Publicly traded U.S. companies will begin calculating and disclosing the ratio between what they pay their top executives and what they pay a typical member of their workforce under rules approved Wednesday by the Securities and Exchange Commission (SEC).
The rule, which passed on a 3-2 vote over strong objections from the two Republican commissioners, was required by the Dodd-Frank Wall Street reform law that President Obama signed three years ago. The rule will force companies to reveal where their CEO-to-worker pay ratio stands relative to the overall ratio for the whole economy, which was 273-to-1 in 2012.
The SEC wrote the rule in a way that allows companies significant flexibility in calculating the worker half of the ratio. Companies may choose to identify the median employee within a statistically valid random sample of their workforce, rather than their entire payroll. But it did not allow companies to exclude employees outside of the U.S. or those who work part-time, concessions requested in many of the roughly 20,000 official comment letters the SEC received while working on the rule. The business community had objected that calculating the median pay and compensation for their workforce would be an expensive process and that the ratio itself would only embarrass their CEOs without providing shareholders any useful information.
One Republican commissioner echoed the business community’s objections at Wednesday’s vote, according to Reuters. “Shame on us for putting special interests ahead of investors,” commissioner Michael Piwowar said, adding that “the sole objective of the pay ratio is to shame CEOs.”
The current state of CEO compensation does suggest a certain shamelessness, though. Executive pay has rebounded in the five years since the financial collapse and averaged $9.7 million last year. A full third of the highest-paid CEOs of the past 20 years have been busted for fraud, bailed out, or fired, suggesting executive compensation is not as closely connected to performance as one might think. And so-called “performance-based” bonuses are in fact routinely gamed by companies to effectively guarantee the ballooning payouts to their top officials. Meanwhile, taxpayers subsidize stock-based compensation due to a 20-year-old loophole that two Democratic senators are working to close.
At the same time, the median U.S. household earned $51,017 in 2012, more than 8 percent lower than the pre-crisis figure. Americans are coming off of a lost decade in terms of wage growth, with the median worker earning no more now than she did in 2000 despite a nearly 25 percent increase in workforce productivity.