SEC finalizes contentious CEO pay ratio rule

SEC finalizes contentious CEO pay ratio rule
© Anne Wernikoff

The Securities and Exchange Commission narrowly adopted rules Wednesday implementing a contentious provision requiring companies to detail for the public the pay gap between top executives and average employees.

The regulator voted 3-2 to adopt the  final rule, which implements a provision of the Dodd-Frank financial reform law. The commission’s two Republican commissioners split with its three Democrats.


Getting the rule finalized, five years after Dodd-Frank’s enactment, is a win for labor unions that had long pushed for the provision’s implementation and a loss for businesses trying to soften its requirements and slow its progress.

The final rule now requires public companies to disclose the pay ratio between the company’s CEO and its average employee.

In the split vote, the SEC put into place one of the biggest remaining chunks of Dodd-Frank, which just turned five years old in July, and also one of the most controversial items still on the agenda.

The little-known rule has pitted the nation’s biggest business groups against the largest labor unions, with the SEC sitting squarely in the middle.

SEC Chairwoman Mary Jo White said Wednesday the regulator received nearly 288,000 public comments on the rule, with views ranging from intense pleas for immediate enactment to outright dismissal of the rule as wholly unnecessary.

“To say that the views on the pay ratio disclosure requirement are divided is an obvious understatement,” she said.

But now finalized, companies will have to publicly provide the ratio between the pay of a CEO and the pay of the median employee. The new rule also could shine a new light on how much economic inequality exists at major U.S. companies, as economic fairness has become a major point of debate among politicians in both parties.

The controversy was evident Wednesday, as Republican SEC commissioners blasted the rule as unnecessary and burdensome. They argued that by agreeing to implement it, the regulator was effectively being bullied by public unions that pushed the provision, at the expense of other, more worthwhile regulatory projects.

SEC Commissioner Daniel Gallagher voted against the “nakedly political” rule and argued it should have been delayed until 2020 and then adopted with extremely narrow language.

But proponents of the language argue it will help inform investors about a company’s executive pay practices and make companies think twice about heaping huge paychecks on CEOs while skimping on the average employee.

Liberal and labor groups were largely positive about the final product, even as they lamented that it took years for it to be produced.

Meanwhile, conservatives and business groups heaped scorn on the entire project.

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) said his panel would consider legislation this fall to repeal that Dodd-Frank provision, even as efforts to unwind parts of the law have been stymied by Democratic opposition. He criticized the SEC for working on the rule, saying it squandered resources that could have been better spent elsewhere.

“Chair White prioritized this rulemaking to appease those that want a government regulator-controlled economy,” he said in a statement.

And the U.S. Chamber of Commerce said it would be exploring all its options to challenge the rule, calling the provision nothing more than a favor to union lobbyists.

“This rule is more harmful than helpful, and we are disappointed that the SEC ignored suggestions for improvement. We will continue to review the rule and explore our options for how best to clean up the mess it has created,” said David Hirschmann, head of the Chamber’s Center for Capital Markets Competitiveness.

Business groups had pushed for a broad interpretation of the provisions, giving companies significant flexibility in determining which employees had to be included in the calculation and how the final number was reached. In particular, they had argued for significant leeway in the inclusion of foreign workers, arguing a host of laws and rules from other countries could significantly complicate the effort.

In its final rule, the SEC offered some flexibility to companies, but not nearly as much as requested. Companies will be able to exclude five percents of its foreign workforce in determining the ratio, as well as make cost-of-living adjustments when calculating employee pay. Companies will also be able to determine what time of year they calculate their ratio, rather than having to hit a certain deadline.

In addition, small emerging companies will not have to comply with the rule until they hit a certain size.