SEC finalizing rules that would require public companies to disclose pay gap

Last year, a study from the Harvard Business School found that Americans believe that the average CEO makes about 30 times what their entry-level employees do. The actual figure was over 350 to 1, more than double the country with the next-largest gap.

Part of the reason why Americans’ perceptions were so far off is that we simply aren’t good at comprehending what $12,000,000 per year — the average American CEO’s salary — actually means in relation to our incomes. We just aren’t good at big numbers. But another reason for the gap is that this kind of data isn’t readily available. Every once in a while, someone in academia will collect an estimate based on a sample of a certain number of Fortune 500 companies, but these studies are few and far between. And they don’t specify which companies have higher and lower gaps.

Not anymore.

The Securities and Exchange Commission is finalizing rules today that will require American publicly traded companies to disclose their pay gap. From the Washington Post:

Corruption via Shutterstock

Executive pay, via Shutterstock

Once the pay-ratio rule is in place, millions of workers will know exactly how their top boss’s payday compares with their own, revealing a potentially embarrassing disparity in corporate riches that many companies have long fought to keep hidden…

The pay ratio, at the center of years of corporate arm-wrestling, could ratchet up the pressure on big companies to bring runaway executive pay under control. Boards and shareholders could use it to judge a firm’s high-priced leadership, and customers could opt to shop at companies where workforce pay seems more fair.

The rule represents one of the many that have taken years to implement following the passage of the Dodd-Frank Act in 2010. As the Post notes, the SEC received over 286,000 public comments on this rule alone, which played a role in holding it up.

As I’ve written before, how economic measures like poverty and economic inequality are defined affects how we address them in discourse and in policy. At the company level, workers can avoid companies with extremely unfair pay, and shareholders can put pressure on companies to lower executive pay and reinvest the money in the company. At the policymaking level, there will be a more clearly-defined frame of reference on which to peg discussions of exactly how extremely overpaid American’s wealthiest executives are, and how economically inefficient runaway executive pay is.

Prior disclosure rules had sought to set these kinds of incentives and conditions. However, by only requiring that companies disclose how much top executives were paid, with no comparison to their average workers, the rules merely encouraged companies to raise executive pay, as senior staff at major companies were able to see if their peers were making more than them, putting upward pressure on executive pay. As the Post continues:

“The theory was disclosure would create embarrassment and lower pay,” said Charles Elson, the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “But that was based on the assumption that those who had asked for that kind of money were capable of that kind of embarrassment. And they weren’t.”

When your peers are making $10 million, you aren’t ashamed to make $12 million. You aren’t a jerk; you’re top dog. But when you’re making $12 million and your average worker is making $40,000, and that worker and your shareholders and the public all know it, that’s much more likely to bring on some shame.

And even if it doesn’t, it will bring on pressure to close the gap, which is all that matters at the end of the day.


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2 Responses to “SEC finalizing rules that would require public companies to disclose pay gap”

  1. Doug105 says:

    Middle Class vs CEO charts

  2. 2karmanot says:

    I wouldn’t get too excited about anything that SEC asserts, attempts, or ‘suggests’. The SEC is probably first among it’s institutional peers for corruption, incompetence, and manifest ineptitude.
