Risk & Compliance

Does the CEO Pay Ratio Rule Have Merit?

Three very interested observers of the executive compensation arena offer three distinctly different viewpoints on the latest major Dodd-Frank deve...
David McCannOctober 1, 2015
Does the CEO Pay Ratio Rule Have Merit?

This is an introduction to a package of three opinion articles debating the merits of the new CEO pay ratio rule. One opposes it, another is in favor of it, and a third offers a very different take on the matter.

Publicly held companies have to make a lot of disclosures, so what’s one more? Actually, it’s a big deal, if you’re talking about the new CEO pay ratio rule.

ThinkstockPhotos-468216253Most companies staunchly oppose the rule, which beginning in 2018 will require them to disclose the ratio of the CEO’s compensation to the median pay level among all company workers. Sounds simple, but some say it isn’t. And that’s just one of the weighty issues around the rule.

Regardless of whether the rule was politically motivated, as some charge, CEOs clearly have the opportunity to take excessive risks. If the terms of their pay packages influence them to do so, it can pose problems for all interested parties. The salient question at hand, though, is whether this particular rule will do anything to lessen the risk.

Other questions abound. Do investors deserve to have this information? How much will it benefit them? Will that benefit justify the expense companies will have to make to comply with the rule? What will that cost be? What opinions might stakeholders and customers form about companies with high or low ratios? What effect on corporate culture might come about when every worker at a company knows what its median pay level is?

Two of the three articles in this package (see the rectangular boxes below) take diametrically opposing positions: the rule has merit, or it does not. The third article proceeds from the viewpoint that this rule is now the law of the land, and whatever we think of its merits, what use can we make of it?

We invite you to weigh in on the debate by posting comments to the articles.

Image: ThinkStock

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