SEC Approves Rule That Shines Light On CEO Pay Ratio
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When CEOs are paid tens of millions of dollars a year, it's understandable why some workers complain about income inequality. Today, federal regulators approved a controversial rule intended to shine a spotlight on just how big the pay gap is. Critics say the rule will impose a costly new burden on public companies with no real benefit to shareholders. NPR's Jim Zarroli reports.
JIM ZARROLI, BYLINE: Congress ordered regulators to draw up the pay roll when it passed the 2010 Dodd-Frank financial overhaul bill, and it's become one of the most controversial parts of that bill. The Securities and Exchange Commission received more than 287,000 letters commenting on the rule before approving it by a vote of 3 to 2. The rule says companies have to calculate the median pay of their rank-and-file workers and then say how it compares to what their chief executive earns. Heather Slavkin Corzo directs the Office of Investment for the AFL-CIO. She says the rule is meant to inform shareholders about their company's pay practices.
HEATHER SLAVKIN CORZO: It'll also be important information for the general public as we think about what executive compensation practices are happening in our country and how that relates to income inequality and raising wages.
ZARROLI: The rule, which takes effect in 2017, was strongly opposed by business groups. They include the U.S. Chamber of Commerce, which have suggested it might go to court to fight the rule. They said calculating the median wages of workers would be a costly and complicated process. Charles Elson, a professor of finance at the University of Delaware, acknowledged that determining worker salaries isn't always a cut-and-dry matter.
CHARLES ELSON: It's not going to be easy. I mean, at, you know, a global company, it depends on, you know, what you - how you define is compensation. Is it straight waged? Does it include bonuses? And at - particularly companies that have lots of workers overseas, how do you factor that in?
ZARROLI: With its new rule, the SEC sought to address those concerns by giving companies what it called substantial flexibility to calculate the numbers. For example, companies are allowed to use statistical samples to determine pay. Smaller companies and emerging businesses are exempted from the rule. And companies are free to leave out some of their foreign workers when they do their calculations. But that didn't go far enough for SEC commissioner Daniel Gallagher.
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DANIEL GALLAGHER: Here we are on the cusp of adopting a nakedly political rule that hijacks the SEC's disclosure regime to once again affect social change desired by ideologues and special interest groups.
ZARROLI: Gallagher said companies are already required to disclose a substantial amount of information about executive salaries. He said the pay rule approved today is mainly of interest to certain activist groups such as labor unions. But supporters of the new rule take issue with that, and they say forcing companies to post their pay ratios will highlight the issue of wage inequality. In the process, they hope it will force U.S. companies to begin to rethink the way they compensate their employees. Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.