Dive Brief:
- The U.S. Securities and Exchange Commission on Aug. 5 adopted a final rule requiring companies to disclose pay ratios for the first fiscal year beginning in 2017.
- An article at the Pittsburgh Business Journal reports that the rule is meant to help shareholders determine CEO pay. It also allows companies to select the methodology to identify the median employee.
- How effective it will be is anyone’s guess, according to the article. It’s likely the gap between top executives and average workers is substantial, it adds. A report issued last month by the Economic Policy Institute said average CEO compensation was $16.3 million in 2014, a 997% increase from $1.5 million in 1978 and about double stock market growth. During that same period, the average employee’s pay rose about 11%.
Dive Insight:
Some experts have doubts that the ratios will have any positive impact.
“In my opinion, it doesn’t really convey meaningful information to stockholders,” said Kennteh Lehn, a professor at the University of Pittsburgh and a former chief economist at the SEC. “Traditionally, the mandate of the SEC is to mandate disclosure of information that’s of value to investors and I don’t see how knowing this ratio would have any material impact on decisions by investors.”
Since the ratio will be included on audited financial statements, it will be a “huge change and require additional work” for companies, Richard Fischer, audit and assurance partner at Louis Plung & Co. LLP, told the Business Journal.
A contrary view comes from James P. Hoffa, president of the Teamsters union. Writing in the Detroit News, Hoffa says the rule is much needed because corporate profits are near an all-time high and income inequality is growing. As a result, he writes, employees and shareholders have a right to know whether businesses are padding the wallets of top executives at the cost of workers and the company’s bottom line. The public and private sectors need to learn from past failings that caused the 2008 economic meltdown, he adds.
HR leaders need to keep a close eye on how this develops, because communicating with the workforce will be a key strategy as the focus on CEO pay is heightened via the rule.
