Corporate CEOs may soon have to reveal how their salaries compare to those of the average employee, thanks to a new rule proposed by the Securities and Exchange Commission (SEC). On Wednesday, the regulatory agency approved a rule which would require public companies to disclose the ratio of CEO compensation to their employees' median pay.
The rule was mandated by the regulatory legislation known as the Dodd-Frank Act, which was passed as a response to the 2008 financial crisis. Business interests have vigorously opposed Dodd-Frank regulations from the beginning, and made no exception for this provision.
“This proposed rule is another example of special interests promoting policies contrary to the interests of investors and the businesses they invest in," said David Hirschman, president and CEO of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, in a statement. "Pay ratios will not give any insight on the performance of a company or its management and fail to give investors decision-useful information or assist with capital formation. This proposal has the potential to drive up compliance burdens and costs for public companies with no benefit to investors—a formula that continues to make it less attractive to be a public company in the United States.”
Public companies are already required to disclose CEO pay; this rule would simply require that they also calculate the median pay for all other employees, and then compare the two figures. Additionally, the SEC specifies that companies will be able choose how they calculate median pay for non-CEO employees. The rule "would allow companies to select a methodology that is appropriate to the size and structure of their own businesses and the way they compensate employees," according to an SEC fact sheet.
In May 2012, researchers from the Economic Policy Institute (EPI) took a stab at calculating the overall CEO-to-worker compensation ratio with the information already available. Here's what they found: In 2011, the average CEO's compensation was equal to 209.4 times that of the average worker, at least when stock options were included in compensation. That was up substantially from the 18.3-to-1 ratio found in 1965, but barely half of the 411.3-to-1 found in 2000.
Nonetheless, the institute found that CEO pay had grown 725% between 1978 and 2011, while worker compensation had only increased by 5.7%. That stratospheric growth in CEO pay has correlated with an overall explosion in income inequality; whereas the top 10% of income earners in the United States controlled only about one-third of all income throughout the 1970s, they now lay claim to over half, according to a report from economist Emmanuel Saez.