New SEC Rules Require Companies to Compare Pay of Workers, CEO

Mary Jo White, chairman of the U.S. Securities and Exchange Commission (SEC), speaks during a House Financial Services Committee hearing in Washington, D.C., U.S., on Tuesday, March 24, 2015.

The Securities and Exchange Commission on Wednesday approved new rules that require publicly traded companies to reveal the gap between what their CEO makes and what rank and file employees take home.

As White explained, the pay ratio disclosure “will provide shareholders with additional company-specific information that they can use when considering a company’s executive compensation practices, an important area of corporate governance on which shareholders now have an advisory vote”.

The requirement will kick in for 2017 fiscal year reporting.

Under the rule, many public companies must publish “the ratio of the annual total compensation of the chief executive officer to the median of the annual total compensation of the company’s employees”. Outsize pay packages – often tied to the company’s stock price – were blamed for encouraging disastrous risk-taking and short-term gain at the expense of long-term performance.

“Pay ratio disclosure should provide a valuable piece of information to investors and others in the marketplace”, SEC Democratic Commissioner Kara Stein said in prepared remarks, according to CNBC.

“May be the most useless of our Dodd-Frank mandates”, Republican Commissioner Daniel M. Gallagher said Wednesday, according to The New York Times.

The disclosure requirement will apply to all companies now required to provide executive compensation disclosure. Disclosing pay for the “median worker” could become a nightmare for the human resources departments and potentially expose the awkward and raw tensions of workplaces that are undercut by the growing gaps in pay. Also, in Rhode Island, the state senate has introduced a bill that would give preference in government contracting to firms whose highest paid executive does not receive more than 25 times the compensation paid to its median, non-executive employee.

Even so, Republicans and business groups still oppose the requirement and said the SEC ignored some of their recommendations to improve it. Groups such as the U.S. Chamber of Commerce or the Business Roundtable are expected to sue the agency over the rule.

The pay ratio can also help future employees make the best decisions when choosing to work for a company.

The Chamber has lobbied the SEC to defer working on the rule at all and it called for permitting companies to disclose the ratio in an addendum instead of formal filings in order to reduce their liability.

These days, that ratio of CEO pay to worker pay is around 300:1, meaning if you’re making a comparable annual wage of about $40,000, your CEO might be raking in $10 million to $12 million a year.

The rule has been tailored to try and minimize the cost to corporations, according to a statement from Commissioner Luis Aguilar. “This is a huge victory for ordinary Americans who are fed up with a CEO pay system that rewards the guy in the corner office hundreds of times more than others who add value to their companies”, said Sarah Anderson, an analyst at the left-leaning Institute for Policy Studies, in a statement.

The commission voted 3-2 in favor of the measure, which was advocated by activist investors as an increase in transparency and a step toward greater fairness, and resisted by many corporations as misleading and an unnecessary expense.