CEO pay-ratio rule: Is shaming companies really worth it?

Will This New Rule Finally Shame Companies Over CEO Pay?

Will This New Rule Finally Shame Companies Over CEO Pay?

Moneybox
A blog about business and economics.
Aug. 5 2015 7:04 PM

Companies Will Soon Have to Admit How Much They Pay Their CEOs Compared With Their Workers

walmart_ceo
Walmart CEO Douglas Mcmillon makes bank. His workers, as we all know, do not.

Reuters

After five years of us waiting, the Securities and Exchange Commission finalized a new rule on Wednesday that will force public companies to publish how much their chief executives are paid compared with their typical worker. The regulation, a part of the 2010 Dodd-Frank financial reform bill, has been widely opposed by corporate lobbyists, who say the reporting requirement will be both expensive to implement and useless, and praised by labor activists, who see it as a way to add a bit more transparency to executive compensation. The SEC split 3–2 on the measure, with the Democrats on the commission voting for it and the Republicans voting against.

Jordan Weissmann Jordan Weissmann

Jordan Weissmann is Slate’s senior business and economics correspondent.

That isn't much of a shock, since the provision is basically about embarrassing companies over their pay practices. Corporations will be required to report the ratio between their CEO's total compensation and that of their median employee (foreign workers included). SEC Chair Mary Jo White suggested that the resulting number could help investors choose whether to cast advisory votes against executive pay packages they find excessive, which they are allowed to do thanks to Dodd-Frank's "say on pay" rules. (In reality, this almost never actually happens, except to, like, Steak 'n Shake.) But the AFL-CIO was a bit more upfront about the ultimate point of the rule a few years back when it suggested that "disclosing this pay ratio will shame companies into lowering CEO pay."

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Will it? Frankly, that seems a bit unlikely.

On the one hand, the public does appear to be in the dark about how much corporate chieftains typically haul in these days. According to the Economic Policy Institute, the CEOs of the top 350 largest U.S. companies by sales earn, on average, more than 303 times the pay of the median American worker. When asked, Americans tend to guess the ratio somewhere closer to 30-to-1. Having data from specific corporations should make it easier to publicize just how lavishly they pay their executives and possibly help activists single out especially egregious offenders for boycotts. As the Washington Post notes, researchers have even found some evidence that consumers might be more willing to shop at retailers where the pay gap between CEOs and workers is lower.

On the other hand, it's not as if Americans are unaware that big box retailers and fast food chains tend to pay their workers poorly. Meanwhile, most investors—who, on the whole, are basically amoral—realistically aren't going to care a great deal about the figure, certainly not enough to dock pay from a CEO whom they feel like keeping around.

And some companies might not end up coming off that badly under these rules. First, the SEC settled on a final rule that gives corporate bean-counters lots of latitude on how to calculate their median worker's salary (which is why the AFL-CIO issued a statement saying it was concerned that the regulation "contains weaknesses"). Second, even though the heads of large public companies make an astronomical amount compared with the typical American worker, many will earn a somewhat-less-astronomical amount compared with their own workers, especially in relatively high-skill industries. I imagine this ratio is going to look terrible for Walmart. I bet it won't be quite so bad for, say, Pfizer.

It's also unclear that this rule will actually survive the inevitable lawsuit coming its way. In a potential bit of foreshadowing last year, a federal appeals court in Washington struck down another SEC regulation that would have forced companies to disclose when they bought conflict minerals from war-ravaged regions of Africa, ruling that it violated their free speech rights. "We’ve seen from our Conflict Minerals rule that naming-and-shaming rules can fall afoul of the First Amendment," Daniel Gallagher, a Republican SEC commissioner, wrote in his dissent Wednesday. As he suggests, these new regulation could too.

If it doesn't, though, labor groups (not to mention journalists) will have a few more rhetorical weapons at their disposal. And a few more workers will have an extra reason to resent their boss's boss's boss's boss.