Risk & Compliance

Pay Ratio Rule Gives Shareholders Better Exec Comp Info

High CEO pay relative to other employees can erode morale, productivity, and loyalty, and thus the bottom line, says an AFL-CIO offical.
Heather Slavkin CorzoOctober 1, 2015
Pay Ratio Rule Gives Shareholders Better Exec Comp Info

This is one of three opinion articles debating the merits of the new CEO pay ratio rule. See the others here and here.

The gap between CEO and worker pay has been an issue for decades, but it came into sharp focus as a result of the financial crisis of 2008 and the Great Recession that followed.

Heather Slavkin Corzo

Heather Slavkin Corzo

As millions of working people lost their jobs, bailed-out companies like AIG continued paying huge bonuses to executives responsible for their downfall. Inappropriate compensation packages at financial services companies like Bear Stearns and Lehman Brothers were identified as contributors to the crisis because they encouraged excessive risk taking by company executives.

The Dodd-Frank Act included a number of provisions aimed at addressing some of the most problematic executive compensation practices. For one, each year shareholders of public companies have the opportunity to vote on CEO compensation. While these “Say on Pay” votes are not binding, a high vote against a CEO’s compensation sends a strong message to the corporate board.

Today, the information shareholders have to base their votes on provides an incomplete picture of a company’s compensation strategy. We have information about salary, equity awards, and benefits paid out to the most senior executives, but we receive no meaningful information about how this reflects the company’s compensation strategies with regard to its workforce. We shouldn’t know how companies choose to distribute the money earned from productivity gains or new technologies? We shouldn’t know if the CEO hoards all the benefits generated from the team’s success or shares them more broadly?

The pay ratio is an important metric for investors. High levels of CEO pay relative to other employees can have a detrimental impact on morale, productivity, and loyalty — all of which can impact a company’s bottom line.

When the Securities and Exchange Commission’s pay ratio disclosure rule finally goes into effect, companies will have to report their CEO’s total compensation, the compensation of their median employee, and the ratio of the two.

The business community is claiming it will cost more than $185,000 and 1,000 hours of staff time per company to calculate the CEO-to-worker pay figure. This is nonsense, plain and simple. Companies should already have this information on the books. Dodd-Frank asks companies to do some simple calculations. If more effort than this is required, it raises serious questions about how companies are fulfilling their financial reporting obligations.

The law only requires disclosure of the CEO-to-worker pay ratio. It does nothing to bring that ratio back into balance. It doesn’t raise pay for workers, reduce compensation for CEOs, or force companies to change their compensation practices.

The Dodd-Frank Act took some important steps forward by providing investors with transparency. But more work needs to be done to finalize the executive compensation provisions of Dodd-Frank. Financial regulators are long overdue in finalizing rules to rein in compensation practices at financial institutions that reward employees for taking excessive risk and require companies to have policies in place to claw back bonuses awarded in error.

Heather Slavkin Corzo is director of the Office of Investment at the AFL-CIO.