Companies will soon have to publicly report the ratio of their top executive’s pay to that of their median worker. The Securities and Exchange Commission (SEC) is close to finalizing the rules on how companies will calculate median worker pay under the requirement, which was part of the 2010 Dodd-Frank Wall Street reform effort.
Like many other Dodd-Frank rules, the formula for reporting the pay gap between a CEO and a typical worker has taken a long time to develop, leaving it vulnerable to lobbying from industry groups. While lawmakers originally sought to force a full tallying of employee compensation under the rule, “the SEC is expected to allow companies to consider a fraction of their employees when calculating minimum pay,” according to the Wall Street Journal. The usefulness of the figures produced for the public by this new rule depends in large part on how the SEC instructs companies to perform the calculation.
Overall, CEO pay was 273 times higher on average than worker pay in 2012. Assuming that the final formula is robust, the SEC rule will provide an illustration of that aggregate ratio at the individual company level.
It may also breathe new life into another Dodd-Frank provision meant to rein in executive pay. The law gave shareholders the power to disapprove proposed compensation packages for executives, but the so-called “Say on Pay” rule has failed to have an impact on the size or structure of CEO pay.
The exorbitant nature of CEO compensation — it averaged a record $9.7 million in 2012, bouncing back from a crisis-induced slump — stands in stark contrast to the earnings picture for a typical worker. Median weekly earnings for U.S. workers are $768, exactly the same level as in the year 2000 despite worker productivity having soared by nearly 25 percent in that time. The disconnect between executive and worker pay has been escalating for decades. CEO pay has increased 127 times faster than worker pay since the late 1970s. That shift is far from an organic one reflecting the orderly distribution of just desserts according to natural capitalist order. As the New York Observer’s Duff McDonald recently explained, the CEO pay boom is a manufactured phenomenon driven by business consultants and an endless cycle of competitiveness between top corporate employees.
As CEO pay has become stratospheric in raw numbers, it’s also developed structural problems that put the entire economy at greater risk of fraud-driven financial crises and accounting scandals. Stock options have become more and more important to executive pay packages, giving top company officials strong incentive to drive their stock price higher at any cost. That creates serious incentives for accounting fraud and other harmful and potentially illegal business practices. Taxpayers actually subsidize stock option compensation, which is tax deductible for companies. Two Senators have proposed closing that loophole in the hopes of reining in the most dangerous feature of executive compensation.