The Securities and Exchange Commission (SEC) ruled Wednesday by a vote of 3-2 that employees of public companies could now know the difference between their salary and that of their boss. This decision comes five years after Congress directed the SEC to mandate businesses disclose pay ratios under the Dodd-Frank Act.
“To say that the views on the pay ratio disclosure requirement are divided is an obvious understatement,” said Mary Jo White, chair of the SEC, at an open hearing Wednesday.
One of the chief reasons why company stakeholders are interested in knowing what the CEO makes is “when considering a company’s executive compensation practices," said Ms. White. CEO compensation is increasingly "an important area of corporate governance on which shareholders now have an advisory vote,” she added.
Wednesday's vote will implement section 953(b) of the Dodd-Frank Act – which effectively constituted a “statutory mandate” from Congress, according to White. Under this section of the 2010 act, a company is required to disclose the ratio of the total annual salary of the company’s median paid employee to the total annual salary of the chief executive.
And those ratios can be staggering. In 2013, the “average multiple of CEO compensation to that of rank-and-file workers is 204,” while some were over 1,000 times higher, according to Bloomberg Business. The 2013 average difference in pay ration was up 20 percent from 2009.
While there are numerous exceptions to the rule, these exceptions are both “flexible and faithful to the terms and objective of the statute,” according to White. These deviations include a certain amount of leniency as to what month the year’s salary is calculated from, an allowance for “estimates and sampling” in determining the median employee, and the exclusion of “emerging growth companies” from disclosing pay ratios, (as stipulated by the 2012 JOBS Act).
Additionally, up to five percent of non-US employees per company can be excluded from the calculation of the median employee’s salary, in order to cooperate with foreign data-privacy laws, according to the SEC.
“There are definitely weaknesses that we are concerned about,” said Heather Slavkin Corzo, director of investment for the AFL-CIO, to The New York Times.
Section 953(b) is scheduled to be implemented in 2017, said James D.C. Barrall, a partner at Latham & Watkins who specializes in executive compensation, to The Wall Street Journal. Which means that the first time you’ll know the ratio of salaries in your office – if you don't already – will be in 2018, when the previous year’s financial statements are disclosed.