Last week, Harvard Business Review published the results of a forthcoming study by two professors that revealed an unsettling finding: Most people have no idea how much money CEOs actually make in comparison to the average worker. The results circulated around the Web, including on the Post's site, and reminded us how few people know that the ratio of CEO-to-worker pay in this country is 354: 1.
Yet few if any stories mentioned that this figure is poised to get much more attention. The Dodd-Frank Act, passed in 2010, included a requirement that companies begin disclosing the ratio between their CEO's compensation and that of their median employee. Then last September, the U.S. Securities and Exchange Commission (SEC) finally proposed a rule that offered companies flexibility in how to determine that ratio and outlined where it would need to appear. They also began taking public comments on the proposal.
Corporations and business groups have long lobbied hard against it — as one might guess, they aren't big fans of the idea. For one, they've said it takes a lot of work to calculate. The proposed rule requires them to compare the CEO's pay to the median of all employees, whether they're full-time, part-time, temporary workers or foreign based.
The SEC tried to simplify things by allowing companies some freedom in how they arrive at the median worker's pay. They could use a statistical sample, for instance, as the SEC hasn't prescribed a methodology for calculating the ratio. But companies have taken issue with this too, says Steve Seelig, a senior regulatory adviser at the consulting firm Towers Watson. He says they're frustrated with the idea that the press and activist investors might try to compare the ratios across different companies, even though the underlying method for reaching the figures might not be the same. Still, he says, "I think most companies are resigned that they’re going to have to make this disclosure."
While the complaints often focus on the mechanics of the rule, companies likely just don't relish the idea of these numbers being published at all. One look at a study from Bloomberg, which calculated these ratios itself, shows why: The study's most eye popping CEO-to-worker pay ratio was 1,795:1, and 28 of the companies it examined had pay ratios of more than 500:1.
Bloomberg, it should be noted, used government data to sub in industry-specific averages for worker pay, since companies don't often publicly share those numbers. Yet even if the actual ratios are somewhat lower when specific company numbers are used, most likely they will still be high enough to ruffle feathers.
In a comment letter to the SEC from December, the president of the Center on Executive Compensation, a business trade group, wrote that "the pay ratio requirement itself is mistaken: it will provide no useful information to investors and to the extent the information is used by investors at all, it is likely to be misleading and thus will be harmful to them." On Friday, the same group submitted another letter urging the SEC to amend the proposed rule, outlining changes it said would significantly save companies money in calculating the figure.
So far, there still isn't an active rule. On Sept. 19, a year after the initial rule was proposed, the nonprofit organizations Americans for Financial Reform and Public Citizen issued a statement urging the SEC to finalize it. The SEC has not announced a timetable on the rule but SEC Chair Mary Jo White has testified that completing the rulemaking required by the Dodd-Frank Act is one of her priorities, and said that it is her "hope and expectation" to complete it by the end of the year.
It's hard to tell yet what impact publicly sharing the ratio will have. CEO pay hasn't exactly gone down since companies began having to disclose more details about executive compensation back in 2006. Says Seelig: "The overarching question on this is, is the behavior going to change when this disclosure hits the streets? Are companies going to do something different?"
Even if it doesn't immediately drive down pay, some investor groups and activists think it will have an effect. Because data isn't currently available to investors, some groups say the disclosure will help them make more informed decisions about a company's human resources practices, as well as help reduce pay levels over time.
"This rule is not a cure-all or a magic bullet," says Lisa Donner, executive director of Americans for Financial Reform. "It's relevant information for investors about how a company works. This disclosure is one piece of the puzzle, but it's useful to have public and standard — or relatively standard — information."
Harvard Business School professor Michael Norton, one of the researchers behind the study that got so much attention last week, notes that while revealing CEO pay ratios could lead to a reduction in executive pay, it could also demotivate workers. "One reason often given for why very high salaries for CEOs are sensible is that higher salaries motivate people to work harder," he explains in an email to me. "But research shows that when pay inequality is suddenly made public, lower paid workers report less job satisfaction but higher paid workers do not experience any benefit."
We don't know yet whether the rule could have long-term effects on reducing the pay gap, or just hit CEOs with some short-term shame. But it's a safe bet that when the rule finally does comes out, Americans — and particularly the investing public — are likely to be more aware of how much the boss actually makes.