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Thu September 19, 2013
SEC Wants Companies To Disclose CEO-Worker Pay Ratio
The Securities and Exchange Commission has proposed a rule that would require publicly traded companies to disclose the difference in pay between the company’s CEO and its employees.
The rule is applauded by unions and labor advocacy groups that think the transparency would help investors “identify top heavy compensation models,” according to Reuters. However, business groups oppose the measure.
- Charles Elson, professor of law and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
JEREMY HOBSON, HOST:
From NPR and WBUR Boston, I'm Jeremy Hobson. It's HERE AND NOW.
The Securities and Exchange Commission wants to put CEO salaries in the spotlight. It is proposing a new rule that would require publicly traded companies to disclose the ratio between what they pay their CEOs and the median pay of their employees. Companies have complained this median number is difficult to come by.
CHARLES ELSON: Charles Elson is a professor of law at the University of Delaware and director of the John L. Weinberg Center for Corporate Governance. He's with me now to discuss. Charles, welcome.
It's good to be with you.
HOBSON: Well, why is the SEC making this move now, do you think? This was part of the Dodd-Frank reforms back in 2010. Why now?
ELSON: Because it is a complicated formulation for a company to do. At the time the bill was passed, there was concern that this number wasn't readily available, and it would take a lot of work to get there. And I think it's taken the SEC a lot of work to figure out how to get a company to that number.
HOBSON: Well, what about the idea? Do you think that it makes sense for a company to have to disclose what the CEO makes compared with what the average worker makes, or the median worker makes?
ELSON: I think it's an important number for the board's consideration of CEO pay and their evaluation. I'm not so sure that this specific number is particularly relevant to investors. When the number was developed or the requirement was developed in Dodd-Frank, it wasn't the result of a broad call for the number from the institutional investment community. It came from a particular segment. And I'm not so sure where this number sort of fits in, ultimately. I think that's problem.
HOBSON: You don't think it's relevant, or what?
ELSON: Well, I think it's relevant, but not - it's not dispositive, as we say in the legal biz. It's an interesting number. It's a shocking number, in some companies, I'm sure. But I don't think it really gets us that far in evaluating CEO pay. The real issue is the CEO's pay consistent with the pay in the rest of the organization, not is it consistent with the pay of the median worker.
HOBSON: And, in many cases, it is clearly not consistent. We've seen, in some cases, companies in this country that are paying their CEO 350 times that of the average American worker.
ELSON: Absolutely. And the real issue is when CEO's pay diverges from the pay of everyone else in the organization, in the scheme of the organization, does that pay create a disincentive for everyone else to work effectively in the organization? I think that's the big question.
HOBSON: And do you think it does?
ELSON: I think in a lot of the organizations, it does. Yeah. Because I think that pay today is determined not on the basis of what everyone else is paid in the company. It's paid on the basis of what other CEOs are being paid. And that's the real problem, because when your pay is created based on what someone else in another company is doing, I think it creates a real divergence between your pay scheme and everyone else's in the organization. It also creates radically higher pay on your part. And I think that when you diverge too greatly from others within your organization, it creates your old disincentive for them to do their jobs enthusiastically.
HOBSON: Do you think shareholders who have this information would be likely to reduce the pay of the CEO, or increase the pay of the workers when they see the disparity?
ELSON: I think it's a shock number that will shock you the first time, but I don't really see its importance going forward. Again, I think the notion of looking at the ratios of CEO pay to everyone else's in the organization is worth looking at. But the ratio, the specific ration of the CEO to a median pay, I'm just not sure where it gets you. I think it's important for the board, critically important. And maybe you could argue that it's important for the shareholders in evaluating how the board's doing in the area. But, as I said, if it were a critical number, it would have been demanded by investors for a long time. It never has been.
HOBSON: Charles Elson is the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. Professor Elson, thanks so much.
ELSON: Great being with you.
HOBSON: Well, let us know what you think: Is it important to know the difference between what the CEO makes and what the median worker pay is at a company? You can go to hereandnow.org. We'll be back in one minute. HERE AND NOW. Transcript provided by NPR, Copyright NPR.