business

SEC Backs Rule Forcing Companies to Compare CEO and Worker Pay

Mary Jo White, chairman of the U.S. Securities and Exchange Commission (SEC), listens during a House Financial Services Committee hearing in Washington, D.C., on March 24.

Photographer: Andrew Harrer/Bloomberg

The U.S. Securities and Exchange Commission approved a rule Wednesday requiring companies to reveal the pay gap between the chief executive officer and their typical worker, handing a new weapon to groups protesting rising income inequality.

The commission voted 3 to 2 to mandate the disclosure. The agency had delayed progress on the rule for years, with SEC Chair Mary Jo White facing attacks from unions and Democratic lawmakers in recent months for failing to get it done.

The disclosure is required under the 2010 Dodd-Frank Act, which hasn’t stopped it from splintering the five-member commission. Republican commissioners and business groups argue it’s meant to embarrass CEOs and won’t be useful to investors.

White and the SEC’s two Democrats, Luis Aguilar and Kara Stein, approved the rule. Democrats have said the metric will be helpful to shareholders who are deciding how to vote on executive pay packages.

“While there is no doubt that this information comes with a cost, the final rule recommended by the staff provides companies with substantial flexibility in determining the pay ratio while remaining true to the statutory requirements” of Dodd-Frank, White said at the meeting.

Company Discretion

The SEC required companies to disclose the median compensation of all its employees, excluding the CEO, and publish a ratio comparing that figure to the boss’s total pay. Companies would have to report the pay ratio beginning in 2017.

In a nod to businesses such as Exxon Mobil Corp. that oppose the effort, the SEC will require the metric to be updated only once every three years and will allow companies to exclude as much as five percent of their foreign workers from the calculation.

The SEC gave allowed for some discretion in determining the median pay of workers. Companies can use sampling to estimate the figure, rather than calculating it by tallying data from all of the payrolls across the company.

“These decisions were designed to facilitate compliance with the rule in a manner that is reasonable and workable” for companies, Aguilar said.

‘Peculiar’ Decision

Even so, Republicans and business groups still oppose the requirement and said the SEC ignored some of their recommendations to improve it. Groups such as the U.S. Chamber of Commerce or the Business Roundtable are expected to sue the agency over the rule.

“We will continue to review the rule and explore our options for how best to clean up the mess it has created,” the chamber’s David Hirschmann said in a statement Wednesday.

Republican lawmakers have sponsored legislation that would repeal the provision in Dodd-Frank that underpins the SEC’s rule. Commissioner Michael Piwowar, a Republican who opposed the measure, said he found White’s decision to move forward “peculiar” given that opposition in Congress.

Commissioner Daniel Gallagher, another Republican, said the vote shows how the agency’s rulemaking agenda has been hijacked by “ideologues” and partisans who want to shame businesses into reducing CEO pay.

“A majority of the commission has opted for a hugely expensive rule over a much less expensive rule,” Gallagher said. “I can only conclude that there is no reasoned basis for the commission’s action.”

Average Pay

Average CEO pay at the 350 largest U.S. companies by revenue surged 997 percent from 1978 to 2014, while the compensation of non-supervisory employees rose 10.9 percent, according to the Economic Policy Institute, a research group that advocates for workers.

While CEOs earned about 30 times what the typical employee did in 1978, corporate chiefs’ pay had jumped to more than 300 times their employees’ compensation as of 2014, the institute said.

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