The Securities and Exchange Commission (SEC) on Aug. 5 adopted a final rule that requires public companies to disclose the ratio of chief executive officer compensation to the median compensation employees receive.
The rule, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which Congress passed in 2010, in the wake of the financial crisis. In addition to implementing safeguards to prevent another economic meltdown, the law was generally designed to promote fiscal transparency. Not everyone agrees that this is a good thing.
Some analysts fear the new CEO-to-median-employee pay ratio rule will encourage employees to demand higher wages or may adversely affect workplace morale. Others who approve of the new rule hope it will shame employers into raising pay.
The Obama administration has focused on wage growth in its regulatory initiatives. Years of wage stagnation amid record corporate profits have exacerbated at least the perception that CEO pay is out of control.
Ironically, CEO pay is no secret. All publicly traded companies must report CEO pay and benefits to the SEC, so investors have a better idea of what they are buying.
Also ironically, disclosure of CEO pay may have caused CEO pay to spiral higher as companies fear losing chief executive talent to competitors. As a result, CEOs currently earn an estimated $300 for each $1 the average worker at their company makes.
So, how can employers use the ratio to their advantage? Two ways:
- Companies can publicize comparisons of their ratio to that of their competitors to show they treat their workers better. This will not only raise morale, but provide a reason for socially conscious consumers to buy that company’s products.
- Employers can also institute higher pay ahead of the ratio announcement, showing that they are committed to paying attractive wages.