SEC Rules That Companies Must Disclose CEO-to-Worker Pay Ratio

August 5th 2015

Kyle Jaeger

The Securities and Exchange Commission ruled on Wednesday that companies must disclose the pay ratio, or difference in compensation, between CEOs and average workers, a move that has been met with significant pushback from corporate executives. There is at least one major loophole in the rule that has caused concern among the AFL-CIO, the American trade union federation, and other financial regulators, and it applies to companies like Wal-Mart that rely on seasonal employees during periods of peak business.

The problem was defined in the press release that the SEC released on Wednesday. It states that companies would be able to "make the median employee determination only once every three years and to choose a determination date within the last three months of a company’s fiscal year." In other words, when companies report the average compensation of their median employee, they can be selective, possibly allowing for deliberate misrepresentation of information.

What exactly is the flaw?

For multi-billion dollar companies that bring on a significant number of seasonal employees—a retailer hiring extra help around the holidays, for instance—this could pose future issues in reporting. If they wanted to downplay the pay-ratio disparity between their CEO and the average sales clerk, they could choose to disclose the median employee figures before or after hiring their seasonal workers, excluding a significant portion because the regulation included this three-month window.

"We're going to have to keep an eye out for what kind of disclosures we get once companies start reporting under the rule to get a sense of whether these are really significant," Heather Corzo, director of investment at the AFL-CIO, told ATTN:.

How much is the pay gap between the CEO and the average worker?

It is no surprise that the chief executives of major corporations make significantly more money than rank-and-file employees—but just how much more has been a matter largely resigned to speculation. Journalists and watchdog organizations have attempted to shed light on the income disparity in the past, but it can be difficult to collect up-to-date information on salary profiles for private companies.

The new rule follows years of discussions between financial regulators and corporate representatives. In 2010, a financial regulation overhaul bill known as the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress and signed by President Obama, and now this rule seems to follow-up on the government's efforts to increase transparency in corporate America. Whether or not it is effective is another matter.

According to the Economic Policy Institute, the CEO to average worker pay gap has dramatically widened since 1965. As of 2013, CEOs brought home approximately 300 times what their median workforce made.

For reference, chief executives were paid about 20 times more than their employees 50 years ago. The SEC's ruling also speaks to the country's growing attention to income inequality issues, demonstrating that interest in salary disparities is strong, among both the public as well as financial regulators.

Businesses have resisted these regulations. In 2014, the Chamber of Commerce released a report that called the SEC's pay-ratio disclosure requirement "egregious," arguing that it would waste time and money that could be more effectively allocated.

"The intent behind the pay ratio rule is inherently political as it is designed to 'shame' American businesses in order to placate certain special interest constituencies," the report noted. "It is hard to understand the economic or logical argument behind the rule, which will damage our economy by imposing unjustified high costs and burdens on businesses, investors, and end-users."

The measure will go into effect in 2017, meaning that the first reported CEO-to-median worker pay ratio will most likely be disclosed after the end of the fiscal year, in 2018.