Securities and Exchange Commission approves CEO Pay Ratio rule

In what would ultimately come down to a party line vote, the Securities and Exchange Commission (SEC) approved one of the final pieces of the Dodd–Frank Wall Street Reform and Consumer Protection Act–the CEO Pay Ratio rule. In effect, all publicly listed companies will need to disclose the ratio of how many more times the CEO of the company is compensated compared to the average employee of the firm.

The rule, which is set to go into effect for the 2017 full year earnings and financial disclosures, passed with a 3-2 split, with Democrats voting for and Republicans voting against.

The case for the rule is that over the last 60 years the gap between CEO and normal worker pay has widened from an average of 30 times to more than 300 times. The gap between the compensation of the CEO of Wal-Mart, for example, is more than 317 times that of an employee making $9 an hour and working 40 hours per week. Proponents of the rule believe that the act of disclosing these increasingly outrageous disparities will be a first step in reaching more equitable pay for the bulk of company employees.

Opponents of the rule, including most business groups aligned with the Republican party, see the rule as just another government intrusion into the marketplace, and that the ratio will prove of little value to actual shareholders of the company since they already have a say in Executive Compensation (also thanks to Dodd-Frank). The argument made to try and scuttle the rule was the expense and complication involved with complying.

It is interesting in what, exactly, opponents mean by the “cost”. Do they mean the egregious expenditure of resources in doing a few very simple mathematical calculations? I did the ratio for Wal-Mart CEO vs. the new floor base pay in about five minutes. Instead, what I think is meant is the extraneous hoops the company will have to go to so that they can 1) achieve a ratio comparable, maybe better, than competitors in the same industry so as to attain and retain “the best talent” 2) figure out the best “happy medium” possible in disclosing what the “average employee” in the firm is making without provoking many of those below that number clamoring for probably well-deserved raises.

It would be exceeding difficult to achieve both goals at the same time.

Some other arguments against the rule point out that many firms will find it beneficial to lay-off many lower tiered workers so as to lower the ratio and raise the average pay of all employees simultaneously. Additionally, free-market thinkers point to the many other failures in trying to social engineer within the workplace with the expectation that this will again have likely unwelcome unintended consequences.

[New York Times] [NPR]