The Securities and Exchange Commission on Wednesday approved new rules that require publicly traded companies to reveal the gap between what their CEO makes and what rank and file employees take home.
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The controversial measure passed by the SEC’s 5-member commission by a vote of 3-2, with both Republican members voting ‘no.’
Under the new rules, companies will be required to disclose median worker pay--the point on the income scale at which half their employees earn more and half earn less--and compare it with CEO compensation.
Emanating out of the Dodd-Frank banking reform legislation of 2010, the new rules take aim at what critics of current CEO pay say is a gross – and growing—level of inequality between CEOs’ salaries and the pay scales of average workers.
Income inequality is certain to be key issue in the upcoming presidential election.
“As investors increasingly focus on corporate governance and executive compensation issues at public companies, the pay ratio disclosure will provide another metric that is useful on many fronts, such as say--on--pay votes,” said Democratic SEC Commissioner Kara Stein.
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But Republicans say regulators (ie., the government) have no business telling companies what they can pay their CEOs.
“Addressing perceived income inequality is not the province of the securities laws or the Commission. And yet here we are, on the cusp of adopting a nakedly political rule that hijacks the SEC's disclosure regime to once again effect social change desired by ideologues and special interest groups,” said Republican SEC Commissioner Daniel Gallagher in a statement before the vote.
Publicly traded U.S. companies already disclose compensation of their CEOs and other top executives in proxy filings submitted to the SEC before annual stockholder meetings. But those forms are often confusing to shareholders.
The new rule will require companies to: disclose the annual total compensation of the CEO; report the median of the annual total compensation of all other employees — the level where half the workers earn more, and half earn less; provide the ratio of those two amounts.
Supporters believe shareholders will eventually benefit from the new rules.
“In recent decades, CEO compensation overall has grown to nearly 300 times what typical employees earn. Investors should have the ability to consider whether a CEO provides hundreds of times the value of their employees as they weigh whether to invest in a particular firm,” a consumer rights activist group wrote in a letter to the SEC.
The final rule allows firms to exclude up to 5% of their overseas workers from a new pay-ratio, according to details released ahead of a final vote. Companies and their trade groups had argued that the SEC should allow them to exclude a larger percentage of foreign workers, which would likely have resulted in a narrower pay gap for some multinational firms.
The disclosure is set to begin with proxy statements covering fiscal 2017 pay. In general, firms only have to recalculate the ratio every three years.