It may not be long before companies finally have to disclose the ratio of how much their average worker makes in comparison to their CEO. Reports in recent weeks have said the long-delayed rule proposal, which was part of the Dodd-Frank law that passed three years ago, could finally arrive this summer. And speaking at a Senate Banking Committee hearing in late July, Securities and Exchange Commission Chairwoman Mary Jo White said she hoped the rule would be completed in the next month or two. “We are very much as a staff and commission focused on that rule-making.”
The rule in question is expected to require companies to report CEO compensation as a multiple of median worker pay, revealing the actual ratio between CEO pay and employee pay at individual companies. It is a number that has long been told in the aggregate. The left-leaning Economic Policy Institute, for instance, released a report in June showing that CEOs recently made 273 times the typical 20-to-1 ratio that existed in 1965. (Those numbers are calculated using realized options rather than granted options to calculate executive pay.)
The AFL-CIO puts the multiple at 354 for what the average U.S. CEO makes compared to U.S. workers, and compares that number to other countries around the world. The ratio in France, for instance, is 104; in Japan, it’s just 67. And although Bloomberg recently came up with ratios as well, it still had to use general industry estimates for the workers’ side of the equation.
The reluctance to divulge such company-level specificity is one reason businesses have been lobbying hard against the rule. (They are also expected to make plenty of noise once the rule is proposed, approved and enters a lengthy public-comment stage before being finalized and voted upon.) A non-profit backed by major corporations that is called the H.R. Policy Association, Bloomberg reports, has been the leading opposition, calling the rule burdensome, potentially misleading and hard to fairly compare across companies.
To some extent, they have a point. How onerous the task will be has not yet been determined, but it is expected to require pay calculations for workers similar to what the SEC requires for executives, so it certainly won’t be easy. Moreover, some will inevitably and unfairly compare the ratio, say, at Wal-Mart (where the CEO of course makes much more than hourly retail workers do) against that at Google (where the differential isn’t quite as large between the CEO and the company’s many highly paid engineers).
So why bother? The AFL-CIO, for one, seems to hope that “Disclosing this pay ratio will shame companies into lowering CEO pay,” as it writes on its Web site. Meanwhile, some activist investors told Bloomberg the pay ratio would be a “useful metric” in identifying risks such as low employee morale that could stem from a big pay discrepancy.
I agree that it’s outrageous when CEOs make 200 or 300 times–or higher–that of the average employee. As John Mackey, the cofounder and co-CEO of Whole Foods (who, as of 2009, limited cash compensation for executives to 19 times the average Whole Foods worker’s), has written, “because of the yawning gap between the leaders and the led, employee morale is suffering, talented performers’ loyalty is evaporating, and strategy and execution is suffering at American companies. Employees really do care about this issue.” Peter Drucker famously believed that the proper ratio should be 20-to-1. That sounds pretty fair to me.
But I have my doubts that the revelations will really do much to shame companies into changing what they pay their executives or what they pay their employees, at least in the near term. It’s not like disclosure has been a silver bullet so far. Since the SEC revised its disclosure rules for executive pay in 2006, CEO earnings are still excessively high, even despite having fallen somewhat with the recession and gotten closer in line with performance.
My guess is the ratios will involve more explanations than real self-examination, with only the companies that have low ratios in comparison to their peers being interested in talking about it. “It’s frankly a little bit of a prisoner’s dilemma,” says Todd Sirras, an executive compensation consultant for Semler Brossy. Companies will hope that it flies under the radar unless investors really start to care a lot about it. And for now, Sirras says, most institutional investors don’t: “There’s not a lot of energy [from investors] about doing anything with it.”
Until there is, the CEO-to-worker pay ratio is likely to cause a lot of fuss. But in the near-term, at least, probably not a lot of change.
Jena McGregor is a columnist for On Leadership.