CEOs of public companies will have to disclose how much they earn compared with the typical worker in their company under a new rule finalized by the Securities and Exchange Commission.
The SEC voted 3-2 Wednesday to finalize the rule, one of a number of corporate pay regulations required by the 2010 Dodd-Frank financial reform law. Requiring further disclosures of executive pay has long been a goal of liberals concerned about inequality, many of whom blame compensation practices for creating incentives that led to the financial crisis.
The SEC has drawn criticism from Democrats for delaying finalization of the rule, which was proposed in 2013. That delay was one of the complaints voiced by Massachusetts Sen. Elizabeth Warren in June, when she told SEC Chairwoman Mary Jo White that she considered her tenure “extremely disappointing.”
But the rule finalized Thursday was mostly as proposed, with a few significant changes. Publicly listed companies are required to disclose the median pay of all employees except for the CEO, the total compensation of the CEO, and the ratio between the two. Total compensation includes annual salary, bonuses and other perks.
In recent months, the SEC said the rule was held up partly because it was determining how to account for the pay of part-time, overseas, seasonal and other kinds of employees whose compensation may vary significantly from that of the typical worker.
White said at the SEC’s meeting Wednesday that the rule was valuable because the “pay ratio disclosure will provide shareholders with additional company-specific information that they can use when considering a company’s executive compensation practices, an important area of corporate governance on which shareholders now have an advisory vote” under Dodd-Frank.
“While there is no doubt that this information comes with a cost, the final rule … provides companies with substantial flexibility,” White said.
In particular, the rule allows companies to select its own methodology for calculating the ratio. Companies can identify median pay using any consistent measure, can use a statistical sample to do so, and only has to make the calculation once every three years. In addition, they can use cost-of-living adjustments for employees in different regions.
Daniel Gallagher, a Republican appointee on the commission, said the rule should have used only full-time workers in the U.S. in calculating median pay.
He also rejected White’s justification for the pay disclosure, quoting Supreme Court Justice Antonin Scalia in saying that it was “pure applesauce” that the purpose was to inform investors voting on executive compensation.
Instead, he said, the rule was meant to “shame” companies into lowering CEO pay. “Addressing perceived income inequality is not the province of securities laws or the commission,” he said.
Republicans and industry are set to keep trying to stop the rule.
Republican Rep. Jeb Hensarling, chairman of the House Financial Services Committee, said within minutes of the rule’s finalization that he would advance legislation to undo it.
“I’m guessing that a worker who loses his or her job will take little comfort in knowing the ratio between the CEO’s pay and the salary that they are no longer receiving because Dodd-Frank has put them out of work,” Hensarling said, blaming the SEC for putting additional regulatory burdens on companies.
David Hirschmann, head of the U.S. Chamber of Commerce’s financial office, echoed the criticism that the rule was a gift to labor that would hurt business. “Congress added this disclosure to Dodd-Frank as a favor to union lobbyists who misguidedly think it will help their organizing efforts,” he said, arguing that it would create inappropriate comparisons between companies.
Hirschmann indicated that the business group will continue to fight the rule as it goes into effect. “We will continue to review the rule and explore our options for how best to clean up the mess it has created,” he said.
