SEC: Companies Must Disclose CEO Pay Ratios
Policy + Politics

SEC: Companies Must Disclose CEO Pay Ratios

REUTERS/Brendan McDermid

The Securities and Exchange Commission on Wednesday narrowly approved a plan that would require companies to disclose how much more their chief executives are paid than their other employees, advancing an initiative that has been years in the making.

The panel's two Republican commissioners — Daniel Gallagher and Michael Piwowar — voted against the proposal, siding with business groups that cast the initiative as a costly burden that is of little use to shareholders. They said the proposal is an attempt to shame corporations into reining in executive pay by forcing companies to calculate compensation in a way that is designed to yield eye-popping results.

The three Democrats supported the proposal, including SEC Chairman Mary Jo White. They said it lifts some of the potential burdens cited by corporate lobbyists and fulfills the agency’s obligation to carry out a long-overdue mandate imposed by the 2010 Dodd-Frank financial overhaul measure.

The mandate requires public companies to report their chief executives’ total compensation, the median compensation of all other employees and the ratio between the two. Supporters say the disclosures will help shareholders make more informed decisions and correct out-of-whack disparities in pay that sparked public outrage during the financial crisis. Wall Street pay during that time encouraged risk-taking that nearly brought down the financial system.

Corporate lobbyists have launched a fierce battle to water down or scuttle the pay-ratio initiative. Multinational corporations said it would be tough to gather pay data for employees spread across several countries, citing currency fluctuations and different compensation and benefits systems and policies. Smaller firms have argued that high staff turnover posed complications and that the number-crunching would drain limited resources.

To address some of those concerns, the SEC proposal would not require companies to calculate the pay and benefits of every employee. Instead, corporations could use any reasonable method to determine median pay, including statistical sampling, which would allow them to gather information for only a fraction of their workers. Companies would have to explain to regulators the methodology they used.

The rules, which have yet to be finalized, would not apply to certain types of companies, including those with less than $1 billion in annual revenue or less than $75 million in securities held by the public. The SEC is soliciting comments on the plan for 60 days.

The agency rejected pleas by the business community to limit the calculations to U.S.-based employees. All employees would be covered by the proposal, including part-time and seasonal workers. Republicans took issue with that detail Wednesday, echoing many of the arguments made by corporate lobbyists.

Going global is an “uninstructive comparison,” Gallagher said. “Of what conceivable use could comparing the pay of workers in developing nations to that of U.S. CEOs be to the investors the SEC is tasked with protecting?”

The U.S. Chamber of Commerce said Wednesday the proposal will discourage companies from going public. The Center on Executive Compensation, which has led the fight against a pay-ratio plan, said it will work with Congress to repeal the mandate.

Supporters of the proposal, including unions and investor advocates, said the continued pushback from corporate lobbyists, even after the SEC addressed the concerns they have repeatedly raised, shows that companies are not negotiating in good faith.

“They just don’t like the law, and they want the SEC to ignore the law,” said Bart Naylor, financial policy advocate for Public Citizen. “Anything short of that will not satisfy them.”

It makes sense for multinationals to collect information on employees across the globe, backers of the proposal said.

“In a globalized labor pool, the effects of extreme pay gaps are just as poisonous in foreign workplaces as they are in the United States,” Sam Pizzigati, an analyst at the Institute for Policy Studies, said in a statement.

Investor advocates have argued that extreme pay disparities lower employee morale and encourage high turnover rates, both of which undermine productivity. The Economic Policy Institute recently reported that the average chief executive made 273 times what a typical worker earned last year.

This article originally appeared in The Washington Post