SEC reform shines a light on CEO-to-worker pay ratio
The Securities and Exchange Commission voted 3-2 to approve a rule Wednesday that will require publicly traded companies of a certain size to disclose what the CEO makes relative to the median compensation of its workers. The rule was five years in the making, stemming from the Dodd-Frank reforms passed after the financial crisis, and will take effect in 2017.
Depending on whom you ask, the ratio will help either shareholders review compensation packages or be relatively useless.
“It’s important to put numbers in context, and I think using a CEO-to-worker pay ratio provides the right context for understanding how extraordinary CEO pay has become in recent decades,” says Lawrence Mishel, president of the Economic Policy Institute.
EPI’s research shows that in 1960s, CEOs made roughly 20 times as much as a typical worker, but that ratio climbed to 300 in 2013. Mishel thinks investors, workers and the community at large should be aware of that growing divide and be able to follow changes over time.
But Amy Hutton, a professor at Boston College, says this ratio’s become very politicized.
“People will use this measure when it’s reported to make whatever argument they want to make,” she says. She thinks the data could be used to complain that CEO pay is too high or to justify the pay package if the ratio is comparable to competitors’ data.
Plus, Hutton says companies that outsource work may look better on this statistic than companies that actually hire workers.
“I don’t know if this really tells us very much about whether CEO pay is really appropriate,” says Nora McCord, managing director of Steven Hall & Partners, an executive compensation consultant. “I have one client who was considering awarding a toaster to the median employee.”
That’s how random or silly the client viewed metric. McCord thinks tacking CEO pay against company performance is better way to judge if the boss is worth millions.
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