The Securities and Exchange Commission (SEC) has voted to introduce a new ruling requiring US public companies to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees.
The controversial new rule, which is one of the final pieces of legislation to be required under the Dodd-Frank Act, has been subject to considerable debate. The SEC received over 20,000 letters of comment on the proposal, which was passed on a vote divided 3-2.
Trade unions and labour organisations maintain that disclosing the CEO pay ratio would help investors identify inappropriate compensation models, pointing to research from the Institute for Policy Studies. This analysed data on the highest-earning CEOs over a 20-year period, and found that those whose companies collapsed or received government bailouts have held 112 of the top 500 slots. The think-tank said the pay gap between CEOS and the average US worker has grown from 195-1 in 1993 to 354-1 in 2012.
However, business groups have suggested it would be expensive to compile the data, which would be of little use to investors.
The proposed new rule would not prescribe a specific methodology for companies to use in calculating a 'pay ratio'. Instead, companies would have the flexibility to determine the median annual total compensation of its employees in a way that best suits its particular circumstances.
SEC chair Mary Jo White said: 'This proposal would provide companies significant flexibility in complying with the disclosure requirement while still fulfilling the statutory mandate. We are very interested in receiving comments on the proposed approach and the flexibility it affords.'
The SEC has declined to address the chief complaint by companies and trade groups who wanted corporations with global operations to be allowed to report median pay only for US employees.
The proposal will now be subject to a 60-day public comment period. India has led the way on executive pay ratios, with listed companies in India subject to similar rules to those proposed by the SEC following the introduction of the new Companies Act, 2013, which became law last month.
