawyers have warned.

The mandatory disclosure will provide ammunition for activists seeking to target perceived examples of excessive pay and perks. The law taps into public anger at the increasing disparity between the faltering incomes of middle America and the largely recession-proof multimillion-dollar remuneration of the typical corporate chief.

S&P 500 chief executives last year received median pay packages of $7.5m, according to executive compensation research firm Equilar. By comparison, official statistics show the average private sector employee was paid just over $40,000.

Business sees the disclosure provision – buried in section 953(b) of the Dodd-Frank financial reform act – as a bureaucratic headache that may encourage false comparisons.

“We’re not debating the concept of disclosure – we think it’s a good thing,” said Larry Burton, executive director of the Business Roundtable, which represents chief executives of the biggest US companies. “But you can do more harm than good if you take a well-intended piece of policy and implement it badly. That’s the risk here.”

The rules’ complexity means multinationals face a “logistical nightmare” in calculating the ratio, which has to be based on the median annual total compensation for all employees, warned Richard Susko, partner at law firm Cleary Gottlieb. “It’s just not do-able for a large company with tens of thousands of employees worldwide.”

Pay experts said business had been caught off-guard by the measure, which was not one of the high-profile battlegrounds of the Dodd-Frank legislation. Companies are now gearing up to lobby the Securities and Exchange Commission, which has to write detailed provisions for the new rule.

The rule could also reward with a relatively low ratio those companies that outsourced low-paid work rather than keeping jobs in-house, lawyers said.

Robert Menendez, the senator who sponsored the provision, dismissed business fears. “The idea behind the new rule is that sunlight is the best disinfectant,” said an aide. “Disclosure will help encourage fair pay for workers at a time when middle class pay has stagnated while CEO pay has skyrocketed.”