CEOs will have to disclose how much they make relative to their workers under a new SEC rule that was mandated by the 2010 Dodd-Frank reform law and was approved today on a 3-2 vote, reports Sarah N. Lynch for Reuters.
SEC’s CEO pay ratio rule
The CEO pay ratio rule is being pushed by labor unions and other pro-labor organizations, but it would also be a good tool for investors to determine which companies are spending too much at the top. The US Chamber of Commerce, the Center on Executive Compensation, and other groups primarily made up of corporate executives oppose the rule. They claim it would be difficult and expensive to gather the necessary information, but taking a simple average of numbers the company already has available doesn’t seem that onerous. The groups also claim that investors aren’t interested in such information, but that determination is better left to investors.
The more likely reason is that the CEO pay multiples are incredibly high, and in many cases unwarranted. A Bloomberg report earlier this year found multiples as high as 1,795 – 1 (Ron Johnson, former CEO of J.C. Penney Company, Inc. (NYSE:JCP), who was fired in less than two years) and there is lots of evidence that pay ratios continue to increase. A study from the Institute of Policy Studies found that of the 500 CEOs with the highest pay ratios, 112 oversaw companies that either collapsed or had to get bailed out by the government.
Statistical sample on worker compensation
Still, the SEC walked the proposal back slightly to mitigate concerns about the cost of compliance, allowing companies to use statistical samples instead of compiling full statistics on worker compensation. The statistical sample has to be representative of all workers in the US and abroad, including those working for subsidiaries. Companies that go this route will also have to disclose the statistical model used for further transparency. Requests to only include US workers, which would lower the final pay ratio for many companies, were denied.
“As owners of public companies, shareholders have the right to know whether CEO pay multiples reflect CEO performance,” said SEC Democratic Commissioner Luis Aguilar. “Pay ratio disclosure can provide a valuable new perspective for executive compensation decisions.”