Five years after the Dodd-Frank Act was passed requiring, among other things, that the country's biggest public businesses disclose exactly how much more their CEOs are making compared to their median workers, the U.S. Securities and Exchange Commission has finally approved a rule for getting it done, in a 3-2 vote today that fell along partisan lines. It's about time. The move, which will require disclosure by January of 2017, will provide the transparency necessary for customers to better judge how a company values its employees, put pressure on businesses to keep the ratio between top and median salaries reasonable, and allow shareholders and other company stakeholders to better evaluate whether executives are worth what they make.
An oft-cited Harvard Business School study released last year showed that the world already thinks CEOs get paid too much, but that we also vastly underestimate just how much they make. Americans generally assume CEOs make about 30 times the typical worker, when the reality is that top executives make an average of around 330 times their median-paid employees. Walmart rightfully took a lot of heat in 2013 when it was revealed that then CEO Michael Duke's annual cash compensation of $23 million-plus was 1,034 times the company's median employee salary.
This transparency is not just about shaming CEOs, however; there are real economic consequences to income inequality. The gap between rich and poor in the 30 Organisation for Economic Co-operation and Development countries (OECD), which includes the United States, is at its highest level in 30 years. And data from the OECD suggest that this has a "negative and statistically significant impact" on the economy, cutting GDP growth by about 9 percent between 1990 and 2010 in its member countries — 7 percent in the United States. Stark income inequality was also blamed in part for the financial collapse of 2008, with economists theorizing that overborrowing by lower income people and an increased political influence among the rich and the financial industries led to the excesses that created a crisis.
Bloated salaries of top executives within a company may not be the biggest problem of income inequality, however. Rather, it's the too-low salaries of the median workers. Studies show that boosting the salaries of low-paid employees has a greater impact on the economy than reducing the top dog's pay, with relatively modest changes resulting in big economic gains. The new SEC rule does nothing to encourage balance in pay, other than shine a light on the disparity; the rest is up to the public — and many didn't want you to have that power.
The SEC received more than 280,000 comments on the proposed rule, with various companies and business organizations fighting the disclosure, claiming it would be too costly to calculate a company's median salary and of little use anyway.
"Whether a CEO makes 20, 200, or 2,000 times as much as the median compensation of the firm's employees provides no particular insight whether a CEO or the median employee is fairly compensated," the U.S. Chamber of Commerce claimed in a May 2014 submission, adding that compliance with the rule would likely cost hundreds of millions of dollars. If that's true, it's even more frightening because it means public companies don't know what they're paying people.
Businesses including Whole Foods and oil and gas company Noble Energy, on the other hand, chose to disclose the salary ratio information ahead of the rule. Kudos to them; it likely paid off in increased customer loyalty. The others come across as if they have something to hide.
Nobody's proposing limiting CEO pay to a certain figure, like the Swiss tried to do in 2013, with a failed referendum that would have capped chief executive pay to 12 times that of junior employees. We're just asking that the ratio be public and that the chips be allowed to fall where they may.
If a company finds that too embarrassing a prospect (Walmart, we're talking to you), perhaps its leaders should rethink their compensation packages — or better yet, pay their workers a salary they can live on.