Regulators proposed a rule on Wednesday that would require publicly traded companies to disclose the difference between the pay of chief executives and their employees, an effort to make compensation more transparent, that has generated controversy and confusion.
Three of the five members of the Securities and Exchange Commission voted Wednesday in favor of a proposal that would require public companies to disclose the ratio of top executive compensation to the median compensation of their employees. Median pay is the point at which half the employees earn more and half earn less.
The proposal is part of the Dodd-Frank financial-overhaul legislation, which requires the SEC to amend existing rules on pay disclosure. Publicly listed companies are required to disclose the compensation of their chief executives but not pay for other employees.
The commission has proposed that companies disclose two additional data points in their filings. These include the median of the total compensation for all employees excluding the chief executive, and the ratio between that number and the chief’s annual total compensation.
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The SEC declined to provide a formula for calculating the ratio, saying companies could choose their own methods.
Public scrutiny over outsize pay packages at some of the country’s biggest companies has intensified since the financial crisis, and the SEC has received more than 20,000 public letters in support of and against its new proposals.
Proponents of the new rules praise the move as progress toward more transparency and increased information for investors, while critics complain that the method for determining median income is too complex, time consuming and costly.
Addressing some of these concerns, SEC Chairwoman Mary Jo White emphasized Wednesday that the agency would provide companies some flexibility in complying with the rules. This would include allowing them to determine the median pay of their employees by using a statistical sample.
In the wake of scrutiny on executive compensation from shareholders and the general public, companies have included less cash in compensation packages and more in restricted stock. But even with this trend, the compensation of top executives has grown exponentially over the last few decades.
Executive pay is now more than 277 times an average worker’s pay, compared with 20 times in 1965, according to the Economic Policy Institute.
“Clearly we have a steep uptrend,” said Luis Aguilar, an SEC commissioner, citing this data.
Aguilar, White and Kara Stein all voted for the proposal. Daniel Gallagher and Michael Piwowar voted against the proposal.
Gallagher called it a “rotten mandate” and said it brought no economic benefit. Piwowar said the proposal would “unambiguously harm investors.”