WASHINGTON, D.C.: The US markets regulator on Wednesday (Thursday in Manila) backed a rule requiring big companies to disclose the pay gap ratio between chief executives and workers, amid rising concerns about the nation’s income inequality.
Part of the Wall Street reforms legislation, the Dodd-Frank Act, that became law in 2010, the new rule will take effect in 2017 and apply to a large number of publicly traded companies, despite objections from the business community.
The rule requires companies to calculate and disclose the ratio of the chief executive’s
annual total compensation to the annual total compensation of the company’s median employee.
“To say that the views on the pay ratio disclosure requirement are divided is an obvious understatement,” said Mary Jo White, chair of the US Securities and Exchange Commission (SEC), according to her prepared remarks in opening an SEC meeting.
White, presenting the SEC staff recommendation calling for the rule’s endorsement, noted that the SEC had received more than 287,000 comment letters, with over 1,500 individual letters and the rest form letters, since the Dodd-Frank Act was passed five years ago.
“The diverse views expressed by these commenters reflect that Congress tasked the Commission with navigating a highly divisive subject—a boon or a bane, depending on one’s perspective,” she said.
The compensation package for CEOs has skyrocketed over the past four decades: In 2013 the boss’s annual pay was 300 times higher than the typical worker’s, compared with a 20 percent ratio in 1965, according to a study by the Economic Policy Institute, a Washington-based think tank.
White said the new rule provides companies with “substantial flexibility” in calculating the pay ratio, by using estimates and sampling to determine the compensation for the median employee. It also will allow companies to choose any date during the final three months of a firm’s fiscal year to determine the median employee.
Despite the SEC-touted flexibility, the powerful US Chamber of Commerce condemned the rule, calling it “a favor to union lobbyists.”
“When disclosure is used to advance special interest agendas rather than provide investors with better information, it is a step in the wrong direction,” the leading US business organization said in a statement.