Business

CEO-to-worker pay ratio to be public under new U.S. rules

U.S. federal regulations will soon demand that publicly listed companies report the ratio between the pay of their workers and their chief executive officer.

Disclosing the gap won't close it, but could lead to more public pressure on corporations

The Securities and Exchange Commission has mandated disclosure of the gap between CEO pay and median pay of workers for listed companies. (Associated Press)

U.S. federal regulations will soon demand that publicly listed companies report the ratio between the pay of their workers and their chief executive officer.

The Securities and Exchange Commission voted Wednesday to formally adopt a rule, which will compel public companies to disclose the ratio between their chief executives' annual compensation and median employee pay.

Companies will get some flexibility in how they find the median. For instance, they can exclude 5 per cent of their overseas workers when arriving at the number and use statistical sampling to estimate pay rates across the company.

CEOs make a lot more than the average working Joe or Jane, but public reporting of the gap is unlikely to result in a rush to cut executives' pay packages or boost employee salaries. The numbers could pack a symbolic punch, though, and nudge company directors as watchdogs to push back on executives' excess, supporters of disclosure say.

Companies will have to start reporting the new pay ratio disclosures in the first fiscal year beginning on or after Jan. 1, 2017. Only larger and mid-sized companies will need to comply, while smaller ones are exempt.

Some corporate trade groups have opposed the measure and threatened a legal challenge, but the SEC has been under pressure from Democrats to pass the CEO pay rule, which was part of a package of reforms that followed the 2008 financial crisis.

Short-term gain

The issue of executive compensation took on greater urgency in the wake of the crisis. Outsize pay packages — often tied to the company's stock price — were blamed for encouraging disastrous risk-taking and short-term gain at the expense of long-term performance.

Although a handful of U.S. companies currently disclose the ratio of CEO compensation to rank-and-file worker's pay, they don't calculate it the way the SEC is requiring, according to an analysis by the law firm Simpson Thacher & Bartlett.

Canadian companies listed in the U.S. will be forced to follow the same rules.

Business interests such as the U.S. Chamber of Commerce have lobbied against the requirement, saying it will be costly and time-consuming for companies to gather the information. The Chamber maintains it will cost U.S. companies more than $700 million US a year, compared with the SEC's estimate of about $73 million.

"It will impose on companies and their shareholders an extremely costly and burdensome requirement, and compel companies to disclose immaterial, if not misleading, information," Mike Ryan, vice-president of corporate governance at the Business Roundtable, said in a statement Monday. The group represents chief executives at the largest U.S. companies.

Widening gulf between CEO and workers

On the other side, investor advocates, shareholder groups and union pension funds have pushed for reporting of the CEO-employee pay gap. They say the gulf has widened about ten-fold since 1950. Moreover, fat pay packages for executives don't necessarily track with strong financial performance by the company, critics say.

"We think it's very important, very clear information," said Ed Mierzwinski, consumer program director at U.S. Public Interest Research Group. "It's going to send a message to investors."

During the nearly two years since the SEC first proposed the rule and sent it out for public comment:

  • Pay packages for CEOs grew for the fifth straight year in 2014, driven by a rising stock market that pushed up the value of executive stock awards. Median compensation for the heads of Standard & Poor's 500 companies rose to a record $10.6 million, up from $10.5 million the year before, according to a recent study by executive-compensation data firm Equilar and The Associated Press.
  • The average annual salary for U.S. employees was $47,230 in 2014, according to the Labor Department. The average salary differs from the median in the SEC's rule — the median is the salary point at which half the company's employees earn more and half earn less.

In the U.S., shareholders already get to weigh in on executives' pay packages. In 2011 the SEC gave shareholders at public companies the right to register their opinions on the executives' pay in a non-binding vote.

There is a movement among some big shareholders for a "say on pay" which would keep a lid on executive compensation. 

With files from Reuters

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