US adopts executive pay-gap rule

Companies in the US will be forced to disclose the gap between their chief executive’s salary and median employee salary under a new rule.

The Securities and Exchange Commission (SEC) voted by 3–2 to adopt the rule, which will apply to larger public companies from 2017. The rule was originally mandated by the Dodd–Frank Wall Street Reform and Consumer Protection Act, passed in 2010 in response to the financial crisis.

Under the terms of the Act, companies will be forced to disclose: the median of the annual total compensation of all their employees, except the CEO; the annual total compensation of the CEO; and the ratio of those two amounts.

SEC chair Mary Jo White said: “The Commission adopted a carefully calibrated pay ratio disclosure rule that carries out a statutory mandate. The rule provides companies with substantial flexibility in determining the pay ratio, while remaining true to the statutory requirements.”

The SEC’s decision was criticized by the US Chamber of Commerce, which released a statement saying: “This rule is more harmful than helpful, and we are disappointed that the SEC ignored suggestions for improvement. We will continue to review the rule and explore our options for how best to clean up the mess it has created.”

Michael Bognanno has written for IZA World of Labor about CEO compensation. Noting that executive pay has accelerated over recent decades, he writes that: “Although empirical evidence of effectiveness is lacking, measures that enhance the transparency of compensation packages, strengthen the shareholder voice on pay issues, and limit the CEO’s freedom to exercise stock options might help move CEO pay toward just levels.”

Read more on this story at the Wall Street Journal and the Financial Times.

Related articles:
Efficient markets, managerial power, and CEO compensation by Michael L. Bognanno
Market competition and executive pay by Priscila Ferreira

Find more IZA World of Labor articles on wage setting here