Although proponents of the rule have argued that knowledge of the CEO-to-worker compensation ratio would be good for investors, labor unions have not made any secret of their hope such disclosures would raise the public pressure on businesses to limit executive pay.
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The SEC received more than 287,000 comment letters on the topic.
Steve Selig, a senior regulatory adviser for the consulting firm Towers Watson says that the new rule can sensitize every worker to their pay compares with others in their own organization and others who do a similar job in another competing organization.
An example of the above disconnect is how CEOs were paid about 20 times as much as rank-and-file workers in the 1960s, according to statistics from the Economic Policy Institute.
“[CEOs] will be embarrassed [when their pay ratios are made public], and that’s the whole point”, Reese was quoted as saying by The Hill in December 2012.
“Disclosing corporate pay ratios between CEOs and average employees will discourage the outrageous and reckless pay practices that fueled the 2008 crash”. The rule was first introduced by the Dodd-Frank Act when it was approved by Congress back in 2010 and will require public firms to disclose just how wide the gap is between CEO pay and median employee earnings.
Companies can also exclude non-U.S. employees from countries in which “data privacy laws or regulations make companies unable to comply with the rule and provides a de minimis exemption for non-U.S. employees”. However, the U.S. Chamber of Commerce might challenge the rule in court.
The new rule establishes guidelines for companies to determine a “median” employee to compare with the CEO. But the real agenda is to shine a light on inequality, said Daniel Gallagher, one of two commissioners to oppose it.
The new measure will cover all of a company’s full-time, part-time and temporary employees, though the business can use statistical sampling and reasonable estimates, without needing to compile their workforce’s entire payroll.
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”.
‘The commission adopted a carefully calibrated pay-ratio disclosure rule that carries out a statutory mandate, ‘ says SEC chairman Mary Jo White in a press release. It is a “nakedly political rule that hijacks the SEC’s disclosure regime to once again effect social change desired by ideologues and special interest groups”.
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“Pay ratio disclosure should provide a valuable piece of information to investors and others in the marketplace… about how a company manages human capital”, one of the SEC’s Democratic commissioners, Kara Stein, said. If that’s true, it’s even more frightening because it means public companies don’t know what they’re paying people.
