Better late than never? That may be the feeling among exhausted advocates of the CEO pay ratio disclosure rule that the Securities and Exchange Commission finally approved on Wednesday. It has now been five long years since the Dodd-Frank Act required publicly traded companies to disclose the ratio between how much they pay their chief executives and the median compensation of all their employees.
But even with the new rule in place, the fight may not be over yet. The Republican commissioners of the SEC spoke out against the measure vehemently during Wednesday’s final public vote, with one even referring to it as an attack on free speech. It’s not at all unlikely that corporate groups, like the U.S. Chamber of Commerce, may yet file a legal appeal seeking to block the rule from taking effect early in 2018. That’s when companies would file their proxy statements for the 2017 fiscal year, the first period for which the SEC would require that they make this pay gap data publicly available. The Chamber has claimed that it might cost a large company as much as $311,800 to calculate this figure.
Even without granular company-specific data on hand, pundits have been busy calculating the size of the CEO-to-worker pay gap, and the extent to which it has widened. The Economic Policy Institute, for instance, believes that CEOs at the 350 largest U.S. firms earned about 303 times that of their average (not median) employee in 2014, including bonuses and stock options. That’s smaller than the 376-to-1 ratio recorded at the height of the dot-com bubble, but much larger than the gap recorded in 2009, in the aftermath of the financial crisis (196 to 1).
The bottom line is that the current ratio is a very big number. And while CEO pay has climbed 54 percent since the recovery began in 2009, according to the Economic Policy Institute, the earnings of the typical employee haven’t budged a bit. Throw in the fact that management consulting guru Peter Drucker (who, before he died in 2005, won the Presidential Medal of Freedom and was known as a fan of capitalism) once urged that the ratio of CEO compensation to median employee pay should never exceed 25:1 — a fraction of where it stands today — and you’ve got the recipe for a big social and political problem. And an economic one, Drucker would have argued. Exceed that ratio, he said, and you “increase employee resentment and decrease morale.”
Sarah Anderson, executive pay analyst at the Institute for Policy Studies, can be counted among those who are happy — or at least, content — with the results of Wednesday’s vote. “It shows that public pressure had an impact,” she says, noting that more than 287,000 public comment letters reached the SEC, a majority of them in favor of the disclosure move. “The new rule won’t force companies to change what they pay, but it could lead to further reforms that could have more teeth.”
Some states have look to race ahead of the plodding SEC. California tried to impose a higher corporate tax rate on companies based in the state that paid their CEOs more than 100 times the median compensation of their employees; conversely, a bill introduced in the state legislature last year would have reduced the tax rate of those companies that had smaller wage gaps. State senators voted to reject the bill after a long and heated public debate, with much rhetoric swirling around the question of whether the proposal was a “job killer.”
Rhode Island, too, has taken a step in the direction of rewarding companies with lower CEO/median employee compensation ratios. In this case, the state’s Democratic senators sought to give preference to this group when determining who would get the edge in government procurement contracts. The bill stalled before it could be voted on in state’s House of Representatives, but Anderson believes initiatives like this, with the help of the data that will become available thanks to the new SEC rules, will be the wave of the future. “We’ve also seen ballot initiatives in some states,” she adds.
Not that the SEC is off the hook yet. The commissioners still have to tackle the pesky question of Wall Street compensation from Section 956 of the Dodd-Frank reforms, which is aimed at preventing banks for taking excessive or “inappropriate” risk. The agency is supposed to design rules that would ban financial institutions from giving top execs compensation packages that might encourage risky behavior — like, say, loading up the balance sheet with subprime mortgages.
So this CEO-worker pay rule may be done, but the long, bitter path to get here only proved that the wider the wealth gap grows, and the more politicized the topic becomes, the tougher it is going to be for regulators to address it effectively.