Don’t fault the boss for making a huge salary — blame the Securities and Exchange Commission (SEC) for disclosing it.
Employees of public companies who would rather have remained blissfully ignorant of the pay gap between themselves and the CEO had that shattered Wednesday as the SEC voted 3-2 in favor of disclosing the pay ratio between rank-and-file employees and head honchos. The Dodd-Frank Wall Street Reform and Consumer Protection Act that was passed by Congress in 2010 included the rule
Under the regulation, many public companies must now disclose “the ratio of the annual total compensation of the chief executive officer to the median of the annual total compensation of the company’s employees.”
The SEC’s five commissioners — three Democrats and two Republicans — were split on the rule with both Republicans voting against it. One of the commissioners who voted against, Daniel M. Gallagher, said the rule will only be used in the “naming and shaming” of CEOs with large compensation packages. The U.S. Chamber of Commerce also lobbied against the rule, arguing it will cost businesses additional hundreds of millions.
But the SEC estimates that the cost to companies will be a fraction of that amount. When the rule was formally proposed by the SEC two years ago, both Republican commissioners also balked at the change.
On its website, the SEC received more than 280,000 public comments in support of the pay ratio rule. But critics continue to contend that it will impose a costly new accounting requirement on companies. For instance, one commenter who supports the rule said, “We call on you to immediately implement, without any further delay, a forceful CEO pay-disclosure rule requiring companies to publicly release the ratio between their executive compensation and average employee pay.”
The agency also grouped nearly 70,000 comments in the category typified by similar comments. “As income inequality reaches unprecedented heights, the public has the right to know which corporations are fueling the yawning gap between rich and poor,” one wrote.
Another nearly 20,000 included sentences like these: “Disclosing corporate pay ratios between CEOs and average employees will discourage the outrageous and reckless pay practices that fueled the 2008 crash.”
The rules were included in the act passed following the Great Recession and financial crisis of 2008. The rule will not apply to “emerging growth” companies, which are defined as those with less than $1 billion in annual gross revenue.
Economists speculated both before and after the 2008 collapse that huge compensation packages, which are often indexed to a company’s stock price, may have encouraged chief executives to take more daring strategies in order to keep the stock ticker prices going up. That risk-taking was partly blamed for causing and worsening the deep crisis of 2008-2010.
And with the gulf between employees’ earnings and CEO salaries only widening — it’s grown about tenfold since 1950 — investor advocates, shareholders and business people are concerned that in recent years, CEO compensation has gone off the rails. Many believe the outsized compensation of CEOs has begun to erode trust in those companies and hurt the overall American economy.
These groups also believe massive pay packages for CEOs don’t lead to higher corporate performance, anger shareholders and give a black eye to companies. And even though no CEO will ever earn enough to say, “Don’t pay me more,” at some point there must be a limit. However, it is a difficult and challenging calculus to find a middle ground in the pay ratio gulf between a middle manager or low-level employee and the big boss.
And ultimately no amount of legislating will decide for public companies what to pay executives. That responsibility will be left to the free market and shareholders. The performance of the CEO and shareholders’ earnings is the real test of what the boss is worth.
In the end, shareholders are the bosses of the boss.
Noah Zuss is a reporter for TheBlot Magazine.