It’s no secret that the top bosses in any company make more money than the workers down in the ranks. It’s expected. But the U.S. Securities and Exchange Commission is asking the question: Just how large should the gap be?
The SEC commission recently voted to require public companies to disclose the differential between their chief executives’ pay and their median employee pay. The topic has been a hotly debated issue before the SEC for years, based on public concern. More than 280,000 comments have been forwarded to the agency over the past two years. The final SEC vote was 3-2, with two Republicans on the bi-partisan board voting no. Predictably, big companies have resisted the effort.
A 2010 law opened the way to the SEC demand for disclosure. The Great Recession was impetus for the law. Objections to over-sized pay packages for some CEOs fueled the movement. Such pay inequities encouraged disastrous risk-taking opponents argued, leading to short-term gain at the expense of long-term performance.
No one expects that disclosing the gap will lead to wholesale trimming of executive pay or significant rises in employee salaries, but the effect could be symbolic, watchdog groups say.
More shareholder participation in voting on executive pay packages may result. Companies will be required to report the pay ratio in annual financial reports starting with Jan. 1, 2017.
The SEC bowed to company pressures by building some leeway into the requirement. Companies will be allowed to use estimates or sampling to determine median employee pay. Up to 5 percent of offshore employees can be excluded from the median pay calculations.
Smaller companies with less than $75 million in total shares held externally, or under $50 million in annual revenue are exempted from the new rules. Emerging growth companies and investment companies also are excused from the requirements.
SEC Chair Mary Jo White called the measures “good and reasonable,” but business groups argue that the requirements will be costly and time-consuming. The U.S. Chamber of Commerce predicts that the cost to companies likely will top $700 million, many times the SEC estimate of about $73 million.
There is little chance that workers on the low end of the totem pole will end up much better off because of the SEC regulations, but increased awareness of the scope of the gap between high and low salaries could have some effect over the years, proponents predict.