The Securities and Exchange Commission on Wednesday made it official: Public companies will soon have to say exactly how their chief executives' payday compares with a typical employee's.
In a 3-to-2 vote, the commission backed a long-delayed rule demanding that companies publicly share their "pay ratio," a potentially embarrassing corporate revealing that will highlight the country's growing workplace pay gap.
Calling it "one of the most controversial rules" to arise out of the sweeping Dodd-Frank reform following the financial crisis, the rule's approving members, including SEC chair Mary Jo White, called it a thoughtful and reasonable measure that would help investors and workers better understand how companies reward both sides of their workforce.
But the SEC's two Republican commissioners belittled the rule as an easily misconstrued burden built to embarrass big businesses. Commissioner Michael Piwowar called it "a page out of the playbook of Big Labor."
Commissioner Dan Gallagher decried it as a "low-quality" number that was “likely to be useless for anything but naming and shaming” well-paid corporate execs, and desired largely by "ideologues, special-interest groups ... and idiosyncratic investors." He added, "Addressing income inequality is not the province of the SEC."
Companies will have to share how the chief executive's pay compares to the median pay of workers—the middle line in which half of all employees make more and half make less. At America's biggest companies, the top boss makes more than $300 for every $1 its typical worker earns, up from a $20-to-$1 split in 1965, Economic Policy Institute data show.
The new measure will cover all of a company's full-time, part-time and temporary employees, though the business can use statistical sampling and reasonable estimates, without needing to compile their workforce's entire payroll.
In response to companies and corporate groups that pushed to declaw the rule, businesses will be allowed what White called “substantial flexibility” in how they calculate and share their ratios.
Companies will only need to update the ratio once every three years, and they can exempt as much as 5 percent of their overseas workers from the ratio, bowing to concerns that the typically lower pay for these foreign workers could skew company-wide payrolls.
Companies will have to share the ratio starting in 2017, seven years after Congress first mandated the rule go into effect. Supporters of the rule — including Congressional Democrats, workers’ unions, good-governance advocates and some institutional investors — have questioned what took so long for the simple ratio to become law, with Democratic presidential candidate Hillary Rodham Clinton saying last month, "There is no excuse for taking five years to get this done."
Sen. Bob Menendez (D-N.J.), who introduced the mandate in 2010, said Wednesday the rule would be a strong tool aimed at "injecting transparency, promoting fairness in Corporate America and restoring sanity to runaway executive pay. Big corporations who insist on top-heavy compensation models will no longer be able to hide from the shareholders.”
After the SEC's vote, business groups again voiced their disapproval for the rule, and some are expected to sue the agency over the rule's approval.
“We will continue to review the rule and explore our options for how best to clean up the mess it has created,” U.S. Chamber of Commerce chief executive David Hirschmann said in a statement Wednesday.