Academics and union activists have been carefully researching how companies can get around new rules imposed last week by the U.S Government which public companies to show how much more their top executives earn than workers.
Although Securities and Exchange Commission Chairman Mary Jo White said the law was written in a way to make it easier for companies to abide by the rules, others say companies will use this flexibility to beat the system.
White said companies will be able to file easily because the pay ratio rule “provides companies with substantial flexibility that allows them to use statistical sampling to estimate the median, rather than fully calculating it by using their entire payroll, once every three years.”
However experts say companies worried about reporting a big gap in pay can use the flexibility allowed to their advantage by picking the date they will report on, as long as it is within the last three months of their most recent fiscal year.
The director of the largest union in the U.S, AFL-CIO, Heather Slavkin Corzo, said the rule also allows companies to distort their figures by not including seasonal workers.
“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. She cited as an example United Parcel Service Inc. (UPS) which last year said it expected to hire at least 90,000 seasonal employees to meet the Christmas rush, when really excluding such workers, it employed 435,000 at the end of 2014.
The experts said the new law also allows companies to not count contractors and other "independent entities," which would work to the advantage of U.S. based retail giants like L Brands Inc and Nike Inc. , which outsource manufacturing.
“If their business model relies on a high concentration of low-wage workers that aren’t part of their formal workforce, the number may appear to be much better than if you actually included the people who are responsible for producing the goods,” said Slavkin Corzo.
Ron Hira, Harvard University associate professor of political science, said many technology companies and financial firms also used a significant number of contractors.
Hira said companies could omit some staff and workers overseas as the new rules allow companies to not count up to 5 percent of overseas staff, which could lower ratios for businesses with workers earning significantly less abroad. He said many large banks had shifted their technology, legal operations and back-office operations to low-wage countries like the Philippines and India.
“The term of art they use is that they’ve ‘rebalanced their workforce,’” Hira said. “We’re talking about hundreds of thousands of people that are overseas.”
Companies could also exclude workers located in countries with privacy laws that prohibit sharing of information such as payroll data, according to the ruling. The SEC notes that jurisdictions including China and Mexico, which are vital manufacturing hubs for many U.S. companies, have adopted or are considering laws that limit access to compensation data.
“How can a company possibly file financial statements if they can’t get information about what they’re paying their workers?” Slavkin Corzo said. “It’s hard to imagine that this would prevent the transfer of anonymized data, which would be perfectly fine to use in determining the median.”
Another loophole experts have found allows for CEO sign on packages to be ignored. They say when a new CEO is hired , the law allows for two options - the business can combine pay for both the new and former CEO for the year, or it can annualize the compensation for the CEO on the day that median pay was defined. This means a company could pick their calculation day or day of CEO transition, to use amounts for the lower-paid executive. With incoming CEOs often receiving packages heavy with equity, the ration could also be skewed.
Another loophole for boards worried about showing a big gap in pay for its 2017 fiscal year could load up their CEO’s financial package for 2016, and then slash it the following year.