The Securities and Exchange Commission moved forward with regulations Wednesday that would require companies to disclose the gap in pay between their chief executives and average employees. [WATCH VIDEO]
The commission voted 3-2 to propose a rule requiring that companies calculate how much their leaders earn per year and then compare that to the median, or middle, employee.
But unions and liberals have pushed for the proposal as a way to shame companies and help workers negotiate their salaries.
“The simple fact is that large pay disparities between CEOs and their employees affect a company’s performance,” AFL-CIO President Richard Trumka said in a statement.
“When the CEO receives the lion’s share of compensation, employee productivity, morale and loyalty suffer. In contrast, reasonable CEO-to-worker pay ratios send a positive message to the workforce that the contributions of all employees are important to running a successful company.”
Supporters of the rule said that disclosure of the pay ratios would be helpful to investors, who might use it to measure worker satisfaction at a particular company and whether chief executives are overpaid.
That could help prevent some of the behavior that led to the 2008 financial crisis, said Bartlett Naylor, a financial policy advocate at Public Citizen.
“Wall Street got blown up by actual human beings. It wasn’t anonymous abstract things,” he told The Hill. “They were incentivized to take these extraordinary risks.”
Estimates have varied on how much CEOs are paid compared to the average worker, but chief executives of companies in Standard & Poor’s 500 Index make 204 times what their average workers do, according to data recently compiled by Bloomberg.
Opponents of the publication of pay ratio have information countered that it would be difficult to calculate and of little use to investors.
They have maintained that the pay ratio is a merely symbolic metric that tells investors little about the overall health of a company. Additionally, they have worried that it could reduce competition by forcing businesses to focus on the ratio instead of carrying out their corporate strategy.
“Because many external factors may affect the calculation of the pay ratio, any investor that uses pay ratio disclosures to compare companies will be at best distracted from material investment information and at worst misled about the investment itself,” SEC Commissioner Michael Piwowar, who is a Republican and voted against the proposal, said in a statement at the meeting.
Business advocates have also said that the measure was a handout to unions and liberal activists.
“This proposed rule is another example of special interests promoting policies contrary to the interests of investors and the businesses they invest in,” said David Hirschmann, head of the Chamber of Commerce’s Center for Capital Markets Competitiveness, in a statement.
“This proposal has the potential to drive up compliance burdens and costs for public companies with no benefit to investors — a formula that continues to make it less attractive to be a public company in the United States.”
The SEC has been tasked with issuing the regulation since 2010, when Dodd-Frank was signed into law.
Sen. Robert Menendez (D-N.J.), who wrote the Dodd-Frank provision and has pushed for the SEC to begin writing the rule, said in a statement on Wednesday that the “gulf” between CEO and rank-and-file worker pay has only grown during the delay in the rules.
“We have middle-class Americans who have gone years without seeing a pay raise, while CEO pay is soaring,” he said. “This simple benchmark will help investors monitor both how a company treats its average workers and whether its executive pay is reasonable.”
That it has taken three years just to move forward with a proposal, which itself could take months or years to finalize, is proof of the power of the financial industry in Washington, Naylor said.
“This rule explains Washington. It explains Dodd-Frank and why it’s not implemented. This is the simplest rule of 400,” he said. “This is 3,000 lobbyists and a lot of funding by Wall Street into Washington — members of Congress — to delay it.”
In addition to the pay disclosure rule, the SEC also moved ahead with new rules for municipal advisers, who advise cities, states and other authorities selling municipal bonds.
That rule, also called for by Dodd-Frank, formalized a 2010 temporary regulation that requires advisers to register with the SEC and establishes a specific set of training and conduct standards for them.
— This story was updated at 1:23 p.m.